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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 20-F

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

For the fiscal year ended December 31, 2003
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)

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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

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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 | 30,203,917
|---------------------------------- | ----------

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               | 7   
|       |                                                              |     
|       | D. Risk Factors                                              | 8   
|       |                                                              |     
|ITEM 4 | INFORMATION ON THE
  COMPANY                                 | 22  
|       |                                                              |     
|       | A. History and Development
  of the Company                  | 22  
|       |                                                              |     
|       | B. Business Overview                                         | 30  
|       |                                                              |     
|       | C. Organizational Structure                                  | 69  
|       |                                                              |     
|       | D. Property, Plants and
  Equipment                          | 71  
|       |                                                              |     
|ITEM 5 | OPERATING AND FINANCIAL
  REVIEW AND PROSPECTS               | 72  
|       |                                                              |     
|       | A. Operating Results                                         | 75  
|       |                                                              |     
|       | B. Liquidity and Capital
  Resources                         | 83  
|       |                                                              |     
|       | C. Research and Development,
  Patents and Licenses          | 86  
|       |                                                              |     
|       | D. Trend Information                                         | 86  
|       |                                                              |     
|       | E. Off-Balance Sheet
  Arrangements                          | 87  
|       |                                                              |     
|       | F. Tabular Disclosure of
  Contractual Obligations           | 88  
|       |                                                              |     
|ITEM 6 | DIRECTORS, SENIOR
  MANAGEMENT AND EMPLOYEES                 | 88  
|       |                                                              |     
|       | A. Directors and Senior
  Management                         | 88  
|       |                                                              |     
|       | B. Compensation                                              | 92  
|       |                                                              |     
|       | C. Board Practices                                           | 93  
|       |                                                              |     
|       | D. Employees                                                 | 97  
|       |                                                              |     
|       | E. Share Ownership                                           | 98  
|       |                                                              |     
|ITEM 7 | MAJOR SHAREHOLDERS AND
  RELATED PARTY TRANSACTIONS          | 99  
|       |                                                              |     
|       | A. Major Shareholders                                        | 99  
|       |                                                              |     
|       | B. Related Party
  Transactions                              | 104 
|       |                                                              |     
|       | C. Interests of Experts and
  Counsel                        | 106 
|       |                                                              |     
|ITEM 8 | FINANCIAL INFORMATION                                        | 107 
|       |                                                              |     
|       | A. Consolidated Statements
  and Other Financial Information | 107 
|       |                                                              |     
|       | B. Significant Changes                                       | 113 

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|ITEM 9                       | THE OFFER AND LISTING                                                          | 113
|---------------------------- | ------------------------------------------------------------------------------ | ---
|                             |                                                                                |    
|                             | A. Offer and Listing
  Details                                                 | 113
|                             |                                                                                |    
|                             | B. Plan of Distribution                                                        | 114
|                             |                                                                                |    
|                             | C. Markets                                                                     | 114
|                             |                                                                                |    
|                             | D. Selling Shareholders                                                        | 114
|                             |                                                                                |    
|                             | E. Dilution                                                                    | 114
|                             |                                                                                |    
|                             | F. Expenses of the Issue                                                       | 114
|                             |                                                                                |    
|ITEM 10                      | ADDITIONAL INFORMATION                                                         | 115
|                             |                                                                                |    
|                             | A. Share Capital                                                               | 115
|                             |                                                                                |    
|                             | B. Memorandum and Articles
  of Association                                    | 115
|                             |                                                                                |    
|                             | C. Material Contracts                                                          | 117
|                             |                                                                                |    
|                             | D. Exchange Controls                                                           | 118
|                             |                                                                                |    
|                             | E. Taxation                                                                    | 118
|                             |                                                                                |    
|                             | F. Dividends and Paying
  Agents                                               | 125
|                             |                                                                                |    
|                             | G. Statement by Experts                                                        | 125
|                             |                                                                                |    
|                             | H. Documents on Display                                                        | 125
|                             |                                                                                |    
|                             | I. Subsidiary Information                                                      | 125
|                             |                                                                                |    
|ITEM 11                      | QUANTITATIVE AND
  QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 126
|                             |                                                                                |    
|ITEM 12                      | DESCRIPTION OF
  SECURITIES OTHER THAN EQUITY SECURITIES                       | 127
|                             |                                                                               
|PART II                      |                                                                               
|                             |                                                                                |    
|ITEM 13                      | DEFAULTS, DIVIDEND
  ARRERAGES AND DELINQUENCIES                               | 127
|                             |                                                                                |    
|ITEM 14                      | MATERIAL MODIFICATIONS
  TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 127
|                             |                                                                                |    
|ITEM 15                      | CONTROLS AND PROCEDURES                                                        | 127
|                             |                                                                                |    
|ITEM 16                      | [RESERVED]                                                                     | 127
|                             |                                                                                |    
|ITEM 16A                     | AUDIT COMMITTEE
  FINANCIAL EXPERT                                             | 127
|                             |                                                                                |    
|ITEM 16B                     | CODE OF ETHICS                                                                 | 128
|                             |                                                                                |    
|ITEM 16C                     | PRINCIPAL ACCOUNTANT
  FEES AND SERVICES                                       | 128
|                             |                                                                                |    
|ITEM 16D                     | EXEMPTIONS FROM LISTING
  STANDARDS FOR AUDIT COMMITTEES                       | 129
|                             |                                                                               
|PART III                     |                                                                               
|                             |                                                                                |    
|ITEM 17                      | FINANCIAL STATEMENTS                                                           | 129
|                             |                                                                                |    
|ITEM 18                      | FINANCIAL STATEMENTS                                                           | 129
|                             |                                                                                |    
|ITEM 19                      | EXHIBITS                                                                       | 130
|                             |                                                                               
|GLOSSARY OF SELECTED
  TERMS | 132                                                                           

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, 2003 of
NIS 4.379= 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, 2003 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, 2003. The
selected consolidated financial data for the years ended December 31, 1999,
2000, 2001, 2002 and 2003 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 as at December 31, 2003 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,
2003 (NIS4.379 = 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.

5

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|                                                                                            |  | 1999              |           | 2000               |  | 2001               |   | 2002               |           | 2003               |  | 2003             |    
|------------------------------------------------------------------------------------------- |  | ----------------- | --------- | ------------------ |  | ------------------ | - | ------------------ | --------- | ------------------ |  | ---------------- | ---
|                                                                                            |  |                   |           |                    |  |                    |   |                    |           |                    |  |                  |    
|(adjusted NIS)                                                                              |  | NIS(inthousands)* |           | NIS (inthousands)* |  | NIS (inthousands)* |   | NIS (inthousands)* |           | NIS (inthousands)* |  | $ (inthousands)* |    
|                                                                                            |  |                   |           |                    |  |                    |   |                    |           |                    |  |                  |    
|                                                                                            |  |                   |           |                    |  |                    |   |                    |           |                    |  |                  |    
|Revenues                                                                                    |  |                   | 481,491   |                    |  | 474,670            |   |                    | 469,389   |                    |  | 495,536          |    
|Operating
  income (loss)                                                                   |  |                   | 115,029   |                    |  | (61,612            | ) |                    | (129,851  | )                  |  | (98,681          | )  
|Financial
  expenses, net                                                                   |  |                   | 9,253     |                    |  | 34,324             |   |                    | 52,088    |                    |  | 48,089           |    
|Other income
  (expenses) net                                                               |  |                   | 440,213   |                    |  | 1,007              |   |                    | 3,053     |                    |  | 278,535          |    
|Income (loss)
  before taxes on
  income                                                    |  |                   | 545,988   |                    |  | (94,930            | ) |                    | (178,886  | )                  |  | 131,765          |    
|Equity in
  earnings (losses) of
  affiliated companies, net                                |  |                   | (151,252  | )                  |  | (128,554           | ) |                    | (78,822   | )                  |  | 10,910           |    
|                                                                                            |  |                   |           |                    |  |                    |   |                    |           |                    |  |                  |    
|Net income
  (loss), under Israeli
  GAAP                                                   |  |                   | 334,060   |                    |  | (223,654           | ) |                    | (257,274  | )                  |  | 33,824           |    
|Net income
  (loss) per ordinary
  share, under Israeli GAAP                                |  |                   | 11.2      |                    |  | (7.7               | ) |                    | (8.9      | )                  |  | 1.2              |    
|Net income
  (loss) per ADS, under
  Israeli GAAP                                           |  |                   | 22.4      |                    |  | (15.4              | ) |                    | (17.8     | )                  |  | 2.4              |    
|Weighted
  average number of
  shares outstanding in thousands,
  basic, under Israeli GAAP |  |                   | 29,899    |                    |  | 28,914             |   |                    | 28,834    |                    |  | 28,860           |    
|ADS shares
  outstanding in
  thousands, basic - under Israeli
  GAAP                       |  |                   | 14,950    |                    |  | 14,457             |   |                    | 14,417    |                    |  | 14,430           |    
|Net income
  (loss), under US
  GAAP                                                        |  |                   | 214,203   |                    |  | (219,400           | ) |                    | (215,639  | )                  |  | 27,451           | ***
|Net income
  (loss) per ordinary
  share, under US GAAP                                     |  |                   | 7.9       |                    |  | (7.7               | ) |                    | (7.4      | )                  |  | 1.0              | ***
|Net income
  (loss) per ADS, under
  US GAAP                                                |  |                   | 15.8      |                    |  | (15.4              | ) |                    | (14.8     | )                  |  | 2.0              | ***
|Weighted
  average number of
  shares outstanding in thousands,
  basic, under US GAAP      |  |                   | 17,243    |                    |  | 28,604             |   |                    | 29,286    |                    |  | 28,860           |    
|ADS shares
  outstanding in
  thousands, basic, under US GAAP                               |  |                   | 13,622    |                    |  | 14,302             |   |                    | 14,643    |                    |  | 14,430           |    
|Capital
  expenditures                                                                      |  |                   | 134,330   |                    |  | 394,206            |   |                    | 272,817   |                    |  | 116,841          |    
|Balance
  Sheet Data:                                                                       |  |                   |           |                    |  |                    |   |                    |           |                    |  |                  |    
|Fixed
  assets, net                                                                         |  |                   | 633,233   |                    |  | 912,346            |   |                    | 1,038,087 |                    |  | 991,998          |    
|Total
  assets, net                                                                         |  |                   | 1,142,814 |                    |  | 1,163,059          |   |                    | 1,183,732 |                    |  | 1,132,626        |    
|Short-term
  credit (including
  current maturities of bank loans
  and debentures)         |  |                   | 49,968    |                    |  | 249,657            |   |                    | 561,365   |                    |  | 547,853          |    
|Long-term bank
  loans                                                                      |  |                   | 1,714     |                    |  | 233,300            |   |                    | 186,154   |                    |  | 142,085          |    
|Debentures                                                                                  |  |                   | 170,830   |                    |  | 142,479            |   |                    | 132,457   |                    |  | 99,462           |    
|Shareholders
  equity under Israeli
  GAAP                                                  |  |                   | 536,061   |                    |  | 367,694            |   |                    | 112,273   |                    |  | 147,072          |    
|Shareholders
  equity under US
  GAAP                                                       |  |                   | 408       |                    |  | 299,831            |   |                    | 102,552   |                    |  | 281,409          | ***
|EBITDA**                                                                                    |  |                   | 203,275   |                    |  | 44,504             |   |                    | 256       |                    |  | 56,735           |    

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. 
***         Restated.  See Note 26c to the financial statements.

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.

|                |  | 1999 |  | 2000  |  | 2001  |  | 2002  |  | 2003  |  | 2004(2) | 
|--------------- |  | ---- |  | ----- |  | ----- |  | ----- |  | ----- |  | ------- | 
|                |  |      |  |       |  |       |  |       |  |       |  |         | 
|Average(1)      |  | 4.14 |  | 4.077 |  | 4.214 |  | 4.736 |  | 4.512 |  | 4.593   | 
|High            |  | 4.29 |  | 4.198 |  | 4.416 |  | 4.994 |  | 4.924 |  | 4.634   | 
|Low             |  | 4.01 |  | 3.967 |  | 4.041 |  | 4.437 |  | 4.283 |  | 4.554   | 
|End of
  period |  | 4.15 |  | 4.041 |  | 4.416 |  | 4.737 |  | 4.379 |  | 4.555   | 

|   
|---
|   
|(1)
|(2)

|     |  | December
  2003 |  | January
  2004 |  | February
  2004 |  | March 2004 |  | April 2004 |  | May2004 | 
|---- |  | --------------- |  | -------------- |  | --------------- |  | ---------- |  | ---------- |  | ------- | 
|     |  |                 |  |                |  |                 |  |            |  |            |  |         | 
|High |  | 4.441           |  | 4.483          |  | 4.493           |  | 4.535      |  | 4.599      |  | 4.634   | 
|Low  |  | 4.352           |  | 4.371          |  | 4.437           |  | 4.483      |  | 4.515      |  | 4.555   | 

At
May 31, 2004, the representative rate of exchange was NIS 4.555 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 or 2003.

3B.         CAPITALIZATION
AND INDEBTEDNESS.

Not
applicable.

3C.         REASONS
FOR THE OFFER AND USE OF PROCEEDS.

Not
applicable.

7

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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 26.5% 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 requirement to start to provide
domestic fixed communications services over cable networks including basic
telephony services, to subscribers by November 25, 2004.  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 9.2 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 $14 million to
the Minister.  The bank guarantee
provided by us was in the total amount of $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.

8

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---

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.

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 has not yet
been decided.  Until the appeal is
finally resolved (and thereafter, if the Controllers declaration is not
dismissed), 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
declaration of the Controller will be dismissed.

We and the other cable television operators
have agreed on the terms of a merger. The 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 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. 
The Supervisor of Banks of the Bank of Israel, or the Supervisor of
Banks, 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 of Banks, the merger of the cable 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 a
Group of Borrowers as such term is defined in the Proper Bank Management
Directives.  The relevant directives
deal with the issue of the giving of loans by banking corporations and
allocation of the merged companys debts, among other things, to an indirect
controlling shareholder of Matav.

Since
April 2002, in accordance with the approval of the Controller 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.

9

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On
November 19, 2003, we, together with the other Israeli cable television
operators submitted a request to the Controller for an exemption from the
requirement to receive an approval of a restrictive arrangement under Section
14 of the Restrictive Business Practices Law, to cover the period from November
16, 2003 and until the earlier of the date of consummation of the merger of the
cable television operators or November 15, 2004, in order to facilitate the
consummation of the merger.  The
application for the exemption related to the existing joint activities of the
cable television operators, including among other things, multi-channel
television broadcasts, domestic fixed telecommunications services, including
access to High Speed Internet and telephony services, marketing, production and
content purchasing.  On December 17,
2003, the Controller granted us and the other cable television operators an exemption
for a period of one year, until December 15, 2004.  This exemption is conditional upon, among other things, 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, or from
undertaking any cooperation among themselves prior to December 15, 2004 which
is not reversible.

In
light of the above, there can be no assurance that the merger will take place,
the date on which it will take place or the structure that will be implemented,
and accordingly our management is examining the options available to us in
order to continue the existing cooperation among the cable television
operators, including the possibility of purchasing Tevels cable television and
access to High Speed Internet subscribers.

In
this regard, we have entered into negotiations 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 580,000 cable subscribers, representing approximately 60% of the
Israeli cable television market, and we would hold 35% of Golden Channels.  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
believe that if we were to acquire all of Tevels assets as aforesaid, the
proposed merger of the three Israeli cable television operators would not be
completed in its current proposed form.

In
order to strengthen the cooperation of the three Israeli cable television
operators, we, Tevel and Golden Channels recently agreed to perform an
operational merger.  To this effect, a
joint management was recently appointed to oversee the operational merger of
the marketing, sales, engineering, customer service, operations and information
systems activities of the three cable companies. We will be subject to
decisions taken by the joint management of the merged operations, and
accordingly, these decisions will affect our policy-making in the areas of the
joint activities. 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 in fact enhance our profits
and competitiveness.

There
can be no assurance that the merger will be consummated.  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:

| |  | 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

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| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | 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.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | 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 any potential competitive advantage it may
  otherwise have.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | 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 YES, the Israeli satellite multi-channel television operator)
  usage of the network infrastructure to access all potential subscribers, and
  not only to the subscribers of
  the merged entity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

11

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| |  | 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.  The merged infrastructure entity is
  obligated to invest in fixed line telephony cable infrastructure an aggregate
  of not less than NIS105 million until June 30, 2004, not less than NIS140
  million until June 30, 2005, not less than NIS105 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. We are responsible for 26.5% of these investments.                                                                                                                                                                                                          
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | The approval of the
  Controller to the merger is conditional upon the provision of a bank guarantee
  in the amount of $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 $3.75 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Certain members of the
  Dankner family, which indirectly control Dankner Investments Ltd., one of our
  principal shareholders, also own indirectly 11.63% of Bank Hapoalim Ltd.,the largest bank in Israel, and
  constitute part of the controlling group of Bank Hapoalim Ltd., which own
  approximately 45.18% of the Bank.  We
  are consequently subject to restrictions under Israeli banking laws
  concerning credit, consents and limitations with respect to our relationship
  with Bank Hapoalim.  The restrictions
  to which we are subject may therefore apply to the merged entity.  Additionally, Bank Hapoalim is a creditor
  of the other parties to the proposed merger, and will therefore be a creditor
  of the merged entity.  Please see
  Item 4C. Organizational Structure for a discussion of a recent transaction
  and pending further transaction between shareholders of Dankner Investments
  Ltd. and Delek Real Estate Ltd.

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

In
1989, together with the other two Israeli cable television operators, we
established I.C.P.  Israel Cable Television Programming Company Ltd., or ICP,
for the purpose of jointly purchasing and producing content for our local cable
channels.  In January 2004, ICP changed
its legal name to HOT Vision Ltd.  Prior
to the approval of the Controller to the proposed merger of the Israeli cable
television operators, the validity of HOT Visions activity was subject to the
approval of the Restrictive Business Practices Authority.  Under the approval of the Controller to the
proposed merger of the Israeli cable television operators, it will not be
necessary for the activity of HOT Vision to be subject to the approval of the
Restrictive Business Practices Court. 
Should the merger not be consummated, the activity of HOT Vision will
continue to be subject to the supervision of the Restrictive Business Practices
Authority.

On
November 19, 2003, we, together with the other two cable television operators,
submitted a request to the Controller for an exemption from the requirement to
receive the approval of the Restrictive Business Practices Court for a
restrictive arrangement with respect to the period from November 16, 2003 and
until the earlier of the date of consummation of the merger of the cable
television operators, or November 15, 2004, in order to facilitate the
consummation of the merger.  The
application for the exemption related to the existing joint activities of the
cable television operators, including among other things, with respect to
multi-channel television broadcasts, domestic fixed telecommunications
services, including access to High Speed Internet and telephony services,
marketing, production and content purchasing. 
On December 17, 2003, the Controller granted us the requested exemption
for a period of one year.  This
exemption is conditional upon, among other things, 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, or from undertaking any
cooperation among themselves prior to December 15, 2004 which is not
reversible.  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 agree to extend 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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Each
of the Israeli cable television operators, including us, is also under a
continuing obligation, as set forth in the Telecommunications Law and in our
Cable Broadcast Licenses, to fulfill programming obligations which remain
outstanding pursuant to the previous franchises, including the obligation to
invest in local productions.  According
to our Cable Broadcast Licenses, we may notify the Council of our intention to
remove certain channels from our Basic Packages and to transmit those channels
within the Premium Broadcastings that we offer our digital subscribers in our
tiering system. In such event, the Council has the authority to recommend to
the Ministry of Communications that our analog subscriber fees for the Basic
Package be reduced.  If the Ministry of
Communications will order us to reduce our fees, this could have a material
impact on our revenues, if the fees received from other sources do not
compensate for the loss of such fees.

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:

| |  | licenses;                                                                                        
| | - | -------------------------------------------------------------------------------------------------
| |   |                                                                                                  
| |  | royalties
  and other payments to be paid by licensees to the government;                        
| |   |                                                                                                  
| |  | content and
  scope of programming;                                                              
| |   |                                                                                                  
| |  | the
  subscriber charges set by cable television operators for their cable
  television services;
| |   |                                                                                                  
| |  | our cable
  infrastructure that will become a public telecommunications network; and             
| |   |                                                                                                  
| |  | 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 provide
services to our subscribers.

The
Israeli telecommunications market is in a state of transition, moving to a more
liberalized environment in which various markets are being gradually opened to
competition.  Amendments to the
Telecommunications Law replaced the previous system of exclusive franchises by
general non-exclusive licenses.  The
licenses we have received (and the terms of the approvals we have received from
the regulatory authorities with regard to the proposed merger between the
Israeli cable television operators), have significantly reduced the barriers to
entry into our market and impose conditions upon us that allow our competitors
to access our subscribers.

In
January 1999, the Ministry of Communications granted a license for the
provision of television broadcasts to subscribers in Israel via satellite to
D.B.S. Satellite Services (1998) Ltd., commonly known as 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 is a government company,
which 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 (namely Warner Brothers, Universal, Buena Vista,
Paramount, MGM, Sony Columbia and Twentieth Century Fox).

13

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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.

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 companies. Our subscribers and those of the other cable companies have
not yet been formally assigned to HOT Telecom. 
We are currently evaluating the implications of performing such
assignment, and we have so notified the Minister of Communications.  We have incurred considerable capital
expenditure preparing for the provision of this service and anticipate that we
and HOT Telecom shall continue to invest in the improvement and maintenance of
this service in the future.  However, we
and HOT Telecom face significant competition in the access to High Speed
Internet market from the government owned Bezeq and may face competition in the
future from other well placed competitors. 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 in this
service.

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

HOT
Telecom must start providing basic telephony services over cable network to the
Israeli public by no later than the end of November 2004.  Pursuant to the approval of the Controller
to the proposed merger of the cable operations, as amended, the merged
infrastructure entity is obligated to invest in fixed line telephony cable
infrastructure an aggregate of not less than NIS105 million until June 30,
2004, not less than NIS140 million until June 30, 2005, not less than NIS105
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. We are responsible for 26.5% of these
investments.

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 recently
published the language of the special general license.

14

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In
March 2004, the Minister announced its new policy with respect to Bezeqs
general license such that Bezeq would be allowed in the future, subject to
certain conditions, to give discounts for size and allow the provision of a
basket of services together with its subsidiaries. This would enable 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. The Minister intends to hold a hearing on this
policy. If the policy described above is implemented, 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 a basket of 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.

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 technologies allow 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, personal video recorder, or PVR, 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.

Our financial condition may be affected by the market price
of one of the cellular telecommunications companies authorized to operate in
Israel, in which we have invested.

We
hold approximately 5.3% of the outstanding share capital of Partner
Communications Company Ltd., or Partner, whose shares are traded on the Tel
Aviv Stock Exchange under the symbol PTNR. 
American Depositary Shares, or ADSs, each representing one of Partners
ordinary shares are quoted on the Nasdaq National Market under the symbol
PTNR, and are traded on the London Stock Exchange under the symbol
PCCD.  Partner holds a license to
provide cellular telecommunications services in Israel, and is currently one of
the two operators in Israel to use the global system for mobile
telecommunications, or GSM, a comprehensive digital standard for the operation
of all elements of a cellular telephone system on a fully commercial basis.
Partner faces intense competition from other cellular telecommunications
service operators in Israel and the Palestinian operator, Jawaal, and also
faces competition from fixed line operators in Israel, currently Bezeq  Israel
Telecommunications Corporation Ltd.  The
market price of Partners shares has been and may continue to be volatile in
response to conditions in the global securities markets in general and the
communications and technology sectors in particular.  The foregoing and other factors could cause the market price of
Partners shares to fluctuate unpredictably, and could adversely affect the
market price of Partners shares.

Partners
results are reflected in our financial statements through December 31, 2003 on
an equity accounting basis and consequently have a material effect on our
financial results.  All of our current
holdings in Partner are pledged to banks under pledges unlimited in sum, to
cover Partners liabilities in respect of its loans from the banks.

We
cannot assure you that Partner will be able to successfully compete against
existing or new competitors in the field of cellular telecommunications, or
that Partners systems and business plan will be adequate, efficient and
capable of performing in light of the large number of material factors that may
affect its future operations and prospects.

For
information regarding recent negotiations between ourselves and Partner for a
transaction, please see Item 7B. Major Shareholders and Related Party
Transactions - Related-Party Transactions.

We may lose our investment in an Israeli international
telecommunications service provider.

We
hold a 10% share ownership interest in Barak I.T.C. (1995)  The International
Telecommunications Services Corp. Ltd., or Barak, which holds a license to
provide international telecommunications services and Internet services in
Israel.  Barak currently competes with
two other licensed international telecommunications service providers, and
several substantial Internet service providers.  One of these competitors is Bezeq International Ltd., which is a
subsidiary of the domestic telecommunications service provider, Bezeq Israel
Telecommunications Corporation Ltd., which in the past had a sole
monopoly.  As a result of this
connection, Bezeq International Ltd. has strong name recognition, long-standing
customer relations, and significantly greater financial and marketing resources
than the other competitors in the international telecommunications market,
including Barak.

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Users
of international telecommunications services may subscribe for the services of
any provider in Israel, and may change their choice of provider, at any
time.  In addition, a user may select
the services of any of the providers on a call-by-call basis.  As a result, regular subscribers of Barak
may not necessarily use Barak services exclusively.

The
Minister of Communications has recently granted an additional license for the
establishment and operation of international telecommunications systems in
Israel to one of the large local access to High Speed Internet providers.  In addition, two other companies have
applied to the Ministry for such a license. Any resulting competitors may be
larger than Barak or have greater financial resources, better technology or
services, and Barak may not be able to successfully compete with them. This may
have the impact of reducing Baraks market share. Furthermore, the
international telecommunications market is characterized by rapidly changing
technology and customer requirements, new industry standards and frequent new
product and service introductions.  If
Barak is unable to anticipate and keep pace with these changes, it may lose
market share.  Baraks performance or
market penetration might not be enhanced and we may lose our investment in
Barak.

In
addition, according to Baraks financial statements for the first quarter of
2004, as of March 31, 2004, Barak had a capital deficiency in the amount of NIS
563 million and a working capital deficit in the amount of NIS 200
million.  If Barak is unable to reach
agreement with its banks and other major creditors regarding the restructuring
of its debt, or is unable to raise other financing, it might not be able to
continue as a going concern, and as a result, we may be required to write-off a
substantial portion of our investment in Barak.  In addition, if Barak will raise equity financing in the future,
and we will elect not to participate in such financing, our shareholding in
Barak could be substantially diluted.

One party will directly and indirectly control a large block
of our shares.

Delek
Investments and Assets Ltd. directly holds 17.98% of our shares.  Delek Real Estate Ltd. currently holds 25%
of the shares of Dankner Investments Ltd., which holds 22.02% of our
shares.  In addition, Delek Real Estate
Ltd. is expected to close a transaction in the upcoming weeks which will bring
its shareholding in Dankner Investments Ltd. to 87.5%.  Delek Investments and Assets Ltd. and Delek
Real Estate Ltd. are both subsidiaries of Delek Group Ltd. which is controlled
by Yitzchak (Tshuva) Sharon. 
Accordingly, Delek Group Ltd. and Yitzchak (Tshuva) Sharon will become
the beneficial owner of 40% of our shares, and 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.   Please see
the discussion of a recent transaction and a pending transaction between
shareholders of Dankner Investments Ltd. and Delek Real Estate Ltd. in Item
4B. Organizational Structure.

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, 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 Partner, 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.  Although
our principal shareholders have made loans and contributed equity to us in the
past, they are not contractually obligated to do so in the future.

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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.  Thereafter,
these negotiations were recommenced, and then ceased again due to negotiations
regarding proposed transactions with Tevel and Partner. Should we recommence
such negotiations, there is no assurance that we will reach an agreement with
the banks and receive such increased credit lines.  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.  Our
agreement with the 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.  If 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.

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.

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

Our
financial statements are presented in shekels, adjusted to reflect changes in
the Israeli consumer price index. 
Consequently, all shekel amounts set forth in our historical financial
statements are adjusted each time that we publish new financial statements in
order to reflect changes in the Israeli consumer price index as of the date of
the latest balance sheet presented. 
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 may have a
material adverse impact upon us.  Our
financial expenses are also affected by inflation, such that 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.

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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.

Our results of operations may be adversely
affected by the implementation of new accounting standards.

In
October 2001, the Israel Accounting Standards Board published Accounting
Standard No. 12 with respect to the discontinuance of the adjustment of
financial statements.  In December 2002,
Accounting Standard No. 17 was published with respect to the deferral of the
effective date of Accounting Standard No. 12 to January 1, 2004.

According
to Accounting Standards No. 12 and No. 17, financial statements will cease to
be adjusted for inflation in Israel beginning January 1, 2004.  Until December 31, 2003, we continued to
prepare adjusted financial statements in accordance with Opinion No. 36 of the
Institute of Certified Public Accountants in Israel.  The adjusted amounts included in our financial statements as of
December 31, 2003, will serve as the starting point for nominal financial
reporting beginning January 1, 2004.

The
effect of the adoption of Accounting Standard No. 12, and its implication on
our results of operations is dependent on the rate of inflation in Israel, and
on the composition of our assets and our sources of financing.  Accordingly, we cannot currently predict the
affect that the new accounting standards may have on our results of
operations.

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 have recently 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 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 recently entered into negotiations with Tevel and its shareholders for the
purchase by us of all of Tevels assets. 
Please 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.

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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 from 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 broadcast of their programs
into Israel. As the 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 legislators to amend the Copyrights
Law to address this issue.  We cannot
predict if and when the legislators will address this issue, 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.

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.

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.

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.

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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.

Some
of our directors, officers and employees are currently obligated to perform
annual reserve duty. Generally, male adult citizens and permanent residents of
Israel under the age of between 45 and 54, unless exempt, may be required to
perform up to approximately 36 days of military reserve duty annually.  Certain reserve soldiers may be required to serve
more.  Additionally, all such reservists
are subject to being called to active duty at any time under emergency
circumstances. While we have operated effectively under these requirements
since we began operations, we cannot assess the full impact of these
requirements on our workforce and business if conditions should change, and we
cannot predict the effect of any expansion or reduction of these obligations on
us.

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 shares not held by 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 at least 70 days have passed since the filing of the merger proposal
signed by both parties with the Israeli Registrar of Companies.

The
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 the
purchaser will become a 25% or greater shareholder of the company unless there
is already a 25% or greater shareholder of the company.  Similarly, an acquisition of shares must be
made by means of a tender offer if as a result of the acquisition the purchaser
would become a 45% or greater shareholder of the company, unless there is
already a majority shareholder of the company.    In any event, if as a result of an acquisition of shares the
acquirer will 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 the shares that the acquirer offered to
purchase will be transferred to it. 
However, the remaining minority shareholders may seek to alter the
consideration by court order. 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.

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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.

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 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.matav.co.
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 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 recently agreed to perform an
operational merger.  To this effect, a
joint management was recently appointed to oversee the operational merger of
the marketing, sales, engineering, customer service, operations and information
systems activities of the three cable companies. We will be subject to
decisions taken by the joint management of the merged operations, and
accordingly, these decisions will affect our policy-making in the areas of the
joint activities.  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 in fact enhance our profits and competitiveness.

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, 2003, we provided cable television services to approximately 26.4% 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 266,700 as of December 31, 2003,
compared to approximately 275,000 as of December 31, 2002 and approximately
292,600 as of December 31, 2001.  Cable
television subscriber penetration has decreased by approximately 11% during the
same period.  In April 2002, we started
to offer a commercial service of access to High Speed Internet over cable.  We also provide various data transmission
services and network services at different bit rates, services to the business
sector, and other ancillary services.

Our
aggregate revenue (including revenue from cable television and access to High
Speed Internet subscribers) has increased from approximately NIS 469.4 million
as of December 31, 2001 to approximately NIS 495.5 million as of December 31,
2002 and approximately NIS 545.5 million as of December 31, 2003.  During the same period, our operating loss
and net loss has decreased from approximately NIS129.9 million and approximately
NIS 257.3 million, respectively, for the year ended December 31, 2001, to an
operating loss and net income of 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.  EBITDA has increased from
approximately NIS 0.3 million for the year ended December 31, 2001 to
approximately NIS 56.7 million and approximately NIS 147.0 million for the
years ended December 31, 2002 and 2003, respectively.

Through
December 31, 2003, we have invested approximately NIS 2,028 million
(approximately US$ 463.2 million) in the build-out of our cable television
network within our license areas and in other fixed assets.

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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., 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.  On April 14, 2004, AMAT Telecom L.P. changed its name to HOT
Telecom L.P.  The partnership agreement
includes, among other things, provisions relating to the management of HOT
Telecom L.P., or 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
November 2003, the Ministry of Communications granted HOT Telecom the HOT
Telecom Infrastructure  License covering
the same services covered by the Telecommunications Infrastructure License
granted to us in 2002 (to be supplied within the time frames set forth in the
Telecommunications Infrastructure License), and including the requirement to
start to provide other domestic fixed telecommunications services including
basic telephony by not later than November 25, 2004.  The HOT Telecom Infrastructure License replaced and cancelled our
Telecommunications Infrastructure License.

We
have recently entered into negotiations to acquire the cable and communications
assets of Tevel.  If this transaction is
completed, we would have over 580,000 cable subscribers, representing
approximately 60% of the Israeli cable market, and we would hold 35% of Golden
Channels.   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.

Until
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 and
November 2003, we beneficially own approximately 5.3% of Partners issued and
outstanding shares.

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.

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 movies (HOT Movies)), and independent producers
produce the other three channels in accordance with the Restrictive Business
Practices Courts decision in 1996 regarding the approval of unified
channels.  For a discussion of this
approval, 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.  Each franchise paired a densely populated
metropolitan area with a less densely populated rural area to ensure that
smaller rural communities would also receive cable television services. The
construction of the nationwide cable television network infrastructure began in
late 1989 and, based on the number of homes covered by cable infrastructure,
approximately 95% of our network had been completed by the end of 2003.

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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 by the HOT Telecom Infrastructure License.  Please see the discussion regarding the HOT
Telecom Infrastructure License in Item 4B. Business Overview  Domestic Fixed
Communications.

On
September 17, 2002, the Minister adopted, with certain changes the
recommendations of a committee formed by the Ministry of Communications for
establishment of policies and rules for opening of competition in the telephony
services market as the guiding principles in this field. The main purpose of
the committee was to improve the benefits to the consumer in the field of
telephony services, specifically by removing limitations to competition in this
area.  The committee found that, among
other things, the merger of the cable television operators and the entrance of
the merged entity into the telephony market will create opportunities for the
opening of competition in the telephony market. 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 recently
published the language of such special general license. For more information,
please see Item 4A.  History and
Development of the Company  Domestic Fixed Communications.

In
March 2004, the Minister announced its new policy with respect to Bezeqs
general license such that Bezeq would be allowed in the future, subject to
certain conditions, to give discounts for size and allow the provision of a
basket of services together with its subsidiaries. This would enable 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. The Minister intends to hold a hearing on this
policy. If the policy described above is implemented, 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 a basket of services, including
multi-channel television services through YES, may have a material effect on
our ability to supply telephony services to our subscribers, and this 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.

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.

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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 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.  According to
the Agreement, towards the end of 2004, we, the other cable operators and YES
are to negotiate the terms for YESs use of our Inside Wiring thereafter.

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.

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 April 30, 2004, we have provided
approximately 214,000 set-top boxes to our subscribers.  We have already purchased approximately
230,000 set-top boxes (including
6,000 one way only set-top boxes).  In
October 2002, we and our subsidiary Cable Systems Media Haifa - Hadera Ltd.
entered into a term sheet with Advent Digital Broadcast Ltd., or Advent,
pursuant to which we will purchase 40,000 digital set-top boxes, to be provided
in four equal portions over the period commencing on December 1, 2002, and
ending on August 1, 2003, for a total purchase price of $5.2 million.  As of May 31, 2004, 34,400 digital set-top
boxes have been supplied by Advent Digital Broadcast Ltd.  The Term Sheet shall bind the parties until
such time that they shall enter into a definitive agreement.

We
and Tevel, jointly and severally, recently signed a quotation with Advent to
purchase an additional 50,000 set-top boxes.

Recently,
we also reached a subsequent oral understanding to purchase another 20,000
set-top boxes from Advent.

Tiering

On
May 10, 2001, we received from the Council the approval to provide digital
broadcasting services in a tiering system. 
The original approval included only a few channels.  We apply for approvals for additional
channels on a case by case basis. We began to provide services according to the
tiering system in July 2001.

We
offer our digital subscribers various channels and packages.  Since December 2002, we and the other two
Israeli cable television operators offer unified tiering packages.  For a list of our channels and packages and the combinations of
packages we offer as part of our tiering system, see Item 4B. Products and
Services - Premium Broadcastings.

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Pay-Per-View, Near Video on Demand and Video
On Demand

We
began offering Pay-Per-View services in October 2000.  We have not yet begun to offer Near Video On Demand services to our
customers.  Pay-Per-View and Near Video
On Demand services are governed by our Cable Broadcast Licenses.   We are in the process of preparing to
provide Video on Demand 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.

On
November 6, 2000, the Ministry of Communications granted Bezeq  Israel
Telecommunications Corporation Ltd., or Bezeq, a license to supply High Speed
Internet services using ADSL technology. 
Since, at that time, we had not received a license to supply access to
High Speed Internet over cable services, as a licensed Internet service
provider, we decided to provide dial-up Internet services via Bezeqs
ADSL.  By April 2001, we had reached a
share of approximately 20% of the ADSL Internet services market.     In May 2001, we decided to cease these
Internet activities and accordingly, we transferred 16,000 of our Internet dial
up subscribers to Bezeq International in consideration for a payment of $1.25
million.

We
performed access to High Speed Internet over cable trials during 2000, 2001 and
the first quarter of 2002.  On March 27,
2002, we received our Telecommunications Infrastructure License, which allowed
us to provide, among other things, access to High Speed Internet over cable
services.  After receipt of our
Telecommunications Infrastructure License, the trials were discontinued and we
began to offer (including to subscribers of the trial services) our commercial
service of access to High Speed Internet over cable, which we launched on April
8, 2002.  In November 2003, the Ministry
of Communications granted HOT Telecom a license covering the same services
covered by the Telecommunications Infrastructure License granted to us in 2002
within the time frames set forth in the Telecommunications Infrastructure
License, and includes the requirement to start to provide other domestic fixed
communications services over cable networks including basic telephony services
to subscribers by not later than November 25, 2004.  The HOT Telecom Infrastructure License replaced and cancelled our
Telecommunications Infrastructure License. 
According to the HOT Telecom Infrastructure License access to High Speed
Internet services shall be provided through HOT Telecom.  Please see the discussion regarding the HOT
Telecom Infrastructure License in Item 4B. Business Overview  Domestic Fixed
Communications Services.  As of
December 31, 2003, we provide access to High Speed Internet over cable services
to 57,357 subscribers.  As of the date
of this annual report, we, Tevel and Golden Channels had not yet assigned our
access to High Speed Internet over cable subscribers to HOT Telecom.  We are currently evaluating the implications
of performing such assignment, and we have so notified the Minister of
Communications.

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:

| |  | 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.; 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.                                                                                                                                                                                                                                                                                                                                      

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| |  | 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.

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.  As of the date of
this annual report, we paid the amounts outstanding in respect of the first
quarter of 2004, but we have not yet made any payments in respect of the
amounts outstanding from 2003.  We
recently 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 for 2003 will be linked to the Israeli Consumer Price Index, and
will bear annual interest at the rate of 5.9%.

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.

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Proposed Merger of the Israeli 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.  The merger
agreement, upon its signing, 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.

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 understanding with the major Israeli banks and the other creditors
of the merging entities, and receipt of approvals required under applicable
law, including the approvals of the Income Tax Commission, the Council, the
Controller of Restrictive Business Practices and the Israeli court.  To date, we have received approvals, subject
to certain terms and conditions, from the Council, the Controller of
Restrictive Business Practices 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.

Since
the date of the approval of the Controller to the merger on April 22, 2002, we,
Tevel and Golden Channels collaborate 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 recently agreed to perform an
operational merger.  To this effect, a
joint management was recently appointed to oversee the operational merger of
the marketing, sales, engineering, customer service, operations and information
systems activities of the three cable companies. We will be subject to
decisions taken by the joint management of the merged operations, and
accordingly, these decisions will affect our policy-making in the areas of the
joint activities.  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 in fact enhance our profits and competitiveness.

In
addition, in an effort to expand our business, we have recently entered into
negotiations to acquire the cable and communications assets of Tevel.  If this transaction is completed, we would
have over 580,000 cable subscribers, representing approximately 60% of the
Israeli cable television market and we would hold 35% of Golden Channels.  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.

Domestic Fixed Communications Services

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 policies in this field.  The
main purpose of the committee was to improve the benefits to the consumer in
the field of domestic fixed communications services, specifically by removing limitations
to competition in this area.  In
accordance with the recommendations of the committee, among other things, the
merger of the cable television operators and the entrance of the merged entity
to the domestic fixed communications services market, create opportunities for
the opening of competition in the telephony services market.  See below for information regarding the
provision of telephony services by HOT Telecom.  For information regarding the provision of telephony services by
the merged entity, see Item 4B. Business Overview -Agreement for a Merger of
the Cable Television Operators  -
Approval of the Controller of Restrictive Business Practices to the Merger -
Interests in telephony services.

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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 communications 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
recently published the language of the special general license.

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, including telephony services.  In October 2003, we and the other two Israeli cable television
operators, acting through affiliates, entered into an agreement, which was
amended in November 2003, for the establishment of AMAT Telecom L.P., which
would engage in the establishment and operation of a public telecommunications
network by which it will supply domestic-fixed telecommunications services,
including, access to High Speed Internet over cable, infrastructure services,
messaging, data telecommunications and fixed telephony services.  On April 14, 2004, AMAT Telecom L.P. changed
its name to HOT Telecom L.P. The partnership agreement includes, among other
things, provisions relating to the management of HOT Telecom L.P., or HOT
Telecom, the distribution of its profits and income and limitations on the
transfer of rights by the partners of 
HOT Telecom.

We
beneficially own 26.5% of the rights in HOT Telecom. We and the other two cable
television 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 NIS105 million until June 30, 2004, not less than
NIS140 million until June 30, 2005, not less than NIS105 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. We undertook to invest up to NIS 93 million in HOT Telecom over
a period of three years commencing on November 25, 2003, and in accordance with
the aforesaid milestones.

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 26.5% 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 operators to afford access to their cable networks to HOT Telecom and HOT
Telecom Ltd.

The
abovementioned two agreements were made conditional upon the Israeli court
overseeing Tevels insolvency proceedings approving the entrance into such
agreement 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 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 and no longer has any obligation to these creditors with
respect to debts incurred prior to April 22, 2002.  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.

In
November 2003, the Ministry of Communications granted HOT Telecom a license
covering the same services covered by the Telecommunications Infrastructure
License granted to us in 2002 within the time frames set forth in the
Telecommunications Infrastructure License, and includes the requirement to
start to provide other domestic fixed communications services over cable
networks including basic telephony services to subscribers by not later than
November 25, 2004.  The HOT Telecom
Infrastructure License replaced and cancelled our Telecommunications
Infrastructure License.

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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. In
addition we provide access to High Speed Internet over cable services and
services to the business sector, data services and, commencing in November
2004, HOT Telecom intends to start to provide commercial telephony services.  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, 2003, there were approximately 1.75 million
homes covered by cable networks in Israel, with a penetration rate of
approximately 57%.  The high penetration
rate for multi-channel cable television services in Israel is attributable to
the high penetration of televisions, multiple televisions and home video
cassette recorders in homes, the fact that we provide additional Hebrew
language (including subtitled and dubbed) programs and other various programs
and services.

Subscriber
Base.  Between
2001 and 2003, the population of Israel grew at an average rate of
approximately 2% per year.  In 2003, 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 2003,
approximately 918,000 new immigrants arrived in Israel, representing
approximately 54% of the increase in Israel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.

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, 2000, 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, 2004.

| |  | Added during
  2000: the classical music channel (Mezzo); a new childrens channel for
  preschoolers (Hop Channel); the American sport channel (ESPN); the TV movie
  channel (Hallmark), and the British entertainment channel (BBC Prime);
  the Cartoon Channel; the classic movie channel (TCM); the Russian classic
  movie channel (Nashe Kino); and the action channel (AXN).                                                                                                                                                                                                                                                                                                                                                      
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | 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, (Good Life); two extra home cinema digital channels; the
  telenovella channel (Viva Platina); the sports channels (Sport 5+); and
  (NBA).
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Added during
  2002: the life style channel (Ego); 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 (Eurosportnews); the economics
  channel (CNBC); the sports channel (Fox Sport); and 4 regional radio
  channels.                                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                     

30

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---

| |  | Added
  through May 2004: the Academic channel; the General Russian channel (Moscow
  Open World); and the Extreme sports channel.
| | - | ------------------------------------------------------------------------------------------------------------------------------------

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, and they may purchase all or part of any of the
Premium Broadcastings.  For additional
information on the Basic Package and Premium Broadcastings, please see Item
4B. Products and Services.

Pay-Per-View,
Near Video on Demand and Video on Demand.  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.  We have not yet begun to offer Near Video on
Demand services to our subscribers.  Pay-Per-View
and Near Video On Demand services are governed by our Cable Broadcast Licenses.
For information regarding our Cable Broadcast Licenses, see Item 4B. Business
Overview - Our Licenses.  We are
currently in the process of preparing to provide Video On Demand, or VOD,
services.

Interactive
Services. 
Since September 2001, we provide the following interactive services to
our digital subscribers: Games Channels, Horoscopes and Weather.  Since February 2002, we provide an entertainment
programming guide service.  Since
November 2002, we operate an interactive youth application (T.J.) that serves
as a portal to our Youth Package, which includes a multi-optional interactive
screen.  Interactive applications have
been integrated into the Ego channel, since July 2002, and the Good Life
channel, since August 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.  In February 2003, we began an interactive
messaging service to subscribers, which allows us to send messages to
subscribers regarding broadcasts and services in connection with broadcasts. 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. . We
have recently commenced providing closed group chat services, known as HOT
Talk, instant messaging services and multi-player game services.  This service is currently provided free of
charge.  Subject to the receipt of the
relevant regulatory approvals, we intend to provide additional interactive
services in the future, including the integration of interactive applications
into additional channels, additional games channels, an interactive lottery and
soccer lottery.  For a list of our
interactive channels and services please see the table below under Item 4B.
Business Overview  Premium Broadcastings.

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

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 VOD
services, enhanced television interactive applications and other services,
which utilize the cable television platform upon other alternative platforms.
Our VOD project is in the design stage. 
This project is conducted jointly together with the other two Israeli
cable television operators, Tevel and Golden Channels.

31

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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 information, telecommunications and entertainment
industry.  In order to achieve our
mission, we are implementing strategies designed to:

| |  | increase our
  range of value-added services offerings to our subscribers;                                        
| | - | ------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                   
| |  | increase
  penetration in the services we provide today and expand into other
  telecommunications activities; and
| |   |                                                                                                                   
| |  | enter into
  mergers, acquisitions and strategic alliances to add to our offering and
  expand our market share.  

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:

| |  | state-of-the-art
  technology and an advanced network and infrastructure which we own entirely,
  including two-way broadband transmission, HFC cables, and a fully digitalized
  broadcasting system;                                          
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                 
| |  | a
  diversified and rich selection of programming content;                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                 
| |  | high quality
  of broadcasting service and support for subscribers;                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                 
| |  | as of
  December 31, 2003, a large subscriber base which contains approximately
  266,700 subscribers, constituting a penetration rate of approximately 56% in
  our license areas;                                                             
| |   |                                                                                                                                                                                                                                                 
| |  | a highly
  experienced and dedicated management team and staff;                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                 
| |  | built in
  technological unique advantages, such as wide bandwidth, 2-way communication,
  one pipe for various, multiple services, segmented network (which allows
  reuse of bandwidth and implementation of narrowcast and Unicast services);
| |   |                                                                                                                                                                                                                                                 
| |  | reasonable
  fees for our cable television broadcast offerings and access to High Speed
  Internet over cable services, and for other services; and                                                                                             
| |   |                                                                                                                                                                                                                                                 
| |  | 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. 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 - Premium Broadcastings.  Two of the most popular channels available
to cable television operators in Israel is provided by HOT Vision and by
independent producers.  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.

32

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---

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. For example, we provide
subscribers with broadcasts of the English football Premier League, the U.S.
National Basketball Association League, the European Football Association
Champion League, the French Open, various childrens programs, channels
dedicated to a variety of topics and interests, and films and popular series
from leading major studios around the world. 
In addition, we offer our subscribers new interactive channels and
applications. See the discussion in Item 4B. Business Overview  Growth in the
Number of Channels and Diversity of Content.

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 services.

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 approximately NIS 99 including VAT, and an average
monthly subscription fee for the analog and the digital Basic Packages of
approximately NIS 175.5 including VAT. 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 199 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 earlier of the date we cease to provide services to such subscriber,
or until removal of the set-top box. 
Alternatively, our subscribers may elect to lease the set-top box for a
monthly fee that ranges between NIS 10 and NIS 15 including VAT, but 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%.

Programming

We
currently transmit programming on varying numbers of channels in our operating
areas, which consists of off-air 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
subscribers in 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 Financial Review and Prospects  Operating Expenses.

We
and the other cable television operators have agreed, however, 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, 2001, 2002 and 2003, we recorded royalties expenses
with respect to such organizations of approximately NIS 2.7 million, NIS 2.9
million and NIS 2.7 million, respectively.

Off-Air
Channels. The off-air channels we transmit to our
subscribers are the Israel Broadcast Authority channel (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.

33

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---

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.

Other
Channels. We broadcast a wide variety of additional
channels, including those channels listed in the Basic Packages tables below,
and those pursuant to our tiering, Pay-Per-View and interactive services.

On May 30, 2001 we commenced broadcasting of
the adult content in accordance with the approval of the Council granted at
such time.  Since October 2001, pursuant
to amendments to the Telecommunications Law and Council decisions, we
transmitted adult content channels by way of Pay-Per-View only.  Pursuant to further amendments to the
Telecommunications Law, broadcasts that include abominable material within
the meaning in the Israeli Penal Law, 1977, and which include certain content
as set forth in the Telecommunications Law, is prohibited as of August
2002.   Following such further
amendment, we ceased to transmit adult content channels also by way of Pay-Per-View.  On June 12, 2003, the Council resolved to
approve the broadcast of the Playboy channel, subject to existing and certain
additional conditions and limitations, under which, among other things, the
Playboy channel will be transmitted only at certain stipulated times and
offered to digital subscribers as a separate pay channel and not as part of the
digital Basic Package.  Cable Broadcast
Licensees are required to, among other things, take reasonable measures to
ensure that: the channel shall be purchased only by subscribers over the age of
18; the channel will be coded such that access will be available only by a
personal code; and Cable Broadcast Licensees are required to transmit during
the transmission of the channel certain broadcasts regarding the prohibition on
exposure of children and youth to the channel. 
We have commenced broadcasts of the Playboy channel pursuant to and in
accordance with the conditions and limitations set forth in the Councils latter
decision.  Subscribers can view the
Playboy channel on a Pay-Per-Night basis, and the Erotica channel on a Pay Per
View basis.  A number of petitions filed
before the Israeli High Court of Justice, in which we were listed as a
respondent, against, inter alia, the Councils decision to approve the
broadcast of the Playboy channel, were denied.

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 (Channel 3 (HOT 3) and movies (HOT
Movies)).  We own approximately 25% of
HOT Vision and make payments to it based on the number of our subscribers.  For the years ended December 31, 2001, 2002
and 2003, we paid HOT Vision approximately NIS 70.0 million, NIS 62.0 million
and NIS 54.0 million, respectively.

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, 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 Licenses) 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.

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.

34

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Local
News Broadcasts.Our
licenses also require that we provide periodic local news broadcasts in each
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 and February 2003, a Cable Broadcasting Licensee may produce
local news broadcast for seven license areas through an external producer,
subject to the Councils approval. 
According to decisions of the Council taken in April 2004, we are
entitled to recognize, with respect to our obligations in the field of local
productions, an amount not to exceed NIS 14 million in respect of broadcasts of
magazines which are not daily events programs in an annual scope that will not
be less than one local news broadcast and one magazine related to regional
matters broadcast each day of the week, except one weekend day, and subject to
the other conditions of the decision. 
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 in consideration for a payment of NIS 42.48 million per annum
(linked to the Israeli consumer price index and subject to adjustments).  The payment of the consideration was
allocated among the three cable television operators, in proportion to the
number of their respective subscribers.

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.  To date, the Arabic channel and
the News Channel have not commenced broadcasts.

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.

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:

| |  | Channels 1
  and 33 of the Israeli Broadcasting Authority;                                                                                          
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                     
| |  | the
  commercial channels (Channels 2 and 10);                                                                                                      
| |   |                                                                                                                                                     
| |  | the Knesset
  channel;                                                                                                                              
| |   |                                                                                                                                                     
| |  | the Israeli
  educational channel;                                                                                                                  
| |   |                                                                                                                                                     
| |  | channels of
  special cable licensees according to the Councils instructions, on the
  digital service only - we currently broadcast Teva Hadvarim;

35

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---

| |  | dedicated
  channels pursuant to the Telecommunications Law (which currently only include
  the Shopping, Russian and Music Channels, but may in the future also include
  the News Channel that won a tender, and other channels that have yet to be
  tendered);
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                   
| |  | regional
  news and community broadcastings; and                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                   
| |  | 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.  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.

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, 2004.

|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 10      |  | Third
  national channel                               |  | Hebrew                      
|Israel 1        |  | First
  national channel                               |  | Hebrew                      
|Israel 33       |  | General
  Channel of the Israel Broadcasting Authority |  | Arabic,
  Hebrew and English
|CNN             |  | World news                                             |  | English                     

36

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|Channel               |  | Description                                       |  | Language(1)              
|--------------------- |  | ------------------------------------------------- |  | -------------------------
|Sky news              |  | World news                                        |  | English                  
|BBC World             |  | Collection
  of BBC best programs                 |  | 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                  
|National
  Geographic |  | Localized
  channel of NGC                        |  | Hebrew                   
|Star World            |  | Entertainment                                     |  | English                  
|Shopping              |  | Israeli
  shopping channel                        |  | Hebrew                   
|Israel 2              |  | Second
  national channel                         |  | Hebrew                   
|Education             |  | Israeli
  educational channel                     |  | Hebrew                   
|Knesset               |  | Israeli
  parliament channel                      |  | Hebrew                   
|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           
|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                   
|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

37

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---

|Channel                 |  | Description             |  | Language(1)      
|----------------------- |  | ----------------------- |  | -----------------
|User
  Guidance Channel |  | User
  Guidance Channel |  | Hebrew
  /Russian
|13 Radio
  Channels     |  | Music, News
  General   |  | Hebrew
  /Russian

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

Analog Basic Package

The
following table lists information regarding the Basic Package that we offer to
our analog subscribers as of April 30, 2004.

|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 &                              |  | Hebrew/        |  | ü                |  | ü     |  | ü                 |  | ü       |  | ü              |  | ü      
|                      |  | Education                                         |  | Russian        |  |                  |  |       |  |                   |  |         |  |                |  |        
|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     |  | ü                 |  | ü       |  | ------         |  | ü      
|TV Guide              |  | TV
  broadcasting programs                        |  | Hebrew         |  | ü                |  | ü     |  | ü                 |  |         |  |                |  | ü      
|Morocco               |  | Moroccan
  national channel                       |  | Arabic         |  | ü                |  | ü     |  | ü                 |  | ü       |  | -----          |  | ü      
|Egypt                 |  | Egyptian
  national channel                       |  | Arabic         |  | ü                |  | ü     |  | ü                 |  | ü       |  | ü              |  | ü      

38

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---

|Channel         |  | Description                                             |  | Language
  (1) |  | Bat-
  Yam/Holon |  | Haifa   |  | Netanya/
  Hadera |  | Golan   |  | Arab
  section |  | Galilee
|--------------- |  | ------------------------------------------------------- |  | -------------- |  | ---------------- |  | ------- |  | ----------------- |  | ------- |  | -------------- |  | -------
|METV            |  | Free Lebanon
  television                               |  | Arabic/        |  | ü                |  | ü       |  | ü                 |  | ü       |  | ü              |  | ü      
|                |  |                                                         |  | English        |  |                  |  |         |  |                   |  |         |  |                |  |        
|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      
|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      
|INTERSTAR       |  | Turkish
  channel                                       |  | Turkish        |  | ü                |  | ü       |  | ü                 |  | ü       |  | ü              |  | ü      
|Emergency
  (2) |  | Emergency
  communications                              |  | Hebrew         |  |                  |  |         |  |                   |  |         |  |                |  | ü      
|TV 7 -TUNIS     |  | Tunisian
  channel                                      |  | Arabic         |  | -------          |  |         |  | ü                 |  | ü       |  | -----          |  | ü      
|SAT 1           |  | German
  channel                                        |  | German         |  | ü                |  | ü       |  | ü                 |  | ü       |  | ü              |  | ü      
|LBC             |  | Arabic
  channel                                        |  | Arabic         |  |                  |  | ü       |  |                   |  | ü       |  | ü              |  |        
|Viva            |  | Teledrama
  Channel                                     |  | English /      |  | ü                |  | ü       |  | ü                 |  | ü       |  | ü              |  | ü      
|                |  |                                                         |  | Hebrew         |  |                  |  |         |  |                   |  |         |  |                |  |        
|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/       |  | ü                |  | ü       |  | ü                 |  | ü       |  | ü              |  | ü      
|                |  |                                                         |  | Hebrew         |  |                  |  |         |  |                   |  |         |  |                |  |        
|BBC Prime       |  | English
  channel                                       |  | English/       |  | ü                |  | ü       |  | ü                 |  | ü       |  | ü              |  | ü      
|                |  |                                                         |  | Hebrew         |  |                  |  |         |  |                   |  |         |  |                |  |        
|AXN             |  | Action                                                  |  | English/       |  | ü                |  | ü       |  | ü                 |  | ü       |  | ü              |  | ü      
|                |  |                                                         |  | Hebrew         |  |                  |  |         |  |                   |  |         |  |                |  |        
|TCM             |  | Movies                                                  |  | English/       |  | ü                |  | ü       |  | ü                 |  | ü       |  | ü              |  | ü      
|                |  |                                                         |  | Hebrew         |  |                  |  |         |  |                   |  |         |  |                |  |        
|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              |  | -------

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

39

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---

Tiering

On
April 5, 2001, the Council published its decision concerning its policy in
relation to broadcasting in the tiering system.  The tiering system enables us to supply to our digital
subscribers the digital Basic Package at a fixed price and additional single
channels and packages of channels for additional payment.  The policy behind the Councils decision is
that the tiering system should enable subscribers to receive and pay for only
the channels or packages chosen by them in addition to the Basic Package.  The Council will not oblige us to offer our
broadcastings in the tiering system in the analog transmission platform.  We received approval from the Council to
provide digital broadcast services in a tiering system on May 10, 2001. We are
allowed to operate the tiering system only in our digital transmission
platform.  Marketing of our tiering broadcasting
packages began in July 2001.

The
Councils decision that permits tiering in our digital transmission platform is
subject to our fulfilling a commitment that we made to the Ministry of
Communications on January 7, 2001, to supply and connect digital set-top boxes
to our subscribers over the years 2001 to 2004.  For additional information, see Item 4A. Information on the
Company - History and Development of the Company - Important Events in the
development of Cable Television and telecommunication industry, and our
business - Digital Broadcasting.

Since
December 2002, we and the other two Israeli cable television operators offer unified tiering packages, in the framework
of which we changed the structure of the tiering packages we offer to our
digital subscribers and the channels included in such packages.  For a list of our channels and packages and
the combinations of packages we offer as part of our tiering system, see Item
4B. Products and Services - Premium Broadcastings.

Premium
Broadcastings

Pursuant
to the Councils approval dated May 10, 2001, we may supply in our digital
broadcastings those Premium Broadcastings that the Council has approved. As
of May 31, 2004, approximately 60% of our subscribers are subscribers to the
digital broadcasting system and of those, 88% are provided with packages or
channels through the tiering system.

Premium
Broadcastings may be provided only to a digital subscriber that has purchased
the digital Basic Package.  The purchase
of any of the Premium Broadcastings may not be conditioned upon the purchase of
other Premium Broadcastings.  Rather,
digital subscribers may purchase all or any part of the Premium Broadcastings
in any combination of channels and packages, as they wish.

40

---

---

The
following channels and packages have been approved by the Council to be
included within the Premium Broadcastings in the tiering system as of April 30,
2004.

|Name of Package                |  | Channels Included
|------------------------------ |  | -----------------
|                               |  |                  
|Movies                       |  | HOT Drama        
|                               |  | HOT Action       
|                               |  | HOT Fun          
|                               |  | HOT Prime        
|                               |  |                  
|Entertainment                |  | Bip              
|                               |  | E!               
|                               |  | History Channel  
|                               |  | Adventure 1      
|                               |  | Life Style       
|                               |  | Viva Platina     
|                               |  | Leisure Guide    
|                               |  |                  
|Men & Sports                 |  | Channel 5+       
|                               |  | NBA              
|                               |  | Ego              
|                               |  | Reality TV       
|                               |  | Adventure 1      
|                               |  | Teams channel    
|                               |  | Eurosportnews    
|                               |  | Fox Sport        
|                               |  | CNBC             
|                               |  |                  
|MTV                          |  | MTV HITS         
|                               |  | MTV2             
|                               |  | MTV BASE         
|                               |  | VH1 CLASSIC      
|                               |  |                  
|Russian                      |  | Mega Film        
|                               |  | History (Russian)
|                               |  | Reality TV       
|                               |  | Romantica        
|                               |  |                  
|Games                        |  | Gogo             
|                               |  | Klick            
|                               |  | Gogo Gold        
|                               |  |                  
|Music Choice                   |  | 40 Audio Channels
|                               |  |                  
|Various channels a
  la  carte |  | Zee TV           
|                               |  | ART 1-5          
|                               |  | Pro TV           
|                               |  | Techelet         
|                               |  | Playboy          

41

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---

|                       |  | MGM                                         
|---------------------- |  | --------------------------------------------
|                       |  | Academic Channel                            
|                       |  | Moscow open world                           
|Childrens             |  | Cinema Fun                                  
|                       |  | Fox Kids                                    
|                       |  | Gogo or Klick                               
|                       |  | Logi                                        
|                       |  | Portal Super
  Kid                          
|Youth                  |  | BIP                                         
|                       |  | MTV HITS                                    
|                       |  | MTV2                                        
|                       |  | MTV BASE                                    
|                       |  | VH1 CLASSIC                                 
|                       |  | TJ Portal                                   
|                       |  | Game channel (Gogo or Klick)                
|                       |  | Extreme sports channel                      
|Interactive
  services |  |                                             
|                       |  | Weather                                     
|                       |  | Horoscope                                   
|                       |  | Gordys Friends                             
|                       |  | HOP Educational                             
|                       |  | HOT Entertainment                           
|                       |  | Who Wants to be a Millionaire               
|                       |  | Gogo Club                                   
|                       |  | Gogo                                        
|                       |  | Klick                                       
|                       |  | Double Click (subscriber against subscriber)

We offer
combinations of packages as part of our tiering system as follows:

|Duet:      | Any
  combination of two of the following channels and packages: Movies;
  Children; Youth and Entertainment.                   
|---------- | ----------------------------------------------------------------------------------------------------------------------------------------
|           |                                                                                                                                         
|Duet Plus: | Any
  combination of two of the following channels and packages: Movies;
  Children; Youth; Entertainment; and Men & Sports.  
|           |                                                                                                                                         
|Trio:      | Any
  combination of three of the following packages and channels: Movies;
  Children; Youth; and Entertainment.                
|           |                                                                                                                                         
|Trio Plus: | Any
  combination of three of the following packages and channels: Movies;
  Children; Youth; Entertainment; and Men & Sports.
|           |                                                                                                                                         
|4U:        | Any
  combination of four of the following packages and channels: Movies; Children;
  Youth; Entertainment; and Men & Sports. 

42

---

---

|Take 5: | Any
  combination of the following packages and channels: Movies; Children;
  Youth; Entertainment; and Men & Sports.
|------- | -------------------------------------------------------------------------------------------------------------------------------

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. 
We are entitled to a fee from the producer of the Shopping Channel for
the use of one of our channels.  For the
years ended December 31, 2001, 2002 and 2003, we received approximately NIS 2.0
million, NIS 1.2 million and NIS 0.9 million, respectively, from the Shopping
Channel in fees.

In
addition, on January 2, 2003, the Council determined its policy regarding
shopping channel broadcasts by a cable broadcast licensee following the receipt
of a separate approval from the Council for the broadcasts of shopping
channels.  To date, we have not
requested permission to broadcast additional shopping channels.

Pay-Per-View, Near
Video On Demand and Video On Demand

Pay-Per-View
and Near Video On Demand 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 4 Pay-Per-View channels on the analog platform and 10 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.

We
have not yet begun to offer Near Video On Demand services to our
subscribers.  We are currently in the
process of preparing to provide Video On Demand services.  Our VOD project is in the design stage.  This project is conducted jointly together
with the other two Israeli cable television operators.

Interactive Services

As
of April 2004, we supply our digital subscribers with interactive services,
including among others, games channels, Horoscopes and Weather, an
entertainment programming guide service, an interactive youth application
(T.J.) that serves as a portal to our Youth Package, interactive
applications integrated into the Ego channel and the Good Life channel, an
interactive invoice service, interactive voting applications, interactive
commercial applications and an interactive messaging service to subscribers
(which allows us to send messages to subscribers regarding broadcasts and
services in connection with broadcasts). 
We intend, subject to the receipt of the relevant regulatory approvals,
to provide additional interactive services in the future, including the
integration of interactive applications into additional channels, additional
games channels, an interactive lottery and soccer lottery.  We currently offer our digital subscribers
the 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. We also provide a portal free of charge
which enables our digital subscribers access to all of our interactive
services.  For a fee, we also enable subscribers
to play games against each other from their own home, and an interactive
channel which enables our subscribers to learn Spanish.  We also offer a music portal which enables
access to all of our music channels, and HOT DJ, which is an interactive music
channel in the Russian language.

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:

43

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---

| |  | 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 operators);                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | instant
  messaging  (between our subscribers of
  this service, and between our subscribers and subscribers of instant
  messaging services of other cable operators); and                                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | interactive
  games (between our subscribers of this service or between our subscribers of
  other cable 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).

On
December 28, 2003, we notified the Ministry of Communications that we will no
longer provide T-Mail and SMS messaging services, and we formally ceased to
provide these messaging services in January of 2004.   In connection with our cessation to provide messaging services,
the memorandum of understanding with Comverse Network Systems Ltd., or
Comverse, from July 2001, regarding the supply by Comverse of products for
interactive television unified messaging using Comverses TVGATE system was
terminated by the parties, and we ceased to acquire such products from
Comverse.

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 2003, we had 57,357 access to High Speed Internet over cable
subscribers.  As of May 31, 2004, we had
approximately 70,000 access to High Speed Internet subscribers. The table below
sets forth the products we offer to our private 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).

Our
access to High Speed Internet over cable service 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.  We recently began to provide
access to High Speed Internet services to certain establishments, businesses and
communal settlements in Israel. As of May 31, 2004, we have purchased
approximately 94,000 cable modems and intend to purchase more in the future in
accordance with the market penetration of the service. In the future, we and
the other cable operators intend to assign our access to High Speed Internet
subscribers to HOT Telecom.  We are
currently evaluating the implications of performing such assignment, and we
have so notified the Minister of Communications.

44

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Services for the
Business Sector

We
have recently commenced the marketing of additional communication services
designed for businesses, including High Speed Internet for businesses, Internet
Protocol Visual Private Network, or IP VPN, and data transmission services and
network services at different bit rates.

We
market packages with the following various broadband widths:

Broad Band 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,
we offer our 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      

Set- top boxes

While
our broadband network is configured to support a wide variety of services, such
as Pay-Per-View, Premium Broadcastings and Interactive Services, it is
necessary to provide addressable set-top boxes to subscribers in order to
implement such services.  We bear the
cost of the addressable set-top boxes supplied to subscribers having set-top
boxes in their homes.  Those subscribers
that are provided with addressable set-top boxes that choose the deposit option
are required to bear, in whole or in part, the cost of the set-top boxes by way
of a deposit.  We are not permitted to
charge a fee for the deposit of the set-top box equal to more than the value of
the set-top box.  We are permitted to reduce
the amount we refund to a subscriber upon return of a set-top box by up to 10%
of the value of the set-top box for depreciation for each year or each partial
year, commencing from the earlier of the date of installation of the set-top
box and until the date we cease to provide services to such subscriber, or
until the removal of the set-top box. In accordance with the terms of our Cable
Broadcast Licenses, as amended by the Council on March 6, 2003, our subscribers
may alternatively elect to lease the set-top box for a monthly fee.  We are not permitted to charge an aggregate
fee for the lease of the set-top box equal to more than the value of the
set-top box to us.    On June 16, 2003,
the Economic Committee of the Israeli parliament approved an amendment to
regulations promulgated under the Telecommunications Law, which regulates the
ability of the Cable Broadcast Licensees to lease the set-top box to the
subscriber, at the subscribers option, in accordance with the terms of the
Cable Broadcast License, and in addition, pursuant to this amendment Cable
Broadcast Licensees are allowed to sell the set-top box to subscribers, at the
subscribers option, in consideration for an amount not exceeding the value of
the set-top box.

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 revenue 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.

45

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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
by advertising particular programs that are broadcast on various channels on
our cable network which we believe would be of interest to potential
subscribers on television and through print media, direct mail, telemarketing
and cross-promotions on dedicated channels. In addition, as part of our effort
to maintain subscribers, we promote channels and programs that we broadcast. We
also invest in promotions specifically aimed at the Russian sector in Israel
due to the potential of this market. 
Since the end of April 2002, in accordance with the approval of the
Controller of Restrictive Business Practices to the proposed merger of the
Israeli cable television operators, we cooperate with the other two Israeli
cable television operators, among other things, in our marketing activities and
content related activities.  In
addition, since December 2002, we and the other two Israeli cable television
operators offer unified tiering packages (in the framework of which we changed the
structure of the tiering packages we previously offered to our digital
subscribers and the channels included in such packages).

Since
September 2003, our joint activities with Tevel and Golden Channels have been
conducted under the brand name HOT.

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.

Additionally,
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 consideration 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.

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 requestor 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.

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
cable broadcasts or access to High Speed Internet 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.

46

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We
believe that satisfaction with cable television services is essential to
reaching and maintaining high levels of penetration. 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, 2003, we had a staff of
209 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. The customer support staff routinely provides
feedback to the marketing and research and development groups.  Since February 2002, our customer service
personnel also engage in sales activities.

Franchises
and Licenses. Between 1990 and April 2002, we conducted our operations pursuant
to five exclusive franchises to operate cable television in central and
northern Israel, including three of Israels largest cities, and numerous
smaller communities and rural areas. Pursuant to the terms of each franchise
deed, we were granted the right to operate cable television systems in
specified geographic regions, each of which included a densely populated
metropolitan area and a less densely populated rural area.  In 2002, these franchises were replaced by
non-exclusive Cable Broadcast Licenses, a Telecommunications Infrastructure
License and a Broadcasting HeadEnd License, to operate in the same geographical
areas as the franchises.  These licenses
were granted on April 30, 2002, March 27, 2002 and May 2, 2002,
respectively.  In November 2003, the
Ministry of Communications granted to HOT Telecom L.P., or HOT Telecom, a
limited partnership owned by the three Israeli cable operators (of which we
beneficially own approximately 26.5%), a license covering the same services
covered by the Telecommunications Infrastructure License granted to us in 2002
within the time frame set forth in the Telecommunications Infrastructure
License, and also includes the requirement to start to provide other domestic
fixed communications 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 the Telecommunications Infrastructure License granted to
us in 2002. As of December 31, 2003, the area covered by our non-exclusive
licenses was approximately 510,300 homes.

To
maximize technological and administrative efficiencies, during 2003 we
reorganized our operational areas, and 
we currently operate the cable television services through two operational
areas representing the geographical areas covered by our previous franchises
and new licenses: Netanya and Haifa. Our principal national common HeadEnd is
located in Haifa, and we have secondary common HeadEnds in Netanya, Bat-Yam,
Ramot Naftali (serving the Kiryat Shemona, Safed and the Sea of Galilee license
areas), and Pardess Hanna.

A
description of the geographical areas where we currently conduct our operations
covered by our licenses are set forth below.

| |  | 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, 2003, the area included
  approximately 116,000 households, and our network in the Bat-Yam/Holon area
  passed 116,000 homes and had approximately 72,200 cable television
  subscribers.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | 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, 2003, the area included approximately 135,000
  households, and our network in the Haifa area passed 132,600 homes and had
  approximately 76,700 cable television subscribers.                                                               

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| |  | 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, 2003, the area included approximately 202,500
  households, and our network in the Netanya/Hadera area passed 179,000 homes
  and had approximately 89,900 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, 2003, the area
  included approximately 56,900 households, and our network in the Galilee
  operating area passed 52,800 homes and had approximately 27,900 cable
  television subscribers.  We have not
  completed the buildout of the cable network in this operating area.                               

The
table below contains information on subscriber penetration on a geographical
basis in the areas in which we currently operate, as of December 31, 2003.

|Area                  |  | Date
  CommencedCableTelevisionOperations |  | 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                                |  | 116,004                      |  | 593                 |  | 116,004         |  | 72,227                         |  | 62.3%                                   |  | 62.3%                               |  | 13,229                 | 
|Haifa                 |  | September
  1991                          |  | 135,005                      |  | 1,131               |  | 132,593         |  | 76,675                         |  | 57.8%                                   |  | 56.8%                               |  | 16,716                 | 
|Netanya 
  Hadera    |  | January 1993                              |  | 202,464                      |  | 3,233               |  | 178,976         |  | 89,869                         |  | 50.2%                                   |  | 44.4%                               |  | 21,789                 | 
|Galilee               |  | December
  1990                           |  | 56,856                       |  | 1,182               |  | 52,846          |  | 27,919                         |  | 52.8%                                   |  | 49.1%                               |  | 5,623                  | 
|Total                 |  |                                           |  | 510,329                      |  | 6,139               |  | 480,419         |  | 266,690                        |  | 55.5%                                   |  | 52.3%                               |  | 57,357                 | 

|(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.  

Technological
Preparations for Competition in the Telecommunications Market

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.

The
digital system enables us to provide our subscribers with dozens of
broadcasting channels, channel packages according to choice, Internet services,
interactive services, and added value services, including Pay-Per-View and Near
Video On Demand services (the latter of which we have not commenced).

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.

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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 350 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, and may enable us in the future to offer telephony over cable and
other bandwidth consumer services.

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
plant.  Our cable transmission network
is capable of supporting both broadcast transmission and two-way data
transmissions for various telecommunications applications.

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 video cassette recorders and/or video servers.  A fiber optic cable network transmits
signals carrying all the systems channels from the 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 coaxial
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 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 currently includes a playback system and 11parabolic antennas
for reception of satellite broadcasts and serves the Netanya operating
area.

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 2 unattended sites,
located in the Galilee license area, which in turn is transmitted by
underground cable to subscribers.  Those
microwave links have been progressively replaced by modern fiber optics links.

In
September 1991, we completed construction of a HeadEnd located in Haifa, which
we now operate as our master HeadEnd. 
This HeadEnd includes, among other things, a playback system, satellite
dish antennas and a production studio that generates original programming.  Subscribers in the Haifa operating area are
served by this HeadEnd via underground fiber optic and coaxial cables.  A fiber-optic network carries television
channels from the Haifa HeadEnd to the Netanya operating area.  The Haifa and Netanya operating areas form a
contiguous geographic area.

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.

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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 December 31, 2003, we completed the installation of
approximately 3,815 miles of underground cable.

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.

HOT
Telecom recently conducted national trials for the provision of telephony
services via IP technologies over cable networks.  As of April 30, 2004, there were 550 trial subscribers.

Cellular Telecommunication Services

As
part of our strategy to develop and become involved in new telecommunication
projects and become a leading telecommunication company in Israel, 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 $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.  Currently, through Matav Investments Ltd., we beneficially own
approximately 5.3% of Partners issued and outstanding share capital.

The
other major beneficial shareholders in Partner are Hutchison Whampoa Ltd.,
Elron Electronic Industries Ltd. (through Elbit Ltd.) and Eurocom
Communications Ltd.  We have the
beneficial right, through
Matav Investments Ltd., to appoint up to two directors to the board of
directors of Partner (which is comprised of 17 directors) as long as we hold at
least 4.99% of Partners issued share capital, pursuant to a shareholders
agreement.

All
of our current holdings in Partner are pledged to the banks participating in
Partners senior credit facility, which was NIS 1,807 million as of December
31, 2003, by means of pledges unlimited in sum, to secure Partners
undertakings under the credit facility.

On
January 1, 1999, Partner commenced operations and the supply of services to the
public on a fully commercial basis. Partners GSM infrastructure covers
approximately 97% of the Israeli population, and according to Partners
financial annual report on Form 20-F for the year ended December 31, 2003,
filed with the U.S. Securities and Exchange Commission, or SEC, on April 30,
2004, the number of its subscribers as of December 31, 2003, is 2,103,000,
equal to approximately 31% of the total subscribers of cellular
telecommunications in Israel.

Partner
reported total nominal revenue of NIS 4,467.7 million (US$ 1,020.3 million) in
2003 as compared to total nominal revenue of NIS 3,249.3 million in 2001 and
NIS 4,054.6 million in 2002, respectively, and net nominal income before taxes
of NIS 529.6 million (US$ 120.9 million) in 2003 as compared to net nominal
income of approximately NIS 84.2 million in 2002, and losses of approximately
NIS 306.8 million in 2001, respectively.

On
March 14, 2004, we, Danker Investments Ltd. and Delek Investments Properties
Ltd., two of our principal shareholders, entered into a memorandum of
understanding with Partner pursuant to which Partner will invest up to $137
million in our company, for up to 40% of our issued and outstanding share
capital.  This memorandum of
understanding has since expired and has no legal effect.  However, the parties announced that they
intend to continue discussions in an effort to reach an agreement.  For more details regarding this transactions,
please see Item 7B. Related Party Transactions  Memorandum of Understanding
with Partner.

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International Telecommunication Services

On
November 7, 1996, Barak I.T.C. (1995)  The International Telecommunications
Services Corp. Ltd., or Barak, in which we indirectly hold a 10% share
ownership interest, was granted a license to provide international
telecommunications services in Israel. 
Barak and one other international telecommunications license holder, 012
Golden Lines International Telecommunications Services Ltd., or Golden Lines,
began offering international telecommunication services in July 1997. The other
major beneficial shareholders in Barak are Clalcom Ltd., and indirectly, Sprint
International, Inc., Deutsche Telekom AG and France Cables et Radio SA.  We have the right to appoint 1 director to
the board of directors of Barak (which is comprised of 10 directors), pursuant
to a shareholders agreement.

During
2003, Barak increased the total volume of voice traffic by approximately
10%.  Since 1998, Barak has provided
Internet services to its customers, and, according to Baraks management, as at
December 2003, Barak holds a market share of approximately 9% of the access to
High Speed Internet market. As of December 31, 2003, our
investments in Barak totaled approximately NIS 16.2 million, after a write-off
of approximately NIS 8.8 million of our investment in Barak (among other
things, based on a company valuation of Barak).  In November 1997, Barak issued senior subordinated discount
notes, the proceeds of which amounted to $100 million.  In addition, Barak entered into loan
agreements with two Israeli banks under which it was entitled to borrow up to
$170 million. The availability period of the bank loans ended during November
2002.  Barak reported revenue of NIS 711
million in 2003 as compared to NIS 694.7 million and NIS 673.9 million in 2002
and 2001, respectively, and net income of NIS 55.9 million in 2003 as compared
to net income of NIS 62.6 million in 2002 and a loss of NIS 70.6 million in
2001.

In
addition, according to Baraks financial statements for the first quarter of
2004, as of March 31, 2004, Barak had a capital deficiency in the amount of NIS
563 million and a working capital deficit in the amount of NIS 200
million.  If Barak is unable to reach
agreement with its banks and other major creditors regarding the restructuring
of its debt, or is unable to raise other financing, it might not be able to
continue as a going concern, and as a result, we may be required to write-off a
substantial portion of our investment in Barak.  In addition, if Barak will raise equity financing in the future,
and we will elect not to participate in such financing, our shareholding in
Barak could be substantially diluted.

Since
we have a 10% interest in Barak and 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
competition.  In April 2004 the Minister
published regulations in order to achieve this.  The regulations provide that companies that meet the requirements
to serve as a international telecommunications operator may receive licenses,
other than domestic operators, cellular operators or material operators in the
field of international transmission services. 
The regulations establish a number of pre-conditions to qualify to
receive a license, and set forth the procedure for application for a
license.  The Ministry of Communications
has recently granted an additional license for the establishment and operation
of international telecommunications systems in Israel to one of the large
access to High Speed Internet providers. 
In addition, two other companies have applied to the Ministry for such a
license.

Investments in Technological Companies

In
May 2000, we and some of our shareholders 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 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 for 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
up to a total sum of $15 million.

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As
of December 31, 2003, we and the other shareholders have invested through
Nonstop Ventures Ltd. in seven start-up companies an aggregate amount of
approximately $5.8 million.  Of the
aggregate investment, we invested approximately $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, 2001 at a value of
approximately $1.4 million and were further reduced and recorded in our
financial statements for the year ended December 31, 2002 at a value of
approximately $0.6 million. These investments are recorded in our financial statements
for the year ended December 31, 2003 at a value of approximately $0.3 million
(which reflects a write-off performed by Nonstop in March 2003 of $0.3 million
in respect of its investment in one of the start-up companies).

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:

| |  | grant cable
  broadcast licenses;                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                 
| |  | establish
  policies and adopt rules concerning the type, subject and content of cable
  television programming;
| |   |                                                                                                                 
| |  | supervise
  the provision of broadcasting services by cable television and satellite
  operators; and           
| |   |                                                                                                                 
| |  | 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 2 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.  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 operators (of which we beneficially own approximately 26.5%), 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 telephony 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 the Telecommunications Infrastructure License
granted to us in 2002. These licenses cover the same geographical areas as our
previous five exclusive franchises.

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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, we are now subject, among other things, to the terms, conditions and
restrictions set forth below.

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.

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
350,000, 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;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | 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;                                                                                                                                                        
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                             
| | 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.

             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.

             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:

| |  | bank
  guarantees by the three cable operators in the aggregate amount of $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 $3.72 million; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                            
| |  | a guarantee
  of NIS 9.2 million to the Council pursuant to the Cable Broadcast Licenses
  given 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.

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             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.

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 License 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.

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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.                                                                                                                        
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                             
| |       | 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.

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             Subscription fees

The
subscription fees that we charge 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.

             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 companies presented their
position regarding the proposed new rules. 
To date, such rules have not yet been adopted.

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.

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We
are entitled to broadcast notices regarding sponsorships during certain sports
broadcasts, subject to certain conditions, in accordance with and as set forth
in the Councils decision of September 3, 2002.

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 2001, 2002 and 2003 is higher than 8% of our annual revenues
from the subscription fees for the same years.

             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.  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;
| | -- | ----------------------------------------------------------

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| | ii.  | $6,466,178
  worth of total investments in original locally produced broadcasts;                                                                      
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                       
| | iii. | 3,890 total
  hours in total of original programming on Channels 3, 6 and 8;                                                                          
| |      |                                                                                                                                                       
| | iv.  | 342 total
  movies on Channel 4;                                                                                                                      
| |      |                                                                                                                                                       
| | 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.

On
May 6, 2003 a letter was sent to the Council on behalf of the Israeli cable
television operators expressing their objections to the Councils decisions
described above regarding the outstanding obligations as determined by the
Council.  On June 1, 2004, we and the
other two cable operators presented our suggested settlement regarding the
outstanding obligations to the Council. We are currently waiting for the
response of the Council to our suggested settlement.

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

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 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.

             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.

             Fees

The
fees we are permitted to charge our subscribers 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, as mentioned
above.

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.

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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 addition
may be charged to the other entitys fee.

             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.

             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.

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.

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.  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:

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| | 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.

On
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 havent been executed yet.

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 25% of the outstanding share
capital of HOT Vision. 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.

According
to Council decisions in March 2000, March 2002, May 2002 and December 2002, the
Council further extended the approval of joint broadcast channels until June
30, 2003, subject to the obligation to allow YES to broadcast those channels
for consideration, excluding originally produced content, until the earlier of
either: December 31, 2003 (regarding the family channel (HOT 3), the movie
channel (HOT Movies), and the sports channel), and March 1, 2003 (regarding the
childrens channel); or the date upon which YES has at least 500,000
subscribers.  After the expiry of this
obligation upon the cable television operators, YES may request an extension.  To date, YES has not requested an
extension.  These obligations to YES
have since expired.  YES broadcasts the
family channel (HOT 3) produced by HOT Vision, except for original productions,
pursuant to an agreement effective until December 31, 2006.  YES ceased to broadcast the movie channel
(HOT Movies) produced by HOT Vision on June 30, 2002.  Furthermore, pursuant to the Councils decision in March 2000, we
are prohibited from broadcasting content that we purchased on an exclusive
basis (with the exception of originally produced content).

Under
the approval of the Controller 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
the joint activities of the cable television operators, it is no longer
necessary for these joint activities of the cable companies to be subject to
the approval of the Restrictive Business Practices Court.  However, the terms and conditions of the
approvals of the Council to the proposed merger impose on the merged entity
similar provisions to those that currently apply to the cable companies
regarding the broadcasting obligations towards YES. For additional information
regarding the conditions of the approvals for the proposed merger and an
exemption we received from the Restrictive Business Practices Authority, see
Item 4B. Business Overview - Agreement for a Merger of the Cable Television
Operators.

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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 law suits 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 Channel 3
(HOT 3) and movie channels (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 the 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 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 major studios and expenses associated with the
management of the above legal procedures. 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 3 and 4. 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 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 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
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 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 companies 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.

Cooperation Among the Cable Companies and Conducting
Negotiations for the Acquisition of the Cable Operations and Assets of Tevel

Agreement for a Merger of the Cable Television
Operators

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.  The
parties have agreed that this merger agreement, upon its signing, 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.

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Prior
to the merger we will 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, and the Controller of Restrictive Business Practices and by the
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.  One of the issues
outstanding to date in connection with the consummation of the merger is the
position of the Supervisor of Banks of the Bank of Israel in connection with,
among other things, certain limitations under Israeli banking laws.

According
to the position of the Supervisor of Banks of the Bank of Israel, the merger of
the cable 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 a Group of Borrowers as such term is defined in the
Proper Bank Management Directives. 
This position of the Supervisor of Banks has an impact as to the issue
of giving loans by banking corporations and as to the issue of allocation of
the merged companys debts, among other things, to an indirect controlling
shareholder of Matav.

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
November 19, 2003, we, together with the other Israeli cable television
operators submitted a request to the Controller of Restrictive Business
Practices for an exemption from the requirement to receive an approval of a
restrictive arrangement under Section 14 of the Restrictive Business Practices
Law, to cover the period from November 16, 2003 and until the earlier of the
date of consummation of the merger of the cable television operators or
November 15, 2004, in order to facilitate the consummation of the merger.  The application for the exemption related to
the existing joint activities of the cable television operators, including
among other things, multi-channel television broadcasts, domestic fixed
communications services including Internet access and telephony services,
marketing, production and content purchasing. 
On December 17, 2003, the Controller granted us and the other cable
television operators an exemption for a period of one year.  This exemption is conditional upon, among
other things, 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,
or from undertaking any cooperation among themselves prior to December 15, 2004
which is not reversible.

According
to the Controllers conditions to the approval of the merger, as extended, it
was determined that, among other things, the merged infrastructure company must
commercially supply telephony services over cable infrastructure to the public
in Israel by no later than November 20, 2004. 
Furthermore, it was determined that the merged infrastructure company
will provide telephony services that compete with those of Bezeq in scope and
time as set forth in the Controllers conditions to his approval of the merger.
The investment in telephony must meet certain required minimums as further
detailed below.

In
light of the above, there can be no assurance that the merger will take place,
the date on which it will take place or the structure that will be implemented,
and accordingly our management is examining the options available to us in
order to continue and maintain the existing cooperation among the cable
television operators, including the possibility of purchasing Tevels cable
television and access to High Speed Internet subscribers.

In
that regard, we have entered into negotiations 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
580,000 cable subscribers, representing approximately 60% of the Israeli cable
television market, and we would hold 35% of Golden Channels.  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.

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We
believe that if we were to acquire all of Tevels assets as aforesaid, the
proposed merger of the three Israeli cable television operators would not be
completed in its current proposed form. 
However, we believe that following an acquisition by us of Tevels
assets, we would expand our cooperation with Golden Channels and 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 recently agreed to perform an
operational merger.  To this effect, a
joint management was recently appointed to oversee the merger of the marketing,
sales, engineering, customer service, operations and information systems
activities of the three companies. We will be subject to decisions taken by the
joint management of the merged operations, and accordingly, these decisions
will affect our policy-making in the areas of the joint activities. 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 in fact enhance our profits and competitiveness.

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.  In September and December 2003 the Court
extended the stay of proceedings order until January 11, 2004 in order to allow
the continuation of the process of receiving the approvals required in order
for the arrangement of creditors to become effective.  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 and, subject to the fulfillment
of the arrangement, no longer has any obligation to these creditors with
respect to debts incurred prior to April 22, 2002.  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.

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, is subject to a number of conditions, including:

| |  | an
  obligation upon the cable television operators to allow direct broadcasting
  by YES, to broadcast the HOT 3, HOT Movies, sports and childrens channels,
  for consideration.  This obligation
  expires upon the earlier of either: December 31, 2003 (regarding HOT 3,
  HOT Movies and sports channels), and March 1, 2003 (regarding the childrens
  channel); or the date on which YES has at least 500,000 subscribers, after
  which YES may request an extension. 
  To date, YES has not required an extension. These obligation to YES
  have since expired. YES broadcasts the HOT 3 channel produced by HOT Vision,
  except for original productions, pursuant to an agreement effective until
  December 31, 2006.  YES ceased to
  broadcast HOT Movies produced by HOT Vision on June 30 2002;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | 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);                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | 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;                                                                                                                                                                            

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| |  | 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;                                                                                          
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | 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                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | 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

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.  The
eventual application of these terms and conditions 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.

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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 Channel 3 (HOT 3) and the movies channel
(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 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 operators relinquished
our interests in the childrens channel and the culture and science channel.

(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 Channel 3 and movie channels and for Pay-Per-View
and Near Video On Demand, and such purchase 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 Channel
3 and the 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. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
| |  | 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.                                                                                                     | 

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| |  | 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:The merger is conditional upon
the merged entity supplying telephony services on cable infrastructure no later
than November 20, 2004, and supplying all of its offered services to any
applicant within at least fifteen defined areas, in each city within such areas
that has a population of more than 10,000 people, by no later than November 20,
2005.  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 105
million until June 30, 2004, not less than NIS 140 million until June 30, 2005,
not less than NIS 105 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.

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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.

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 $3.75 million.

In
the event of a non-material breach, the Controller may exercise $500,000 of the
bank guarantee in relation to each breach, and an additional $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.

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4C.        ORGANIZATIONAL
STRUCTURE

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

| |  | 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
  10% of the share capital of Barak I.T.C. (1995)  The International
  Telecommunications Services Corp. Ltd., an international telephony service
  provider in Israel, and through Matav Investments Ltd., we are the beneficial
  owners of approximately 5.3% 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Cable Systems Media Haifa-Hadera Ltd. is a company wholly owned by us, and holds the Cable
  Broadcast License for the Haifa-Hadera area.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | 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 Assets Ltd. is a company wholly owned by
  us, through Matav Investments Ltd., and engages in real estate
  activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Matav Infrastructure Ltd. is a company wholly owned by us, and
  is the general partner of Matav Infrastructure 2001 L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Nonstop Ventures Ltd. is a company of which we hold 50% of
  the issued share capital, with the remainder being held by several of our
  shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | HOT Telecom L.P. is a limited partnership
  owned by the three Israeli cable television operators, of which we
  beneficially own approximately 26.5% through Matav Investments Ltd.  HOT Telecom L.P. holds the HOT Telecom
  Infrastructure License.                                                                                                                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | HOT Telecom Ltd. isa company owned by the three Israeli
  cable television operators, of which we beneficially own approximately 26.5%
  through Matav Investment Ltd.  HOT
  Telecom Ltd. is the general partner of HOT Telecom L.P.                                                                                                                                                                                                                                                                                                                                                                                                                   

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 Assets Ltd., or Delek, and
granted to Delek an option exercisable for two years to purchase an additional
2% of our outstanding shares.   As of
April 30, 2004, Dankner Investments still held approximately 22% of our
outstanding shares, and nominates a majority of our directors pursuant to the
terms of a shareholders agreement.  On
May 31, 2004, Dankner Investments Ltd. issued an immediate report to the Israel
Securities Authority and the Tel Aviv Stock Exchange stating that the members
of the Dankner and Gineo families that hold shares in Dankner Investments Ltd.
signed an agreement with Delek Real Estate Ltd. for the purchase of such
shares, constituting 87.5% of the issued share capital of Dankner Investments
Ltd.  The transaction is subject to a
number of approvals, including the approval of the Controller of Restrictive
Business Practices and the Cable and Satellite Broadcasting Council.  The agreement also provides that in the
event the conditions to the aforesaid sale are not met by a specified date,
subject to certain other conditions, Delek Real Estate Ltd. may purchase shares
of Dankner Investments Ltd. from the other parties to the agreement
representing 20-25% of the issued share capital of Dankner Investments Ltd. .  On June 16, 2004, Delek Group Ltd. issued an
immediate report to the Israel Securities Authority stating that Delek Real
Estate Ltd. purchased 25% of the issued share capital of Dankner Investments
Ltd. on June 15, 2004. This immediate report also stated that, with respect to
the purchase of the remaining shares to arrive at the total 87.5% referred to
above, so far the approval Cable and Satellite Broadcasting Council and the
Ministry of Communications have been obtained.

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For
additional information regarding the shareholders agreement, see Item 7.  Major Shareholders and Related Party
Transactions.  The shares of Dankner
Investments are publicly traded on the Tel Aviv Stock Exchange.  On February 5, 2004, the Council approved
the change of means of control resulting from the sale of Matav shares to Delek
by Dankner Investments.

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4D.     PROPERTY, PLANTS AND
EQUIPMENT

We
own our telecommunications network infrastructure and related equipment.  Our network infrastructure covers covers
480,419 homes and is approximately 3,815 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 10,000. The lease
is scheduled to expire in August 31, 2004. 
We have an option to extend the lease for an additional period of one
year.

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 approximatelyanadditional
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 988,000.  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.  An agreement for the
extension has not yet been signed.

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 3,200 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 the Company are approximately $20,000.

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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 and 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
those followed in the United States. 
U.S. generally accepted accounting principles (as restated, see Note 26
to the financial statements). 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, 2003 ($1.00 = NIS
4.379). 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, 2003.

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 and
contingent liabilities,
which are discussed below:

Depreciation of fixed assets:

Our
fixed assets are depreciated by the straight-line method on the basis of 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 and
converters.  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 for 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 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. We fully
provide for the balance of disconnected subscribers. If the financial condition
in Israel was to deteriorate, resulting in an impairment of our subscribers
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.

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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 can not currently evaluate
the likelihood of success of such claims, and therefore, no provision has been
included in our financial statements in respect of 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 in respect of 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 in respect of such 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.

New Accounting Standards in the United States

In
January 2003, the FASB issued Interpretation No. 46R, Consolidation of
Variable Interest Entities (FIN No. 46R). The objective of FIN No. 46R is to
improve financial reporting by companies involved with variable interest
entities. A variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do
not provide sufficient financial resources for the entity to support its
activities. FIN No. 46R requires a variable interest entity to be consolidated
by a company if that company is subject to a majority of the risk of loss from
the variable interest entitys activities or entitled to receive a majority of
the entitys residual returns or both. FIN No. 46R also requires disclosures
about variable interest entities that the company is not required to
consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN No. 46R apply immediately to variable
interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim period
ending after December 15, 2003.

In
May 2003, the FASB issued Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes standards
for how an issuer classifies and measures in its statement of financial
position certain financial instruments with characteristics of both liabilities
and equity. In accordance with the standard, financial instruments that embody
obligations for the issuer are required to be classified as liabilities. SFAS
No. 150 shall be effective for financial instruments entered into or modified
after May 31, 2003 and otherwise shall be effective beginning in our first
quarter of fiscal year 2004. The adoption of SFAS No. 150 is not expected to
have a significant impact on the Companys results of operations or financial
position.

In
November 2002, Emerging Issues Task Force (EITF) reached a consensus on Issue
No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No.
00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 applied to revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. Additionally,
companies will be permitted to apply the consensus guidance in this issue to
all existing arrangements as the cumulative effect of a change in accounting
principle in accordance with APB Opinion No. 20, Accounting Changes. The
adoption of EITF Issue No. 00-21 had no material impact upon the Companys
financial position, cash flows or results of operations.

New Accounting Standards in Israel

In
October 2001, the Israel Accounting Standards Board published Accounting
Standard No. 12 with respect to the discontinuance of the adjustment of
financial statements. In December 2002, Accounting Standard No. 17 was
published with respect to the deferral of the effective date of Accounting
Standard No. 12 to January 1, 2004.

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According
to Accounting Standards No. 12 and No. 17, which deal with the discontinuance
of the adjustment of financial statements, financial statements will cease to
be adjusted for inflation in Israel beginning January 1, 2004. Until
December 31, 2003, the Company continued to prepare adjusted financial
statements in accordance with Opinion No. 36 of the Institute of Certified
Public Accountants in Israel. The adjusted amounts included in the financial
statements as of December 31, 2003, will serve as the starting point for
nominal financial reporting beginning January 1, 2004.

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.

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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, 2001, 2002 and 2003, we recorded aggregate expenses
for royalties to governmental authorities of NIS 21.9 million, NIS 20.6 million
and NIS 17.8 million, respectively.

As
of December 31, 2003, we provided cable television services to 266,690
subscribers, representing approximately 26% of all cable television subscribers
in Israel, and have achieved an average subscriber penetration rate of
approximately 55.5% for all of our license areas.  For the years ended December 31, 2001, 2002 and 2003, we generated
revenue of NIS 469.4 million, NIS 495.5 million and NIS 545.5 million,
respectively. Our operating loss for the years ending December 31, 2001, 2002
and 2003, was NIS 129.9 million, NIS 98.7 million and NIS 7.8 million,
respectively.

Our
net loss for the year ended December 31, 2001 was NIS 257.3 million. Our net
income for the year ended December 31, 2002 was NIS 33.8 million. Our net loss
for the year ended December 2003 was NIS 5.5 million. During the years 2001,
2002 and 2003 we achieved EBITDA (Earnings Before Interest Taxation
Depreciation and Amortization) of NIS 0.3 million, NIS 56.7 million and NIS
147.0 million, respectively. The EBITDA excludes other income or expenses and
equity in earnings (losses) of affiliates.

Through
December 31, 2003, we invested approximately NIS 2,028.4 million ($463.2
million) in building out our cable television network and in other fixed assets
within our license areas.  As of
December 31, 2003, our cable television network extended 3,815 miles and
covered approximately 480,000 homes, or approximately 94% of the households in
the areas in which we operate.

With
our transition to digital cable television services, we increased our revenues,
but also increased our expenses by investments in digital settop boxes,
program content purchasing and providing other services to our subscribers.
Each digital set-up box costs us between approximately $130 to $200. Due to
marketing considerations, we do not charge the customer the full cost of the
digital set-up box, and we subsidize this cost.  As of May 31, 2004, we have already purchased approximately
228,000 digital set top boxes, including 6,000 one-way only set-top boxes. As
of May 31, 2004, approximately 60% of our subscribers were equipped with
digital set-top boxes.

In
2000 and part of 2001, we provided dial-up Internet services and Internet
content under the brand name Nonstop. We ceased these activities during 2001.  In April 2002, we commenced providing access
to High Speed Internet over cable services. 
As of December 31, 2003, we had 57,357 access to High Speed Internet
subscribers.

Revenues

We
derive a substantial amount of our revenue from a monthly subscriber fee of NIS
170.9  176.5 (including VAT) for providing the analog and the digital Basic
Packages of cable television services. 
We also charge our subscribers 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 199 (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 revenue, 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 10 and
NIS 15 including VAT, but in any event, not more than the value of the set-top
box.  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.

75

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Our
revenue 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 revenue 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:

| |  | programming
  costs;                                                                      
| | - | ------------------------------------------------------------------------------------------
| |  | depreciation
  and amortization of fixed assets;                                          
| |  | pay-roll and
  related expenses;                                                          
| |  | license
  (previously franchise) royalties and payments to the government of Israel;
  and
| |  | 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
revenue 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. 
For the year ended December 31, 2003, our churn rate for our operating
areas averaged approximately 23%.

76

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Results of Operations

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

|In adjusted NIS (in millions)                                         |  | Years
  ended December 31, |       
|--------------------------------------------------------------------- |  | -------------------------- | ------
|                                                                      |  |                            |       
|                                                                      |  |                            |       
|                                                                      |  | 2001                       |       
|                                                                      |  |                            |       
|                                                                      |  |                            |       
|Revenues                                                              |  |                            | 469.4 
|Operating
  expenses                                                  |  |                            | 484.2 
|                                                                      |  |                            |       
|Gross profit
  (loss)                                                 |  |                            | (14.8 
|Selling and
  marketing expenses                                      |  |                            | 58.0  
|General and
  administrative expenses                                 |  |                            | 57.1  
|                                                                      |  |                            |       
|Operating
  loss                                                      |  |                            | (129.9
|                                                                      |  |                            |       
|Financial
  expenses, net                                             |  |                            | 52.1  
|                                                                      |  |                            |       
|Loss after
  financial expenses                                       |  |                            | (182.0
|Other
  income, net                                                   |  |                            | 3.1   
|                                                                      |  |                            |       
|Income
  (loss) before taxes on income                                |  |                            | (178.9
|                                                                      |  |                            |       
|Taxes on
  income                                                     |  |                            | (0.4  
|                                                                      |  |                            |       
|Income
  (loss) from operations of the Company and its
  subsidiaries |  |                            | (178.5
|Equity in
  earnings (losses) of affiliated companies, net            |  |                            | (78.8 
|                                                                      |  |                            |       
|                                                                      |  |                            |       
|Net income
  (loss)                                                   |  |                            | (257.3
|                                                                      |  |                            |       
|                                                                      |  |                            |       
|EBITDA                                                                |  |                            | 0.3   
|                                                                      |  |                            |       

Comparison
of Years Ended December 31, 2001, 2002 and 2003

Operating results according to business
segments

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

|In adjusted NIS (in millions)                                         |  | 2001     |         | 2002     |  | 2003     |  
|--------------------------------------------------------------------- |  | -------- | ------- | -------- |  | -------- | -
|                                                                      |  |          |         |          |  |          |  
|                                                                      |  | Cable TV |         | Internet |  | Cable TV |  
|                                                                      |  |          |         |          |  |          |  
|                                                                      |  |          |         |          |  |          |  
|Revenues                                                              |  |          | 463.8   |          |  | 5.6      |  
|Operating
  expenses                                                  |  |          | 461.6   |          |  | 22.6     |  
|                                                                      |  |          |         |          |  |          |  
|Gross profit
  (loss)                                                 |  |          | 2.2     |          |  | (17.0    | )
|Selling and
  marketing expenses                                      |  |          | 55.1    |          |  | 2.9      |  
|General and
  administrative expenses                                 |  |          | 52.0    |          |  | 5.1      |  
|                                                                      |  |          |         |          |  |          |  
|Operating
  (loss) profit                                             |  |          | (104.9  | )        |  | (25.0    | )
|                                                                      |  |          |         |          |  |          |  
|Financial
  expenses, net                                             |  |          | 49.2    |          |  | 2.9      |  
|                                                                      |  |          |         |          |  |          |  
|Income
  (loss) after financial expenses                              |  |          | (154.1  | )        |  | (27.9    | )
|Other
  income, net                                                   |  |          | 1.5     |          |  | 1.6      |  
|                                                                      |  |          |         |          |  |          |  
|                                                                      |  |          |         |          |  |          |  
|Income
  (loss) before taxes on income                                |  |          | (152.6  | )        |  | (26.3    | )
|                                                                      |  |          |         |          |  |          |  
|Taxes on
  income                                                     |  |          | (0.4    | )        |  | ---      |  
|                                                                      |  |          |         |          |  |          |  
|Income
  (loss) from operations of the
  Company and its subsidiaries |  |          | (152.2) |          |  | (26.3)   |  
|Equity in
  earnings (losses) of affiliated
  companies, net          |  |          | (78.8)  |          |  | ---      |  
|                                                                      |  |          |         |          |  |          |  
|Net income
  (loss)                                                   |  |          | (231.0  | )        |  | (26.3    | )
|                                                                      |  |          |         |          |  |          |  
|                                                                      |  |          |         |          |  |          |  
|EBITDA                                                                |  |          | 19.4    |          |  | (19.1    | )
|                                                                      |  |          |         |          |  |          |  

77

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Revenues

|                 |  | Years
  ended December 31,    |  |       |  |       | 
|---------------- |  | ----------------------------- |  | ----- |  | ----- | 
|                 |  | 2001                          |  | 2002  |  | 2003  | 
|                 |  |                               |  |       |  |       | 
|                 |  | in
  adjusted NIS in millions |  |       | 
|                 |  |                               |  |       |  |       | 
|Cable TV         |  | 463.8                         |  | 486.4 |  | 511.1 | 
|Internet         |  | 5.6                           |  | 9.1   |  | 34.4  | 
|                 |  |                               |  |       |  |       | 
|Total
  revenues |  | 469.4                         |  | 495.5 |  | 545.5 | 

Of our total
revenues, approximately 93.7% can be attributed to cable TV activities in 2003,
in comparison to 98.2% in 2002 and 98.8% in 2001. Our revenue from cable TV
activities increased by NIS 24.7 million in 2003 and NIS 22.6 million in
2002.  Our revenue from cable TV
activities is 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.

Here is the distribution of our subscribers for the periods
covered:

|                                                                          |  | 2001    |  | 2002    |  | 2003    |  | %Change 2001 vs. 2002 |   | %Change
  2002 vs. 2003 |      
|------------------------------------------------------------------------- |  | ------- |  | ------- |  | ------- |  | --------------------- | - | ----------------------- | -----
|                                                                          |  |         |  |         |  |         |  |                       |   |                         |      
|Average of
  total number
  of subscribers for cable
  TV services        |  | 297,112 |  | 281,241 |  | 270,592 |  | (5.3                  | ) |                         | (3.8 
|Average of
  total digital
  subscribers                                  |  | 56,373  |  | 137,811 |  | 151,266 |  | 144.5                 |   |                         | 9.8  
|Average of
  total access
  to High Speed Internet
  services subscribers |  | NA      |  | 10,395  |  | 39,440  |  | NA                    |   |                         | 279.4

The increase
in revenue from cable TV services despite a decline in subscriber number, is
mainly due to an increase in the rate of digital subscribers out of total
subscribers from 49.0% in 2002 up to 55.6% in 2003, and also due to an increase
in subscription fees.  The increased
total revenues in 2002, despite a decrease in total subscribers, are attributed
to higher sales of tiering and high-speed Internet services.

Our revenues from High Speed Internet services are derived mainly from
monthly subscription fees, and increased by NIS 25.3 million in 2003, compared
by an increase of NIS 3.5 million in 2002. The sharp increase in revenue from
High Speed Internet services is due to an increase in subscriber number. We
anticipate that in spite of our continuing marketing efforts to increase our
subscribers base for High Speed Internet services, subscription fees might be
eroded as a result of the intensive competition in this field.

78

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Operating expenses

|                               |  | Years
  ended December 31,    |  |       |  |       | 
|------------------------------ |  | ----------------------------- |  | ----- |  | ----- | 
|                               |  | 2001                          |  | 2002  |  | 2003  | 
|                               |  |                               |  |       |  |       | 
|                               |  | in
  adjusted NIS in millions |  |       | 
|                               |  |                               |  |       |  |       | 
|Cable TV                       |  | 461.6                         |  | 494.7 |  | 449.3 | 
|Access to
  High SpeedInternet |  | 22.6                          |  | 12.7  |  | 17.4  | 
|                               |  |                               |  |       |  |       | 
|Total
  operating expenses     |  | 484.2                         |  | 507.4 |  | 466.7 | 

Of our total
operating expenses, approximately 96.3% can be attributed to cable TV only
activities in 2003, in comparison to 97.5% in 2002 and 95.3% in 2001.  As a percentage of revenue from cable TV
only activities, operating expenses from cable TV only activities increased
from 99.5% in 2001 to 101.7% in 2002, and decreased to 87.9% in 2003.

The decrease in operating expenses (excluding depreciation and
amortization) in 2003 is derived mainly from a decrease in programming
costs.  The increase in operating
expenses in 2002 is mainly derived from an increase in programming costs and
depreciation costs due to our investments in infrastructure and digital set-top
boxes.

Cable TV operating expenses are comprised of:

|                                                    |  | Years
  ended December 31,    |  |       |  |       | 
|--------------------------------------------------- |  | ----------------------------- |  | ----- |  | ----- | 
|                                                    |  | 2001                          |  | 2002  |  | 2003  | 
|                                                    |  |                               |  |       |  |       | 
|                                                    |  | in
  adjusted NIS in millions |  |       | 
|                                                    |  |                               |  |       |  |       | 
|Cable TV programming
  expenses                     |  | 224.0                         |  | 242.8 |  | 194.4 | 
|Depreciation and
  amortization of fixed assets     |  | 136.4                         |  | 156.0 |  | 153.7 | 
|Other operating expenses
  from Cable TV activities |  | 101.2                         |  | 95.9  |  | 101.2 | 
|Total                                               |  | 461.6                         |  | 494.7 |  | 449.3 | 

As a
percentage of total revenue from cable TV activities our cable television
programming expenses decreased from 49.9% of our total revenue in 2002, to
38.0% in 2003. The decrease in programming expenses in 2003 reflects lower
costs for most of the channels in spite an increase in tiering services, which
generates additional expenses as a result of additional purchase of content.

Our cable television programming expenses increased from 48.3% of our
total revenue from cable TV activities in 2001, to 49.9% in 2002. The increase
in programming expenses in 2002 reflects an increase in tiering services, which
generates additional expenses as a result of additional purchase 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.  There is no assurance that
programming expenses will continue to decrease.

The decrease in depreciation and amortization of fixed assets in 2003
reflects a lower level  of investment in
infrastructure and digital set-top boxes and the fact that parts of our fixed
assets are terminating their accounting life. 
The increase in depreciation and amortization of fixed assets in 2002
reflects the continuation of investment in infrastructure and digital set-top
boxes.

79

---

---

The increase in other operating expenses in 2003 is primarily due to an
increase in maintenance costs mainly those which related to digital
set-top-boxes.  The decrease in other
operating expenses in 2002 is primarily due to a decrease in employee salaries.

Selling and
marketing expenses

|                                      |  | Years
  ended December 31,    |  |      |  |      | 
|------------------------------------- |  | ----------------------------- |  | ---- |  | ---- | 
|                                      |  | 2001                          |  | 2002 |  | 2003 | 
|                                      |  |                               |  |      |  |      | 
|                                      |  | in
  adjusted NIS in millions |  |      | 
|                                      |  |                               |  |      |  |      | 
|Cable TV                              |  | 55.1                          |  | 37.5 |  | 38.3 | 
|Access to
  High SpeedInternet        |  | 2.9                           |  | 3.2  |  | 5.7  | 
|                                      |  |                               |  |      |  |      | 
|Total
  selling and marketingexpenses |  | 58.0                          |  | 40.7 |  | 44.0 | 

Of the total
selling and marketing expenses, approximately 87% can be attributed to cable TV
only activities in 2003, in comparison to 92.1% in 2002, and 95% in 2001.

As a percentage of total revenue from cable TV only activities, our
selling and marketing expenses for cable TV activities decreased from 11.9% in
2001 to 7.7% in 2002, and  7.5% in 2003.
The decrease in selling and marketing expenses in 2002 compared to 2001 is
mainly due to lower marketing expenses due to a joint advertising campaign of
the three Israeli cable television operators. 
The increase in selling and marketing expenses in 2003 compared to 2002
is mainly due to our increased advertising expenditures in the fourth quarter
of 2003 in connection with the launch of the HOT brand name.

80

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General and
administrative expenses

|                                              |  | Years
  ended December 31,    |  |      |  |      | 
|--------------------------------------------- |  | ----------------------------- |  | ---- |  | ---- | 
|                                              |  | 2001                          |  | 2002 |  | 2003 | 
|                                              |  |                               |  |      |  |      | 
|                                              |  | in
  adjusted NIS in millions |  |      | 
|                                              |  |                               |  |      |  |      | 
|Cable TV                                      |  | 52.0                          |  | 45.1 |  | 41.7 | 
|Access to High Speed
  Internet               |  | 5.1                           |  | 1.0  |  | 0.9  | 
|                                              |  |                               |  |      |  |      | 
|Total
  general and
  administrative expenses |  | 57.1                          |  | 46.1 |  | 42.6 | 

Of the total
general and administrative expenses,
approximately 97.9% can be attributed to cable TV only activities in 2003, in
comparison to 97.8% in 2002, and 91.1% in 2001.

As a percentage of total revenue from cable TV activities, our general
and administrative expenses from cable activities decreased from 11.2% in 2001
to 9.3 % in 2002, and 8.2% in 2003. 
Please see Note 19b, of the financial statements for more details
regarding our general and administrative expenses.  Our payroll and related expenses decreased significantly in 2003
compared to 2002 due to a one-time reduction which is likely not to apply, in
whole or in part, in 2004.  In 2004, we
expect our general and administrative expenses to increase to approximately the
amount we recorded in 2002.

Operating income
(loss) and total EBITDA

|                                |  | Years
  ended December 31,    |   |       |   |       |  
|------------------------------- |  | ----------------------------- | - | ----- | - | ----- | -
|                                |  | 2001                          |   | 2002  |   | 2003  |  
|                                |  |                               |   |       |   |       |  
|                                |  | in
  adjusted NIS in millions |   |       |  
|                                |  |                               |   |       |   |       |  
|Cable TV                        |  | (104.9                        | ) | (90.9 | ) | (18.2 | )
|Access to
  High SpeedInternet  |  | (25.0                         | ) | (7.8  | ) | 10.4  |  
|Total operating
  profit (loss) |  | (129.9                        | ) | (98.7 | ) | (7.8  | )
|EBITDA from
  Cable TV          |  | 19.4                          |   | 58.5  |   | 129.8 |  
|Total EBITDA                    |  | 0.3                           |   | 56.7  |   | 147.0 |  

*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.

EBITDA from cable TV only activities represented 25.4% of our total
revenue in 2003 as compared to 12.0% of our total revenue in 2002, and 4.2% of
our total revenue in 2001.

Total EBITDA is comprised of the following:

|In adjusted NIS in millions                                                                     |  | Years
  ended December 31, |       
|----------------------------------------------------------------------------------------------- |  | -------------------------- | ------
|                                                                                                |  | 2001                       |       
|                                                                                                |  |                            |       
|Total
  operating profit (loss)                                                                 |  |                            | (129.9
|Depreciation
  and amortization, including income
  from amortization of set-top boxes deposits |  |                            | 130.2 
|Total EBITDA                                                                                    |  |                            | 0.3   

81

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Net financial
expenses

|                               |  | Years
  ended December 31,  |  |      |  |      | 
|------------------------------ |  | --------------------------- |  | ---- |  | ---- | 
|                               |  | 2001                        |  | 2002 |  | 2003 | 
|                               |  |                             |  |      |  |      | 
|                               |  | In adjusted NIS in millions |  |      | 
|                               |  |                             |  |      |  |      | 
|Total net
  financial expenses |  | 52.1                        |  | 48.1 |  | 84.0 | 
|                               |  |                             |  |      |  |      | 

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 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 the result of losses derived from
exchange rate hedging transactions we performed.

Other income. 
This item includes non-recurring sources of income (expenses) or other
income (expenses) not derived from our ordinary operations.  Other income is primarily derived from the
sale of 13,778,668 shares in Partner in April 2002, approximately 50% of our
holdings at such time, and 3,826,169 shares in Partner in November 2003.  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 73.3 million, or 67.3%  from NIS
108.9 million in 2002 to NIS 35.6 million in 2003. Costs related to taxes on
income increased by NIS 109.3 million, from NIS  -0.4  million in 2001 to
NIS 108.9 million in 2002. These increases are primarily due to a capital gain
derived from our sale of shares in Partner described above.  For more information regarding our taxes on
income, please see Note 17 in our financial statements.  See the discussion regarding our sales of
shares in Partner in Item 5B. Operating and Financial Review and Prospects -
Liquidity and Capital Resources.

Equity in earnings
of affiliated companies, net. 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.Our
share in the earnings of affiliated companies increased by NIS 89.7 million,
from losses of NIS 78.8 million in 2001 to earnings of NIS 10.9 million in
2002, mainly due to Partners gains in 2002, as opposed to its losses in 2001.

During 2003, our management revised its plans as to the nature of the
investment in the shares of Partner from an investment whose realization in the
foreseeable future is unlikely to an investment whose realization in may be in
the foreseeable future.  The revision of
the plans of our management, as aforesaid, included the sale of holdings in
Partners unrestricted shares during November 2003.

In view of the change in our managements plans as to the nature of the
investment in the shares of Partner, as aforesaid, and in accordance with the
provisions of Opinion 68 of the Institute of Certified Public Accountants in
Israel, in the year ended December 31, 2003, we recorded a deferred tax
liability of approximately adjusted NIS 22 million for the difference between
the cost of the investment in shares for tax purposes and their book value as
presented in the financial statements as of December 31, 2003.  This expense was presented at the profit and
loss accounts as an offset from our share in earnings of affiliates.   Please see Note 5b of the financial
statements for a further discussion regarding our investment in Partner.

82

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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 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. 
The gross consideration we received was approximately $62.4 million. In
November 2003 we sold 3,826,169 shares of Partner.  The gross consideration we received was approximately $25.5
million. The gain received for the sales of our shares in Partner is subject to
income tax. 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 5.3% of the outstanding share capital
of Partner. All of our shares in Partner are pledged to banks under pledges
unlimited in sum to cover Partners liabilities in respect of its loans from
the banks.

We
received net capital contributions from our principal shareholders in the
amount of approximately NIS 36.3 million prior to December 31, 1995. In
addition, such shareholders have, from time to time, made loans available to
us, although as of December 31, 1997 we had no outstanding balances due to such
shareholders. We do not anticipate that equity contributions and loans from our
principal shareholders will be a source of capital in the foreseeable future.

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 253.3 million for the
year ended December 31, 2001, NIS 77.3 million for the year ended December 31,
2002, and NIS 56.6 million for the year ended December 31, 2003.  This decrease in our capital expenditures is
due to large projects relating to infrastructure (such as upgrading the network
and the digital infrastructure), which required intensive capital expenditures
that were completed in 2001.  Our
investments in affiliated and other companies (on cash basis, net) were
approximately NIS 3.5 million for the year ended December 2001. We did not
invest in affiliated or other companies in 2002 or 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.

As
of December 31, 2003, our investments in Barak I.T.C. (1995)  The
International Telecommunications Services Corp. Ltd., or Barak, totaled NIS
16.2 million. In 2002, we wrote-off approximately NIS 8.8
million of our investment in Barak, based on, among other things, a company
valuation of Barak. 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 $200,000.  In addition,
according to Baraks financial statements for the first quarter of 2004, as of
March 31, 2004, Barak had a capital deficiency in the amount of NIS 563 million
and a working capital deficit in the amount of NIS 200 million.  If Barak is unable to reach agreement with
its banks and other major creditors regarding the restructuring of its debt, or
is unable to raise other financing, it might not be able to continue as a going
concern, and as a result, we may be required to write-off a substantial portion
of our investment in Barak.  In
addition, if Barak will raise equity financing in the future, and we will elect
not to participate in such financing, our shareholding in Barak could be
substantially diluted.

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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, 2003, 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, 2003, we guaranteed to Bank Hapoalim between US$4.3
million to US$7.0 million.  In January
2003, Bank Hapoalim requested to exercise the guarantee, however, to date, no
additional request was made.  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, 2003, 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 tothree
  years |  | Four tofive
  years |      
| | ------------------------------------ |  | ----- | ----- | ---------------- |  | ------------------- |  | ------------------- | -----
| |                                      |  |       |       |                  |  |                     |  |                     |      
| | Short-term
  bank credit (1)         |  |       | 389.7 |                  |  | 389.7               |  |                     | 0    
| | Debentures
  (Series A) (2)          |  |       | 99.8  |                  |  | 33.7                |  |                     | 66.1 
| | Long-term
  bank loans and other (3) |  |       | 173.1 |                  |  | 45.7                |  |                     | 55.0 
| | Total                                |  |       | 662.6 |                  |  | 469.1               |  |                     | 121.1

(1)
In NIS (not linked to the Israeli consumer price index), and as of December 31,
2003, bears average annual interest of approximately 7%.

(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 +
1.7%.

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 build-out, development
acquisition of additional digital set-top boxes and upgrade of our cable
television network.  In the framework of
our negotiation 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, however may be recommenced depending on
the progress of the merger or should the merger proceedings cease to continue.  Thereafter, these negotiations were
recommenced.  Subsequently, as the
result of the proposed Partner and Tevel transactions, we ceased the
negotiations with the banks regarding our credit lines.  For more details regarding the proposed
Partner transaction, please see Item 7B. Major Shareholders and Related Party
Transactions  Related Party Transactions. For more details regarding the
proposed Tevel transaction, please see Item 4B. Business Overview  Agreement
for a Merger of the Cable Television Operators.  Should we recommence such negotiations, there is no assurance
that that we shall reach an agreement with the banks and receive such increased
credit lines.

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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 absence 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, 2003 was approximately NIS 39 million.  We are not currently in breach of any of our
covenants to this bank.

Cash
Flow (Cable TV and Internet activities together)

Below
is a condensed presentation of certain aspects of our cash flow during 2002 and
2003.  For our full cash flow statements
please see the financial statements attached at Item 18. Financial
Statements.

| |                                                         |  | Years
  ended December 31,  |       
| | ------------------------------------------------------- |  | --------------------------- | ------
| |                                                         |  | 2002                        |       
| |                                                         |  |                             |       
| |                                                         |  | in adjusted NIS in millions |       
| |                                                         |  |                             |       
| | Net cash
  provided by (used in) operating
  activities |  |                             | (89.4 
| | Net cash
  provided by investing activities             |  |                             | 228.4 
| | Net cash
  used in finance activities                   |  |                             | (131.9
| | Increase in
  cash and cash equivalents                 |  |                             | 7.1   
| | Cash and
  cash equivalents at beginning of
  year      |  |                             | 0.5   
| | Cash and
  cash equivalents at end of year              |  |                             | 7.6   

The
increase in net cash from our operating activities in 2003 compared to 2002
derives from an increase in our revenues and a decrease in our operating
expenses (primarily costs of programming), and this is despite an increase in
our net financing costs.

Cash
derived from investment activities in 2003 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 set off by
investments in fixed assets in the amount of NIS 56.6 million, compared to cash
from investment activities in 2002, primarily derived from the proceeds of the
sale of a portion of our shares in Partner in the amount of approximately NIS
305.1 million, which were set off against investments in fixed assets in the
amount of approximately NIS 77.3 million.

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Net
cash used in finance activities in 2003 is comprised of NIS 131.5 million net
used for repayment of bank loans and NIS 33.7 million used for payments on our
debentures, and NIS 39.1 million provided by sales of our shares held by a
subsidiary.  Net cash provided by or
used in finance activities in 2002 is comprised of NIS 99.2 million net used
for repayment of bank loans and NIS 33.6 million used for payments on our
debentures, and NIS 1.0 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 or 2003. 
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, 2003.

Impact of Inflation and Exchange Rate
Fluctuations

Our
financial statements are presented in shekels, adjusted to reflect changes in
the Israeli consumer price index. 
Consequently, all shekel amounts set forth in our historical financial
statements are adjusted each time that we publish new financial statements in
order to reflect changes in the Israeli consumer price index as of the date of
the latest balance sheet presented.  See
Note 2 to the financial statements. 
Since we may not be permitted to raise our fees pursuant to our Licenses
in a manner that would fully compensate for any increase in the Israeli
consumer price index, inflation in Israel may have a material adverse impact
upon us.

Substantially
all of our revenues and a majority of our operating expenses are denominated in
shekels. However, through December 31, 2003, 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,
2003 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
2003, our number of cable television subscribers declined, due in part 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 2004 so far.

2.          During
2003, our total revenues and monthly average revenues per subscriber
increased.  This trend has continued in
2004. We do not know if this trend will continue at the same rate, if at
all.

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3.          In
recent years our results, such as gross profits, profit from operations and EBITDA,
have improved.  We do not know if our
results will continue to improve at the same rate, if at all.

4.          In
2000 and 2001 we made significant capital expenditures to upgrade our network.
In 2002 and 2003, we significantly reduced our capital expenditures.  We expect that our capital expenditures will
increase in 2004 as the result of our provision of telephony and other new
services.  Such increased capital
expenditures will affect our operating results, cash flow and liquidity.

For
more information about other factors that may affect our results of operations,
see Item 3D. Key Information 
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. 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, 2003, 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, 2003, we guaranteed to Bank Hapoalim between US$4.3
million to US$7.0 million.  In January
2003, Bank Hapoalim requested to exercise the guarantee, however, to date, no
additional request was made.  All of our
shares in Partner are pledged to banks under pledges unlimited in sum to cover
Partners liabilities in respect of its loans from the banks.

We
also provided a guarantee on behalf of Barak to a bank in the amount of
$200,000.

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5F.         TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The
following table sets forth, as of December 31, 2003, 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, 2003 |  | Total                   |        
|                                                       |  |                         |        
|Long-term debt obligations
  (banks and others)        |  |                         | 173,076
|                                                       |  |                         |        
|Operating lease
  obligations                          |  |                         | 8,753  
|                                                       |  |                         |        
|Debentures                                             |  |                         | 99,846 
|                                                       |  |                         |        
|Total                                                  |  |                         | 281,675

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 15, 2004.

Directors

|Name                      |  | Age |  | Position                            
|------------------------- |  | --- |  | ------------------------------------
|                          |  |     |  |                                     
|Shmuel
  Dankner          |  | 73  |  | Chairman of
  the Board of Directors
|Shimon
  Cheifetz (1)     |  | 61  |  | Director                            
|Dr. David
  Dankner       |  | 76  |  | Director                            
|Dor Dankner
  (1)         |  | 43  |  | Director                            
|Leah Dankner              |  | 78  |  | Director                            
|Alon Dankner              |  | 53  |  | Director                            
|Dr. Zvi
  Dinstein (2)    |  | 77  |  | Director                            
|Hananya
  Gibstein        |  | 70  |  | Director                            
|Yair Keusch
  (2) (3)     |  | 64  |  | Director                            
|Yeshayahu
  Drori (2) (3) |  | 66  |  | Director                            
|Zvi Mor                   |  | 55  |  | Director                            
|Joseph
  Bartfeld         |  | 52  |  | Director                            
|Meir
  Srebernik          |  | 45  |  | Director                            
|Yehuda Gill               |  | 76  |  | Director                            
|Yehoshua
  Gibstein (1)   |  | 44  |  | Alternate
  Director                

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Officers

|Name                |  | Age |  | Position                                                
|------------------- |  | --- |  | --------------------------------------------------------
|                    |  |     |  |                                                         
|Amit Levin          |  | 41  |  | Chief
  Executive Officer                               
|Ori Gur
  Arieh     |  | 47  |  | Counsel and
  Company Secretary                         
|Shalom
  Bronstein  |  | 55  |  | Chief
  Financial Officer                               
|Genia
  Raichel-Gil |  | 51  |  | Vice
  President, Customer Service                      
|Meidad Katz         |  | 41  |  | Vice
  President, Engineering                           
|Shlomi
  Ashkenazi  |  | 38  |  | Vice
  President, Sales, Marketing and Operational Areas
|Ron Sharon          |  | 48  |  | Vice
  President, Information Systems                   

|   
|---
|   
|(1)
|(2)
|(3)

Shmuel
Dankner has
been the chairman of our board of directors since 1988. Mr. Dankner is the
chairman of the board of directors of Dankner Investments Ltd., and serves as a
director of various companies, including Dor Chemicals Ltd., Israel Salt
Company Ltd., Israel Salt Company (Eilat) 1976 Ltd., Dankner Holdings Ltd.,
Dankner Assets Haifa (1996) Ltd., Dankner Communications Ltd., Dankner
Transportation Ltd., Carmel Resins Ltd., Carmel Chemicals Ltd., H.K. Trade
Ltd., Conlog Control Ltd., Alex Control Systems Ltd., Israel Salt Industries
Ltd., Kirkwood Enterprises Inc., Alcar-Electric Productions Ltd., G.D.
Chemicals Ltd., Cable Systems Media Haifa-Hadera Ltd., Matav Investments Ltd.,
Partner Communications Company Ltd., Matav Infrastructure Ltd., Dor Chembat
Ltd., Elran (D.D.) Investments Ltd., Elran (D.D.) Holdings Ltd. and Shamdar
Holdings Ltd.  Mr. Dankner is the
brother of Leah Dankner and David Dankner, the father of Dor Dankner, and the
uncle of Alon Dankner and Orli Mor, wife of Zvi Mor. In April 2004, Mr. Dankner
and Dor-Alon Gas Technologies Ltd. (formerly known as Dor Gas Ltd.), together
with others, were indicted by the representative of the Attorney General on
behalf of the Israeli Restrictive Business Practices Authority in connection
with an alleged unlawful restrictive arrangement for the supply of gas to
industries and household consumers during the years 1994 through 1997.  Mr. Dankner is not charged with having been
a party to the restrictive arrangement, but he was among the parties named in the
indictment due to the fact that he served as a director of Dor-Alon Gas
Technologies Ltd. during the period in question, and the indictment alleges
that he knew or should have known of the restrictive arrangement during the
period in question, or at least for part of it. The indictment alleges that
certain of the defendants unlawfully divided the gas supply market among
themselves and others.  Mr. Dankner has
not yet submitted his answer to the indictment.  If convicted, Mr. Dankner could face criminal penalties including
imprisonment and fines. As a result, Mr. Dankner might be precluded by a court
from serving as a director of any public company, including ours. Mr. Dankner
is no longer a director of Dor-Alon Gas Technologies Ltd. The action described above
concerns matters that are not related to Matav.

Alon Dankner has
been a director of Matav since July 26, 1999. Mr. Alon Dankner serves as a
director in various companies, including: Cable Systems Media Haifa - Hadera
Ltd., Matav Investments Ltd., Nave Shoshana Ltd., Israeli Salt Company (Eilat)
Ltd., Intact Holdings Ltd., Danran Holdings Ltd., Elran (D.D.) Holdings Ltd.,
Elran (D.D.) Investments Ltd. and G.D.A.D. Atlit Development Ltd. Mr. Alon
Dankner is the nephew of Shmuel Dankner, Leah Dankner and David Dankner, and
cousin of Dor Dankner and Orli Mor (wife of Zvi Mor).

Dr. David Dankner
has been a director of Matav since July 26, 1999. Dr. David Dankner has been
serving as the Chief Executive Officer of Carmel Chemicals Ltd. since 1966. Dr.
David Dankner also serves as a director of various companies, including:
Dankner Constructions and Development Ltd., Dor Chemicals Ltd., Carmel Resins
Ltd., Carmel Chemicals Ltd., Israel Salt Industries Ltd., Israel Salt Company
(Eilat) 1976 Ltd., Israel Salt Company Ltd., Alcar-Electric Productions Ltd.,
G.D. Chemicals Ltd., H.K. Trade Ltd., Conlog Control Ltd., Alex Control Systems
Ltd., Salit Salts Ltd., Limor Development Ltd., Unigad Ltd., Dankner Assets
Haifa (1996) Ltd., Dor Chembat Ltd., Salt Productions Ltd., Chutzot Hayotzer
Ltd., Kastra  Ltd., D.G.D Haifa Ltd.,
Matav Investments Ltd., and Cable Systems Media Haifa-Hadera Ltd. Dr. David
Dankner is the brother of Shmuel Dankner and Leah Dankner, and the uncle of Alon
Dankner, Dor Dankner and Orli Mor (wife of Zvi Mor).

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Dor Dankner has been
a director of Matav since July 26, 1999. Mr. Dor Dankner also serves as a
director in various companies, including: Cable Systems Media Haifa - Hadera
Ltd., Matav Assets Ltd., Matav Investments Ltd., Dankner Investments Ltd.,
Israel Salt Industries Ltd., Partner Communications Company Ltd., Dankner
(D.D.) Infrastructures Ltd.,  Elran (D.D.) Management &
Holdings Ltd., Elran (D.D.) Investments Ltd. (as chairman of the board of
directors), Elran (D.D.) Holdings Ltd., Elran (D.D.) Technologies Ltd., Elran 
Gmul Power Stations Ltd., Shachaf Dan Investments Ltd., Dankner Communications
Ltd., Carmel Assets Ltd., D.Retail (Dankner Corporation) Ltd. and Avirad
Holdings (1998) Ltd,   In addition, Mr.
Dor Dankner serves as Chief Executive Officer of D.S.D. Investments Ltd.  Mr. Dor Dankner is the son of Shmuel
Dankner, and the nephew of Leah Dankner and David Dankner, and the cousin of
Alon Dankner and Orli Mor (wife of Zvi Mor).

Dr. Zvi Dinstein has
been a director of Matav since August 14, 1987.  Since 1985 Dr. Dinstein has been the Chairman of the board of
directors of the Belfer Center for Energy Research, which grants research
funding and operates in cooperation with the Israeli Ministry of National
Infrastructure and the Ministry of Environment. Dr. Dinstein is also the
chairman of the board of directors of Dorot Properties and Holdings Ltd., and
director of various companies, including 
Cable Systems Media Haifa - Hadera Ltd., Matav Investments Ltd. and
F.I.B.I. Holding Company Ltd. Dr. Dinstein is also a member of the Board of
Governors of the Tel Aviv University, the Weizmann Institute of Science and The
Hebrew University of Jerusalem.

Leah Dankner has
been a director of Matav since September 17, 1997.  Ms. Leah Dankner also serves as a director of Cable Systems Media
Haifa- Hadera Ltd., Matav Investments Ltd., Dankner Investments Ltd., Dor
Chemicals Ltd., Carmel Chemicals and the Israel Salt Industries Ltd., Kikar
Leah Hanynon Ltd. and G.D. Chemicals Ltd., Ms. Leah Dankner is the sister of
Shmuel Dankner and David Dankner and the aunt of Alon Dankner, Dor Dankner and
Orli Mor, wife of Zvi Mor.

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.

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.

Zvi Mor has been a
director of Matav since September 17, 1997. 
Mr. Mor serves as the Chairman of Dor Gaz Ltd. and Dor Chemicals
Ltd.  Mr. Zvi Mor also serves as a
director in various companies, including: Dankner Investments Ltd., the Israel
Salt Industries Ltd., Carmel Chemicals Ltd., Dankner Assets Haifa (1996) Ltd.,
Cable Systems Media Haifa - Hadera Ltd. and Matav Investments Ltd. Mr. Zvi Mor
is married to Orly Mor (Gineo), niece of Shmuel Dankner, Leah Dankner and David
Dankner, and cousin of Alon Dankner and Dor Dankner. On April 13, 2004, the
representative of the Attorney General on behalf of the Restrictive Business
Practices Authority indicted Dor Gas and several of its former senior officers,
including Mr. Mor, as well as other liquid petroleum gas supplying entities, on
three counts of charges related to violations of the Restrictive Business Practices
Law, 5748-1988.  The indictment was
submitted as a result of an investigation which was conducted by the
Restrictive Business Practices Authority between 1998 and 2001. If convicted,
Mr. Mor could face criminal penalties including imprisonment and fines. As a
result, Mr. Mor might be precluded by a court from serving as a director of any
public company, including ours. Mr. Mor is no longer a director of Dor-Alon Gas
Technologies Ltd. The action described above concerns matters that are not
related to Matav.

Meir Srebernik has
been a director of Matav since March 2002. 
Mr. Srebernik is the Chief Executive Officer of Dankner Investments
Ltd., since February 2002.  Mr.
Srebernik serves as a director of various other companies, including Dankner
Assets Ltd., Dankner Assets Haifa (1996) Ltd., Dankner Constructions and
Development Ltd., Dankner Investments in Real Estate (USA) Ltd., Neot Dankner
Maintenance & Services (1982) Ltd., Drorim Mall Ltd., Rehovot Shopping and
Transport Center Management Company Ltd., Dankner Transportation Ltd., Dankner
Communications Ltd., Dankner Holdings Ltd., Shalom Industrial Park Ltd., Matav
Investments Ltd., Cable Systems Media Haifa-Hadera Ltd., Matav Assets Ltd.,
Matav Infrastructure Ltd., HOT Telecom Ltd. and Nonstop Ventures Ltd.  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, as Vice President of Telecommunications of
Dankner Investments Ltd. and as a director of Pelephone Communications Ltd.,
one of the four mobile phone service providers in Israel.

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Yehuda Gill has been
a director of Matav since November 2001. 
Mr. Yehuda Gill also serves as a director of Union Bank of Israel
Ltd.  Since 2001, Mr. Gill serves as the
managing director and executive vice chairman of Israel Oil Prospectors
Corporation 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.

Joseph Bartfeld has
been a director since June 8, 2004. Mr. Bartfeld is currently the CEO of Delek
Group Ltd., and the CEO of Delek Investments and Assets Ltd. Prior to holding
his current positions in the Delek Group he was CFO of Delek Group. Mr.
Bartfeld serves as the chairman of the board of directors of Delek Real Estate
Ltd., Gadot Biochemical Industries Ltd., Delek Balron 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.

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.

Amit Levin has been
our Chief Executive Officer since October 7, 1999. Mr. Levin also serves as
Vice President of Marketing and Programming of the merged operations of the
three cable companies. 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 companies,
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.

Shalom Bronstein has
been our Chief Financial Officer since 1989. Prior to 1989, Mr. Bronstein was
vice president of finance of SI Holdings Ltd., an industrial, construction and
real estate company.

Genia Raichel-Gil
has been Matavs Vice President of customer service since February 2000. Before
that and since November 1994, she served as an operating area manager of our
Netanya and Haifa franchise areas.

Meidad Katz has been
Matavs Vice President of engineering since 1996. Before that he served as a
hardware engineer at ECI Telecom Ltd. in their SDH (Synchronous Digital
Hierarchy) Telecom department.

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Shlomi Ashkenazi has
been Matavs Vice President of sales, marketing and operational areas since
August 2002 and also serves as Vice President of Sales of the merged operations
of the three cable companies, 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.

Ron Sharon has been
Matavs Vice President of information systems since November 2000.  Before that and since May 1998, he worked at
Hamashbir Fashion House Ltd. as their information system officer.

Under
the shareholders agreement dated October 18, 1993, as amended in
July 2002, to which Dankner Investments Ltd., Mr. Hanania Gibstein, Mr. Eli
Cheifetz, Mr. Shimon Cheitetz and Dr. Zvi Dinstein, and the companies
controlled by such parties that hold our ordinary shares are currently parties,
certain of our shareholders have agreed to vote their respective shares in a
manner that would enable each of such shareholders to appoint a number of
directors to our board of directors in proportion to each of such shareholders
holdings in our company as compared with the original holdings of all parties
to this agreement.  For additional
information regarding the shareholders agreement, see Item 7A. Major
Shareholders and Related Party Transactions  Major Shareholders.

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, 2003 (23 persons of which 3 are directors) was approximately
NIS 8.5 million.  This amount excludes
amounts we expended for automobiles 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.

In
addition, options were granted to our senior management under our 1997 Senior
Employee Share Option Plan, or the 1997 Plan, and as of January 2003, options
to purchase up to 71,100 of our ordinary shares, at an exercise price of $8 per
share were outstanding.  The 1997 Plan
terminated and all of the outstanding options granted under the 1997 Plan
expired. We also granted options under our 2001 Senior Employee Option Plan, or
the 2001 Plan.  37,235 options to
purchase ordinary shares granted under the 2001 Plan were exercised, and 34,233
options granted under the 2001 Plan remain outstanding.

In
addition, as of December 31, 2003, options were granted to approximately fifty
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 vests 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.  The options that were granted under the 2001 Plan that were not
vested at such time were cancelled with the agreement of the grantees.  For more information, see Item 6E.
Directors, Senior Management and Employees  Share Ownership.

During
2003, we compensated Michael Goldschmidt and David Harnik, our previous two
external directors whose terms ceased during 2004, and Yehuda Gill for their
services as members of our board of directors and its committees.

Pursuant
to bonus incentive agreements with directors, on January 20, 2003, we paid the
amount of approximately NIS 0.2 million to the heirs of our former director,
Mr. Uri Levit, and on April 13, 2004, we paid Mr. Moshe Gavish the amount of
approximately NIS 1 million.  For more
details regarding these bonus arrangements, please see Item 7B. Major
Shareholders and Related Party Transactions  Related Party Transactions.

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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.

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.

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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: Dr. Zvi Dinstein, 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.  Shai Nagor of the
accounting firm Elan Kataz Nagor was appointed as our internal auditor in
November 17, 2003.

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.

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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.

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.

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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;                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                             
| | (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, 2004.

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.

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6D.         EMPLOYEES

As
of December 31, 2003, we had 841 employees on a full-time or full-time
equivalent basis. Of these employees, 111 were in engineering and technical
support, 307 were in customer service and support, 255 were in marketing, 71
were in Internet activities, and the remainder in administration and
management.

As
at December 31, 2003, 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.

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.         SHARE
OWNERSHIP

As
of April 30, 2004, our directors owned an aggregate of 3,592,209 or
approximately 11.9% of our outstanding ordinary shares.  Except for Shimon Cheifetz, Dr. Zvi Dinstein
and Hanania Gibstein, no individual director or senior manager listed in Item
6B - Directors and Senior Management, owns directly (or through fully owned
companies) 1% or more of our outstanding ordinary shares.

As
of April 30, 2004, our senior managers, held, in the aggregate options to
purchase up to 770,000 of our ordinary shares under the 2003 Plan.  The options granted under the 2003 Plan vest
in three equal installments.  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
vests 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.

As
of April 30, 2004, Mr. Hanania Gibstein owned 262,939 ordinary shares, or
approximately 0.87% of our outstanding ordinary shares directly, and an
additional 1,207,426 ordinary shares, or approximately 3.99% 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, 2004, 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.

As
of April 30, 2004, Dr. Zvi Dinstein owned 596,170 ordinary shares or 1.97% of
our outstanding ordinary shares, indirectly through his holdings in Dorot
Communications Ltd.

Members
of the Dankner and Gineo families are parties to a shareholders agreement in
Dankner Investments Ltd., concerning the voting of a part of their respective
shares in coordination with the other parties to the agreement.  For additional information, see Item 7A.
Major Shareholders  Shareholders Agreements. Each member of the Dankner and
Gineo families who is a party to this agreement could be deemed to be the
beneficial owner of all the shares of our ordinary shares owned by Dankner
Investments Ltd., but they disclaim beneficial ownership of such shares.

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, 2004, options to purchase 37,235 ordinary shares granted under the
2001 Plan were exercised by our senior employees, and options to purchase
34,233 ordinary shares were outstanding.

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

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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 options to purchase our ordinary shares to approximately
50 of our employees and officers.  The
2003 Plan was approved by our shareholders in December 2003.  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 vests 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.  The options that were granted under the 2001 Plan that were not
yet vested were cancelled with the agreement of the grantees.  On December 29, 2003, pursuant to the 2003
Plan, our board of directors approved the issuance of 770,000 options to
employees and officers, and, subject to the waiver of each of the grantees,
approved the cancellation of 208,766 options granted under the 2001 Plan.  All of such waivers were received. 500
options are still reserved and available for grant under the 2003 Plan.

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

Warrants and Debentures

In
August 1997, the Company issued NIS 200 million par value registered
debentures, of Series A, for redemption in seven equal installments on every
August 20, commencing August 2000.  As
of December 31, 2003, the net outstanding balance of debentures appearing in
our financial statements is approximately NIS 100 million.

On
August 28, 1997, in connection with the issuance of debentures to the public,
we issued warrants, of series one, to the purchasers of our debentures, to
purchase an aggregate of 2,850,000 of our ordinary shares.  By August 20, 2001 (the expiry date of the
warrants), warrants to purchase 2,786,764 ordinary shares had been exercised,
for consideration of approximately NIS 134.8 million (out of which we, through
a fully owned subsidiary, exercised warrants to purchase 1,370,148 ordinary
shares for a total payment of approximately NIS 65.8 million), and warrants to
purchase 63,236 ordinary shares had expired.

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, 2004 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 |      
|------------------------------------------ |  | -------------------------------------------- |  | ---------------------------------------------------------------- | - | --------------------------------- | -----
|                                           |  |                                              |  |                                                                  |   |                                   |      
|Dankner
  Investments Ltd. (1)             |  | 6,654,933                                    |  | 22.02                                                            | % |                                   | 22.02
|Delek
  Investments and Assets Ltd.(2)     |  | 5,433,685                                    |  | 17.98                                                            | % |                                   | 17.98
|Bank Leumi
  LIsrael B.M. (3)             |  | 2,454,354                                    |  | 8.12                                                             | % |                                   | 8.12 
|Bank
  Hapoalim B.M. (4)                   |  | 1,853,978                                    |  | 6.14                                                             | % |                                   | 6.14 
|Maariv
  Modein Publishing House Ltd. (5) |  | 1,529,890                                    |  | 5.06                                                             | % |                                   | 5.06 

(1)          Dankner
Investments Ltd. owns 22.02% of our ordinary shares directly. Dankner
Investments Ltd. is a publicly held company, whose securities are traded on the
Tel Aviv Stock Exchange, controlled by members of the Dankner and Gineo
families (who collectively hold approximately 
87.5% of Dankner Investments Ltd. issued share capital).  Members of the Dankner and Gineo families
are parties to the shareholders agreement in Dankner Investments Ltd.,
concerning the voting of part of their respective shares in coordination with
the other parties to the agreement. 
Each member of the Dankner and Gineo families who is a party to the
Dankner shareholders agreement could be deemed to be beneficial owners of all
of our ordinary shares owned by Dankner Investments Ltd., but except to the
extent of their pecuniary interest in such shares, they disclaim beneficial
ownership of such shares.  Shmuel
Dankner, the chairman of our board of directors, owns 3.46% of the share
capital of Dankner Investments Ltd. and together with Roz Dankner, owns an
additional 0.79% of such share capital and together with Dor Dankner, owns an
additional 0.04% of such share capital. 
David Dankner, one of our directors, owns 3.09% of the share capital of
Dankner Investments Ltd. and together with Erlen Roda Dankner, owns an
additional 1.4% of such share capital. 
Alon Dankner, one of our directors, owns 1.07% of the share capital of
Dankner Investments Ltd.  Leah Dankner,
one of our directors, owns 18.24% of the share capital of Dankner Investments
Ltd. Zvi Mor, one of our directors, is married to Orly Mor, who owns 5.35% of
the share capital of Dankner Investments Ltd. 
Dor Dankner, one of our directors, owns approximately 1.94% of the share
capital of Dankner Investments Ltd. and together with Shmuel Dankner, owns an
additional 0.04% of such share capital. In addition, Shmuel Dankner, Abraham
Dankner, David Dankner, Leah Dankner, Rachel Elran and Orly Mor (wife of Zvi
Mor), collectively own, together, 29.71% of the share capital of Dankner
Investments Ltd. Each of Shmuel Dankner, Abraham Dankner, Rachel Elran, Leah
Dankner, Dor Dankner and Zvi Mor are directors on the board of directors of
Dankner Investments Ltd.

99

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On May 31, 2004, Dankner Investments Ltd. issued an immediate report to
the Israel Securities Authority and the Tel Aviv Stock Exchange stating that
the members of the Dankner and Gineo families that hold shares in Dankner
Investments Ltd. signed an agreement with Delek Real Estate Ltd. for the purchase
of such shares, constituting 87.5% of the issued share capital of Dankner
Investments Ltd.  The transaction is
subject to a number of approvals, including the approval of the Controller of
Restrictive Business Practices and the Cable and Satellite Broadcasting
Council.  The agreement also provides
that in the event the conditions to the aforesaid sale are not met by a
specified date, subject to certain other conditions, Delek Real Estate Ltd. may
purchase shares of Dankner Investments Ltd. from the other parties to the
agreement representing 20-25% of the issued share capital of Dankner
Investments Ltd.  On June 16, 2004,
Delek Group Ltd. issued an immediate report to the Israel Securities Authority
stating that Delek Real Estate Ltd. purchased 25% of the issued share capital
of Dankner Investments Ltd. on June 15, 2004. This immediate report also stated
that, with respect to the purchase of the remaining shares to arrive at the
total 87.5% referred to above, so far the approvals of the Council and the Ministry
of Communications have been obtained.

(2) In February 2004, Delek Investments and Assets Ltd. acquired
approximately 18% of our outstanding shares from Dankner Investments Ltd., and
was granted an option exercisable for two years to purchase from Dankner
Investments Ltd. an additional 2% of our outstanding shares.  Delek Investments and Assets Ltd. is a
private company wholly owned by Delek Group Ltd., a public company whose
securities are traded on the Tel Aviv Stock Exchange.  As of April 30, 2004, Sharon Tshuva Ltd., a private company
wholly owned by Mr. Yitzchak (Tshuva) Sharon, owns approximately 36.1% of the
shares of Delek Group Ltd.  April M.I.
Ltd., a private company wholly owned by Tashluz Assets Ltd., owns approximately
45.4% of the shares of Delek Group. 
Tashluz Assets Ltd., is a private company owned approximately 21.4% by
Tashan Investments Ltd. (a private company wholly owned by Tashluz Assets
Ltd.), approximately 17.2% by Ori Dori Ltd., approximately 25.8% by Sharon
Tshuva Investments Ltd., and approximately 33.4% by Tashluz Investments  (1993) Ltd. Tashluz Investments  (1993) Ltd. is a private company owned by
Tashluz Investments and Assets Ltd. Tashluz Investments and Assets Ltd. is a
private company owned  approximately
26.3% by Carmi Dor Ltd. and approximately 15.4% by Ori Dori Ltd.  Carmi Dor Ltd. and Ori Dori Ltd. are private
companies wholly owned by Yitzchak (Tshuva) Sharon.  On June 15, 2004, Delek Real Estate Ltd. acquired 25% of the
issued and outstanding shares of Dankner Investments Ltd.  Please see details above.

(3)  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.

(4)  Bank Hapoalim B.M., or Bank
Hapoalim, is one of the two largest commercial banks in Israel. The shares
beneficially owned by Bank Hapoalim are held by various of its affiliated
mutual funds and provident funds.

100

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(5)  Maariv Modiin Publishing
House Ltd. is a company fully owned by Maariv Holdings Ltd.  Dankner Investments Ltd. own approximately
3.24% of Maariv Holdings Ltd. Approximately 61.73% of the issued share capital
of Maariv Holdings Ltd. is directly and indirectly owned by The Israel Land
Development Company Ltd., or ILDC, a public company whose securities are traded
on the Tel Aviv Stock Exchange. ILDC is directly and indirectly controlled by
Mr. Jacob Nimrodi (68.08% in voting power and 36.16% in share capital). Mr.
Ofer Nimrodi, Jacob Nimrodis son, holds 6.65% of the voting power and 13.29%
of the share capital of ILDC. 
Accordingly, Messrs. Jacob and Ofer Nimrodi could be deemed to be
beneficial owners of our ordinary shares owned by Maariv Modiin Publishing
House Ltd., but they each disclaim beneficial ownership of such shares.  27.19% of the issued share capital of
Maariv Holdings Ltd. is held by Mr. Vladimir Gusinsky.  Our Cable Broadcast Licenses include a comment
stating that the Council has considered including a provision in these licenses,
whereby Maariv Holdings Ltd. or its current controlling shareholder will cease
to be the beneficial owner of 5% or more of our outstanding ordinary shares,
due to certain convictions of Mr. Jacob Nimrodi for criminal offenses according
to the Telecommunications Law, which are currently under appeal; however, due
to the fact that the merger of the Israeli television operators has been
approved by the Council and the Controller of Restrictive Business Practices,
and to the Councils best knowledge, these operators intend to effect the
merger, and since such a merger would nullify the necessity for such a
provision, the Council decided to grant these licenses without, at such stage,
including such a provision; in the event that the merger will not be consummated
by February 28, 2003, or in the event that following the merger Maariv
Holdings Ltd. will be an interested party of 
the merged entity, the Council will reconsider the integration of such a
provision into our licenses.  The
Council approached us in this regard, following which there have been exchanges
of correspondence between the Council and us. 
We have expressed our objection to including such a provision in our
licenses, due to, among other things, the fact that we do not have the right or
any other legal means to force a shareholder to sell its shares in Matav.  Since Maariv holds only 5.06% of our
outstanding shares, we believe that this issue is not material to us.

Mr. Hanania Gibstein ceased to be a 5% shareholder of Matav during
2003.

Our major shareholders do not have different voting rights.

Shareholders Agreements

On
October 18, 1993, Dankner Investments Ltd., Mr. Hanania Gibstein, Hapoalim
Electronic Communications Ltd., Maariv Electronic Communications, Shamrock Holdings
of California Inc., Mr. Eli Cheifetz, Mr. Shimon Cheifetz and Dr. Zvi Dinstein
entered into a shareholders agreement. 
In this agreement certain of our shareholders have agreed to vote their
respective shares in a manner that would enable each of such shareholders to
appoint a number of directors to our board of directors in proportion to each
of such shareholders holdings in our company as compared with the original
holdings of all parties to this agreement. This agreement further grants each
shareholder a right of first refusal to acquire the shares of a shareholder who
offers his shares to a third party or a shareholder who offers more than 15% of
his cumulative shareholdings (as of the date of our initial public offering) in
a transaction through the Tel Aviv Stock Exchange. This agreement remains in
force as to a party so long as such party holds at least 25% of the number of
shares in our company held by such shareholder immediately prior to our initial
public offering. This agreement binds these shareholders as well as their
assignees and transferees.

In
July 1998, Dankner Investments Ltd. reached an agreement with Mr. Hanania
Gibstein, Mr. Shimon Cheifetz and Mr. Eli Cheifetz according to which Mr.
Gibstein and Messrs. Cheifetz agreed not to sell their shares in our company
without the consent of Dankner Investments Ltd. and Dankner Investments Ltd.
agreed not to sell its shares in our company without allowing Mr. Gibstein and
Messrs. Cheifetz to take part in the sale and Mr. Gibstein and Messrs. Cheifetz
agreed to join the sale of all or most of Dankner Investments shares of our
company. This agreement is subject to the Matav shareholders agreement
described above.

In
July 2002, the parties to the original shareholders agreement agreed to amend
such agreement.  Under the amendment,
Maariv Electronic Communications ceased to be a party to the shareholders
agreement and has no right or obligation in connection with such agreement or
the amendment.  In addition, pursuant to
the amendment, if Messrs. Cheifitz shall not have a right to nominate a
director to our board of directors, on account of the number of original shares
held by them, then the parties shall act to nominate a director to our board of
directors designated by Messrs. Cheifetz, provided that the number of original
shares held by Messrs. Cheifetz shall be at least 60% of the number of original
shares required in order to have a right to nominate one director to our board
of directors.  Dankner Investments Ltd.
shall not be obligated to act according to the above, if as a result the number
of directors nominated by Dankner Investments Ltd. shall not constitute the
majority of our directors (the director designated by Messrs. Cheifetz shall
not be considered a director nominated by  
Dankner Investments Ltd.).

In
February 2004, Danker Investments Ltd. completed a transaction with Delek
Investments and Assets Ltd., pursuant to which Delek Investments and Assets
Ltd. purchased from Dankner Investments Ltd. 17.99% of our outstanding ordinary
shares.  At the time of the
transactions completion, Dankner Investments Ltd. waived certain of its rights
under the original shareholders agreement. 
In February 2004, Dankner Investments Ltd. sent Mr. Hanania Gibstein,
Mr. Shimon Cheifetz and Mr. Eli Cheifetz a twelve months prior notice of
termination of the agreement that was entered into between them in July
1998.  Accordingly, this agreement will
cease to be in effect on February 15, 2005.

101

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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 2001, 2002 and 2003, as applicable.

Transactions by Dankner Investments Ltd.

|1.  | On January
  1, 2001, Dankner Investments Ltd. acquired 8,276 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 66.99 and at an aggregate
  price of NIS 554,409.        
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                     
|2.  | On January
  7, 2001, Dankner Investments Ltd. acquired 5,805 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 65.79 and at an aggregate
  price of NIS 381,911.        
|    |                                                                                                                                                                                                     
|3.  | On January
  8, 2001, Dankner Investments Ltd. acquired 23,200 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 65.86 and at an aggregate
  price of NIS 1,527,952.     
|    |                                                                                                                                                                                                     
|4.  | On January
  9, 2001, Dankner Investments Ltd. acquired 13,059 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 65.58 and at an aggregate
  price of NIS 856,409.       
|    |                                                                                                                                                                                                     
|5.  | On January
  11, 2001, Dankner Investments Ltd. acquired 3,886 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 64.77 and at an aggregate
  price of NIS 251,696.       
|    |                                                                                                                                                                                                     
|6.  | On January
  14, 2001, Dankner Investments Ltd. acquired 3,600 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 65.09 and at an aggregate
  price of NIS 234,324.       
|    |                                                                                                                                                                                                     
|7.  | On January
  15, 2001, Dankner Investments Ltd. acquired 20,200 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 64.49 and at an aggregate
  price of NIS 1,302,698.    
|    |                                                                                                                                                                                                     
|8.  | On January
  21, 2001, Dankner Investments Ltd. acquired 24,400 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 65.88 and at an aggregate
  price of NIS 1,607,472.    
|    |                                                                                                                                                                                                     
|9.  | On January
  22, 2001, Dankner Investments Ltd. acquired 22,570 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 64.45 and at an aggregate
  price of NIS 1,477,207.    
|    |                                                                                                                                                                                                     
|10. | On January
  23, 2001, Dankner Investments Ltd. acquired 49,970 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 62.42 and at an aggregate
  price of NIS 3,119,127.    
|    |                                                                                                                                                                                                     
|11. | On January
  25, 2001, Dankner Investments Ltd. acquired 11,688 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 61.35 and at an aggregate
  price of NIS 717,059.      
|    |                                                                                                                                                                                                     
|12. | On January
  28, 2001, Dankner Investments Ltd. acquired 17,000 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 59.90 and at an aggregate
  price of NIS 1,018,300 NIS.
|    |                                                                                                                                                                                                     
|13. | On January
  29, 2001, Dankner Investments Ltd. acquired 24,599 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 58.58 and at an aggregate
  price of NIS 1,441,009.    
|    |                                                                                                                                                                                                     
|14. | On January
  30, 2001, Dankner Investments Ltd. acquired 9,018 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 57.22 and at an aggregate
  price of NIS 516,010.       

102

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|15. | On February
  1, 2001, Dankner Investments Ltd. acquired 26,887 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 55.24 NIS and at an aggregate
  price of NIS 1,505,672 NIS.                                                                                                                                                                                                                       
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|16. | On February
  5, 2001, Dankner Investments Ltd. acquired 15,494 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 56.00 and at an aggregate
  price of NIS 855,889.                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|17. | On February
  7, 2001, Dankner Investments Ltd. acquired 7,170 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 57.94 and at an aggregate
  price of NIS 415,430.                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|18. | On February
  12, 2001, Dankner Investments Ltd. acquired 3,985 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 57.92 and at an aggregate
  price of NIS 230,811.                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|19. | On February
  13, 2001, Dankner Investments Ltd. acquired 9,600 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 59.67 NIS and at an aggregate
  price of NIS 572,832.                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|20. | On February
  14, 2001, Dankner Investments Ltd. acquired 20,223 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 59.12 and at an aggregate
  price of NIS 1,195,584.                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|21. | On February
  18, 2001, Dankner Investments Ltd. acquired 6,605 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 57.27 and at an aggregate
  price of NIS 378,268.                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|22. | On February
  19, 2001, Dankner Investments Ltd. acquired 3,400 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 57.54 and at an aggregate
  price of NIS 195,636.                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|23. | On February
  21, 2001, Dankner Investments Ltd. acquired 32,577 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 71.63 and at an aggregate
  price of NIS 169,726.                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|24. | On February
  22, 2001, Dankner Investments Ltd. acquired 51,000 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 71.63 and at an aggregate
  price of NIS 2,900,880.                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|25. | On February
  26, 2001, Dankner Investments Ltd. acquired 11,225 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 57.08 NIS and at an aggregate
  price of NIS 640,723.                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|26. | On February
  27, 2001, Dankner Investments Ltd. acquired 17,015 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 57.31 and at an aggregate
  price of NIS 975,130.                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|27. | On September
  16, 2001, Dankner Investments Ltd. acquired 6,405 ordinary shares on the Tel
  Aviv Stock Exchange at a price per share of NIS 27.17 and at an aggregate at
  a price of NIS 174,023.                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|28. | 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.                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|29. | 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.                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|30. | 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.                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|31. | 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.                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                
|32. | On February
  22, 2004, Dankner Investments sold 5,433,685 ordinary shares to Delek
  Investments and Assets Ltd. at a price per share of $8.00, and at an
  aggregate price of $43,500,000, and granted to Delek Investments and Assets
  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.

103

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---

Transactions by Maariv Modiin Publishing
House Ltd.

In
January 2004, Maariv Modiin Publishing House Ltd.sold in private transactions in Israel 1,052,631 ordinary
shares, representing approximately 3.5% of our outstanding shares, in
consideration for an aggregate amount of approximately NIS 40 million
(approximately $8.5 million), at a price per ordinary share of approximately
NIS 38 (approximately $8.0 per share), and granted an option to the other
parties to such transaction to acquire up to an additional aggregate of
1,950,000 ordinary shares, representing approximately 6.5% of our outstanding
shares.  In April 13, 2004, the other
parties to such transaction exercised the option for aggregate consideration of
NIS 84.7 million (approximately $17.9 million), at a price per ordinary share
of NIS 43.5 (approximately $9.2 per share).

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.

Number of Record Holders in the United States

On
April 30, 2004, 91,612 ADSs were held of record in the United States.  These ADSs were held by 10 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.

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 and 2003, we paid Cabletek Ltd. a total of
approximately NIS 2.9 million and NIS 2.4 million, respectively. As of the
period ended May 31, 2004, we paid Cabletek Ltd. a total of approximately NIS
1.1 million.

The Levit Agreement

On
December 17, 1997, we entered into a bonus incentive agreement with Mr. Uri
Levit (deceased), pursuant to which Mr. Levit served as vice-chairman of our
board of directors until September 15, 2000. Under this agreement, Mr. Levit
was entitled to receive a bonus during the period that Mr. Levit provided
service to our company, which accumulated gradually, and was calculated based
on the value of our ordinary shares on the Tel-Aviv Stock Exchange.  Mr. Levit was required to exercise his
rights during a period of 36 months following the vesting of such rights.  The exercise price per ordinary share under
this right is equal to the difference between the closing price of our ordinary
shares on the Tel Aviv Stock Exchange on the day of exercise and 90% of the
closing price of our ordinary shares on the Tel Aviv Stock Exchange on December
17, 1997, linked to the consumer price index. 
On January 20, 2003, we paid the amount of approximately NIS 0.2 million
to Mr. Levit heirs.  We will not be
required to make any future payments under this agreement.

104

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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 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 $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, 2003, we and the other shareholders invested through Nonstop
Ventures Ltd. in seven start-up companies an amount of approximately $5.8
million.  Of the aggregate investment,
we invested approximately $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, 2001 at a
value of approximately $1.4 million and were further reduced and set in our
financial statements for the year ended December 31, 2002 at a value of
approximately $0.6 million.  These
investments are recorded in our financial statements for the year ended
December 31, 2003 at a value of approximately $0.3 million (which reflects a
write-off performed by Nonstop in March 2003 of $0.3 million in respect of its
investment in one of the start-up companies).

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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
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 and 2003 we paid B-Point an amount of approximately NIS
12.5 million and approximately NIS 11.5 million, respectively.  As of the period ending May 31, 2003,
we paid approximately NIS 5.6 million. 
The terms of these agreements have been extended by the parties and are
currently in effect until December 31, 2004. Following this term we have an
option to extend the terms of both agreements for two additional terms.

Payment to Mr. Dor Dankner

On
October 31, 2002, our shareholders resolved to approve a payment of $50,000 to
Mr. Dor Dankner, a member of our board of directors, for his services over the
years since 1998 on our behalf in connection with Partner Communications
Company Ltd., including, among other things, with regard to the sale of
approximately half of our holdings in Partner Communications Company Ltd.
during April 2002.

Payment to Dankner Investments Ltd.

In
September 2003, our shareholders resolved to approve a payment of $600,000 to
Dankner Investments Ltd., one of our principal shareholder, for the efforts of
its executives on our behalf in connection with the proposed merger of the
Israeli cable television operators.

Memorandum of
Understanding with Partner

On
March 14, 2004, we, Dankner Investments Ltd. and Delek Investments Properties
Ltd., two of our principal shareholders, entered into a memorandum of
understanding with Partner pursuant to which Partner would invest up to $137
million in our company, for up to 40% of our issued and outstanding share
capital.

This
memorandum of understanding has recently expired and has no legal effect.  However, the parties announced that they
intend to continue discussions in an effort to reach an agreement.  We can make no assurance that this agreement
will be concluded.

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.

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ITEM
8.FINANCIAL INFORMATION

8A.CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

Audited
financial statements for the three fiscal years ended December 31, 2003 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
September 8, 1998, a lawsuit was filed in the Tel-Aviv-Jaffa District Court
against us, the other cable television operators and other parties. The suit
alleges that we, together with the other cable television operators, performed
certain acts in purchasing the rights to broadcast the Spanish soccer league
games, resulting in a breach of an agreement between the parties, and
consequently, that we were unjustly enriched in an amount constituting the
difference between the price which we actually paid to purchase the rights to
broadcast and the price we were prepared to pay prior to signing the agreement.
The plaintiff seeks, among other things, compensation in an aggregate amount of
adjusted NIS 30.4 million, which for the purposes of court fees was limited to
NIS 7.6 million.  Together with the
other cable television operators, we submitted a statement of defense. The parties
submitted their affidavits, and thereafter, consented to a mediation procedure,
however, the parties attempt to have their disputes mediated failed.  Accordingly, court hearings resumed on April
29, 2004 and June 1, 2004.  The next
hearing is currently scheduled for October 31, 2004.

(b)          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 (subject to adjustment).
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. 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.

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 companies 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 companies). The main elements of these
claims are as follows:

1)
The cable companies acted pursuant to the legislation that allowed them to
collect subscriber fees, and even determined the rates for this matter,
according to the discretion that was applied by the sub legislator in the
regulations for that purpose. According to the claim, the reasonability of the
rates of the cable companies should not be attacked as if they are unfair, as
long as it was not determined that there was a flaw in the legislation pursuant
to which the franchisees operated. Therefore, the Company is entitled to
benefit from article 6 to Torts Ordinance, which grants a type of immunity to
someone acting according to legislation. The court will be requested to
determine, among others, if a prior precedent of the Supreme Court in this
respect is valid applicable for our case.

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2)
In the past, the Restrictive Trade Practices Court approved that the cable
companies could raise the subscriber fees rates, in the context of the request
to approve the restrictive arrangement presented to it. The Company claims that
this ruling constitutes an estoppel by res judicata and a good defense against
this claim.

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 matter.
The Court found, among other things, that the cable companies 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 companies to the action.  In a pre-trial hearing held on November 26,
2003, the Court determined that the proceedings against the various cable
companies would be separated and first the application to recognize the suit as
a class action against us would be heard. 
A hearing was set for February 7, 2005.

(c)          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. The parties are currently waiting for the ruling of the Restrictive
Business Practices Court on this appeal.

(d)          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 $171
million and for the purpose of court fees was limited to an initial sum of $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.

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On
January 19, 2004, Tevels trustee notified the Court of the cessation of this
proceeding 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.  The plaintiff has
objected to the notice of the trustee to cease these proceedings, and claimed
that it has the right to continue its proceedings against Tevel and Gvanim.  The plaintiff applied to the court
overseeing Tevels insolvency proceedings to request permission to continue in
the proceeding against Tevel and Gvanim, despite the stay of proceedings and
arrangement of creditors that has since entered into effect, to instruct the
trustee to reserve a sum out of the trust fund of Tevel and Gvanim to cover the
cost of the proceedings until their resolution, and to change the trustees
decision to postpone the proof of the debt that is the subject of the action as
part of the stay of proceedings. The plaintiff and the trustee subsequently
reached an agreement that the trustees decision to cease the proceedings
referred to above would be delayed until the court overseeing Tevels
insolvency proceedings would render its decision in the interim proceedings
before it.  On March 29, 2004, the court
overseeing Tevels insolvency proceedings rendered its decision in the interim
proceedings.  The court overseeing
Tevels insolvency proceedings denied the plaintiffs request to allow it to
continue its action against Tevel and Gvanim because, even if a debt was
adjudicated against them for matters occurring prior to the stay of
proceedings, such remedy would be meaningless because there is not monetary
source from which the plaintiff could recover the debt, and the court
overseeing Tevels insolvency proceedings denied the plaintiffs request that
funds be reserved out of the trust account because this would delay or
frustrate the arrangement of creditors, and the court overseeing Tevels
insolvency proceedings determined to allow the plaintiff to submit another
proof of debt to the trustee which would be based upon the statutory
compensation to which it is entitled for the matters which preceded the stay of
proceedings.  The court overseeing
Tevels insolvency proceedings gave the plaintiff 14 days to submit the
aforementioned proof of debt.  On April
28, 2004, the plaintiff submitted a request for a re-review to the court
overseeing Tevels insolvency proceedings with respect to the aforesaid
decision, and requested an extension for the submission of the proof of debt
until the determination in the request for a re-review, and the court
agreed.  On May 27, 2004, Tevels
trustee submitted its response to the request for the re-review and on June 7,
2004, the plaintiff submitted its response. 
The parties are now awaiting the decision of the court overseeing
Tevels insolvency proceedings on the request for the re-review.

(e)          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 adjusted NIS 1 million 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.  Another hearing is scheduled for September 20, 2004.

(f)          In
May 2002, D.B.S. Satellite Services (1998) Ltd., or YES, and Bezeq, - Israeli
Telecommunications Corporation Ltd., or Bezeq, filed appeals in the Restrictive
Trade Practices Court against the decision of the Controller of Restrictive
Trade Practices for the approval to the proposed merger of the Israeli cable
television operators.  Bezeq
subsequently requested to cancel its appeal. 
The cable television operators and the Controller requested the Court to
determine that Bezeq be obligated to pay expenses.  To date, the Court has not ruled on the matter of such expenses.
YES requested in its appeal to cancel the merger approval, based on its claim
that the merger between the cable television operators harms competition in the
field of multi-channel television, and alternatively requested to change the terms of the
approval such that, among other things, a corporate separation of the merged
entities shall be required, the exclusive purchase of content shall be
prohibited and the mutual sale obligation requirement shall be terminated.  The parties summaries were heard by the
Court.  On June 9, 2004, the Court
dismissed the appeal submitted by YES, subject to the cancellation of a
provision in the approval of the Controller to the merger of the Israeli cable
television operators which provided that a presumption existed that the
purchase of exclusive local broadcasting rights for a period of up to two years
was appropriate for receipt of an exemption from the requirement to receive the
approval of the Controller or the Restrictive Trade Practices Court.

(g)          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 March 31, 2004, 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. 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. 
The motion to approve the class action against Tevel was rejected with
no order for expenses, and thereafter, in May 2004, the application to
recognize the suit as a class action against us was denied.

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(h)          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 hearing for the application to recognize the suit as a class action was
suspended due to a stay of proceedings to which Tevel Israel International Ltd.
(one of the other cable television operators) was subject. Thereafter, the
plaintiffs submitted a request to continue the action against us and Golden
Channels. The Court has not yet rendered its decision on the request.

(i)          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 $ 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
companies) 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 $182 thousand only) and approve Warner a debt in the aggregate
of $17 million and alternatively $12 million. The trustee and the Official
Receiver filed its response to the appeal. The court accepted Warners request
to allow it to file a response to the response of the trustee and the Official
Receiver.  On June 13, 2004, Warner
submitted its response, and a decision has not yet been rendered.

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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 $ 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 $25 million. Golden Channels requested compensation in the amount
of approximately $3.8 million.

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 $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.

(j)          On
March 30, 2003, the State of Israel (through the representatives of the
Attorney General of the Ministry of Trade of Commerce) filed an indictment in
the Netanya Magistrate Court against us, Mr. Amit Levin, our Chief Executive
Officer and Mr. Doron Admati, our marketing and programming manager at the time
relevant to the indictment, for the offense of Prohibition to Mislead
Consumers Regarding a Material Issue in a Transaction according to the Consumers
Protection Law, 1981.  In accordance
with the indictment, the defendants are alleged to have misled consumers within
the framework of a certain publication published in connection with a certain
sales promotion campaign.  Subsequently,
Messrs. Levin and Admati were dropped from the indictment.  On November 25, 2003, the court approved a
plea bargain with the Attorney General, pursuant to which we admitted the facts
in the amended indictment, paid a fine of NIS 60,000 and our CEO, Amit Levin,
signed an undertaking on behalf of Matav to pay an additional fine of NIS
60,000 if the offense is repeated within two years.

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

| | (1) | Based on
  orders we, together with Cable Systems Media Haifa-Hadera Ltd., a wholly
  owned subsidiary of ours, received from the Israeli Income Tax Authority for
  the years 1997 through 2001, it was determined that we own an additional tax
  payment of approximately NIS 52 million (not including interest and linkage differentials),
  and that we must reduce our carry forward loss for the years 2000 and 2001 by
  approximately NIS 96 million.  In
  January 2003, we submitted our objection to the results of these assessments.  Our management believes, based on the
  opinion of our outside advisors, that it has good defenses against the orders
  and therefore no allocation was made for these orders in our financial
  statements.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | (2) | Due to our
  failure to timely submit the tax return with the Income Tax Authority for the
  year ended December 31, 2002 of Matav Investments Ltd., a wholly owned
  subsidiary of ours.  It received an
  assessment for 2002 during December 2003. 
  Recently Matav Investments Ltd. has filed the said tax return.  Accordingly, after a preliminary
  discussion, we received tax assessments for the tax years 1998 through 2002,
  under which we are required to pay the additional amount of NIS 6.6 million
  (not including interest and linkage differentials).                                                                                                                                                                                     

(l)  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 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 obligate
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, 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
companies.

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In
January 2004, Eshkolot submitted two petitions to the Restrictive Business
Practices Court.  The first petition
challenges the decision of the Controller to grant the cable television
operators an exemption from approval by the Restrictive Business Practices
Court of a restrictive arrangement (in connection with their joint
activities).  The second petition
challenges the decision of the Controller taken on December 15, 2003, to extend
the validity of the approval of the merger of the three Israeli cable
television operators, or in the alternative, to make the extension conditional
upon matters listed in Eshkolots petition or any other condition deemed
appropriate by the Restrictive Business Practices Court.   On or about the date of filing the
principal lawsuit, the parties commenced negotiations in order to forward the
case to arbitration. On May 2, 2004, the parties entered into an agreement to
arbitrate the disputes pending before the District Court, which included the
agreement that the cable companies would pay some amount to Eshkolot in
consideration for the use of its rights until the conclusion of the
arbitration.  Accordingly, on May 11,
2004, Eshkolot submitted an application, with the agreement of the parties and
in light of the arbitration agreement referred to above, to have the petitions
to the Restrictive Business Practices Court cancelled in order to transfer the
petition to the arbitration.  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. On June 2, 2004, the first arbitration hearing was held, and at such
hearing, dates were set for the submission of statements of claims and
defenses.

(m)
On June 29, 2003, a request to approve a class action was filed against us. The
amount of the claim, as estimated by the petitioners, is approximately NIS 100
million, as of the date of the request. The claim consists of two causes of
action. The first cause of action is not granting penetration discount as
opposed to the directives of the franchise. The petitioners argue that the
discount requested is by virtue of the terms of the franchise which determine
that it is mandatory to grant a penetration discount at the rate of 10% of the
price determined in the ICP arrangement whereas, in practice, we granted our
customers a penetration discount of 10% of the price set in the franchise.  For more details regarding the ICP
arrangement, please see Item 4B. Business Overview  HOT Vision and
Cooperation of the Cable Television Operators in Production of Broadcasting.

The
second cause of action is with respect of a limitation, which the Restrictive
Trade Practices Court imposed on the increase of subscriber fees, where it
prohibited the cable companies, including the Company, to increase, in real
terms, the subscriber fees in excess of 1.9% per year (the Ruling).

The
petitioners contend that the cable companies increased the subscriber fees a
day after the Ruling was rendered and calculated the annual increase rate 
1.9% from a starting price that was higher than the price that was determined
as a starting price by the Restrictive Trade Practices Court.  On February 23, 2004, we submitted our
response to this petition, whereby with respect to the first allegation of the
petitioners, we clarified that the clear and defined objective of the increase
of the subscriber fees that was determined by the Restrictive Trade Practices
Court was not a determination of new subscriber fees, as defined in the
franchise.

We
claimed that the Restrictive Trade Practices Court determined a ceiling for the
increase only to prevent the cable companies from rolling over to the public
the arrangement fee they were required to pay, by an immediate increase of the
subscriber fees up to the ceiling. In addition, whereas we already granted a
penetration discount of 10% in regions, which are the object of the claim prior
to rendering the Ruling, the petitioners allegation implies that it was to
grant a double discount than the one intended by the Minister of
Communications, and such a conclusion is unreasonable and is not consistent
with the provisions of the Ruling.

As
to the second allegation of the petitioners, we responded that an increase of
the subscriber fees a day after the Ruling was rendered, was only a result of
linking the subscriber fees to the CPI, pursuant to the provisions of the
franchise and the Bezeq Regulations (Franchises)  1987, and such an increase
was permitted in the ICP arrangement and pursuant to the Ruling.

112

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We
and the petitioner have  reached an agreement according to which the
lawsuit will be stricken in consideration for the payment by us of the petitioners
legal expenses in an immaterial amount.

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

No
significant change has occurred since the date of our financial statements.

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.

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.

|                                      |  | Nasdaq
  ($ per ADS) |       | Nasdaq
  (NIS per ADS) |  | Tel Aviv
  Stock
  Exchange
  ($ per
  ordinary
  share) |  | Tel Aviv
  Stock Exchange(NIS per
  ordinary share) |       
|------------------------------------- |  | -------------------- | ----- | ---------------------- |  | -------------------------------------------------------- |  | --------------------------------------------------- | ------
|                                      |  |                      |       |                        |  |                                                          |  |                                                     |       
|                                      |  | High                 |       | Low                    |  | High                                                     |  | Low                                                 |       
|                                      |  |                      |       |                        |  |                                                          |  |                                                     |       
|Most recent five full financial years
|                                      |  |                      |       |                        |  |                                                          |  |                                                     |       
|1999                                  |  |                      | 59.00 |                        |  | 19.87                                                    |  |                                                     | 245.02
|2000                                  |  |                      | 69.25 |                        |  | 32.81                                                    |  |                                                     | 281.57
|2001                                  |  |                      | 34.25 |                        |  | 9.74                                                     |  |                                                     | 140.70
|2002                                  |  |                      | 18.58 |                        |  | 8.34                                                     |  |                                                     | 83.11 
|2003                                  |  |                      | 16.59 |                        |  | 9.91                                                     |  |                                                     | 74.26 
|                                      |  |                      |       |                        |  |                                                          |  |                                                     |       
|Most recent two full financial years 
|                                      |  |                      |       |                        |  |                                                          |  |                                                     |       
|2002                                  |  |                      |       |                        |  |                                                          |  |                                                     |       
|First
  Quarter                       |  |                      | 18.58 |                        |  | 11.70                                                    |  |                                                     | 83.11 
|Second
  Quarter                      |  |                      | 12.05 |                        |  | 8.84                                                     |  |                                                     | 57.67 
|Third
  Quarter                       |  |                      | 11.40 |                        |  | 9.66                                                     |  |                                                     | 54.88 
|Fourth
  Quarter                      |  |                      | 11.03 |                        |  | 8.34                                                     |  |                                                     | 51.48 
|                                      |  |                      |       |                        |  |                                                          |  |                                                     |       
|2003                                  |  |                      |       |                        |  |                                                          |  |                                                     |       
|First
  Quarter                       |  |                      | 12.0  |                        |  | 9.91                                                     |  |                                                     | 56.24 
|Second
  Quarter                      |  |                      | 15.70 |                        |  | 11.76                                                    |  |                                                     | 71.65 
|Third
  Quarter                       |  |                      | 13.50 |                        |  | 11.44                                                    |  |                                                     | 58.68 
|Fourth
  Quarter                      |  |                      | 16.59 |                        |  | 12.77                                                    |  |                                                     | 74.26 
|                                      |  |                      |       |                        |  |                                                          |  |                                                     |       
|Most recent six months                |  |                      |       |                        |  |                                                          |  |                                                     |       
|                                      |  |                      |       |                        |  |                                                          |  |                                                     |       
|December
  2003                       |  |                      | 16.59 |                        |  | 14.22                                                    |  |                                                     | 73.56 
|January
  2004                        |  |                      | 17.67 |                        |  | 15.00                                                    |  |                                                     | 78.76 
|February
  2004                       |  |                      | 17.49 |                        |  | 15.24                                                    |  |                                                     | 78.58 
|March
  2004                          |  |                      | 20.25 |                        |  | 15.41                                                    |  |                                                     | 90.78 
|April
  2004                          |  |                      | 20.39 |                        |  | 19.45                                                    |  |                                                     | 92.88 
|May
  2004                            |  |                      | 19.31 |                        |  | 17.00                                                    |  |                                                     | 88.25 

113

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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.

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 30,203,917 ordinary shares were
issued and outstanding as of December 31, 2003, and 30,219,454 ordinary shares
were issued and outstanding as of May 31, 2004.  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 our company. We are not obligated to
pay interest or linkage on an unclaimed dividend.

115

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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. However, our directors are nominated
according to the provisions of a shareholders agreement from October 1993, as
more fully described in Item 7A. Major Shareholders and Related Party Transactions
 Major Shareholders - Matav Shareholders Agreement.

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).

116

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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 AMAT Infrastructure
License  include 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 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 statutory merger will not
be deemed approved if a majority of the shares 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 at least 70 days have passed from the time that the requisite proposals
for approval of the merger were filed with the Israeli Registrar of Companies
be each merging company.

The
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 such acquisition,
the purchaser would become a 25% or greater shareholder of the company and
there is no existing 25% or greater shareholder 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 become a 45%
shareholder of the company and there is no existing majority shareholder 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

117

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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

ISRAELI TAX

The
following is a summary of the current tax laws of the State of Israel as they
relate to us and our shareholders.  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.

Tax Reform

On
January 1, 2003, the Law for Amendment of the Income Tax Ordinance (Amendment
No. 132), 5762-2002, as amended, known as the Tax Reform, came into effect.

The
Tax Reform, aimed at broadening the categories of taxable income and reducing
the tax rates imposed on employment income, introduced the following, among
other things:

| |  | Reduction
  of the tax rate levied on real capital gains (other than gains deriving from
  the sale of listed securities) derived after January 1, 2003, to a general
  rate of 25% for both individuals and corporations. Regarding assets acquired
  prior to January 1, 2003, the reduced tax rate will apply to a proportionate
  part of the gain, in accordance with the holding periods of the asset, before
  or after January 1, 2003, on a linear basis;                                                                                          
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Imposition
  of Israeli tax on all income of Israeli residents, individuals and
  corporations, regardless of the territorial source of income, mainly on a
  personal basis, including income derived from passive sources such as
  interest, dividends and royalties, subject to exemptions provided by
  applicable law in certain circumstances;                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Imposition
  of capital gains tax on capital gains realized by Israeli individuals as of
  January 1, 2003, from the sale of shares of companies publicly traded on the
  Tel Aviv Stock Exchange and from the sale of shares of publicly traded
  Israeli companies on certain other stock exchanges (such gain was previously
  exempt from capital gains tax in Israel in certain circumstances). For
  information with respect to the applicability of Israeli capital gains taxes
  on the sale of our ordinary shares, see Capital Gains Tax below;

118

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| |  | Effectuation
  of a new regime for the taxation of shares and options issued to employees
  and officers (including directors); and                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                    
| |  | Introduction
  of tax at a rate of 25% on dividends paid, under certain circumstances, by
  one Israeli company to another (which are generally not subject to tax), if
  the source of such dividend is income that was derived outside of Israel.

General Corporate Tax Structure

Israeli
companies are generally subject to income tax at the corporate tax rate of 36%
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.  On June 2, 2004, the
Israeli government introduced a bill to the Israeli parliament proposing, among
other things, changes to the corporate tax rate.  The bill proposes to reduce the corporate tax rate from 36% to
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. 
In order to enact the bill as law, the bill must be approved by the
Israeli parliament and published.  The
bill might be modified prior to enactment or might not be enacted at all.  Accordingly, we cannot predict the
consequences of the bill to us.

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.

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 InformationTaxationCapital Gains Tax  Taxation of Israeli
Residents.

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.

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

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Taxation
of Israeli Residents

Pursuant
to the Tax Reform, 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 the tax reform); (ii)
the sale of shares by dealers in securities(who will be taxed at a rate of 36%
for corporations and at a marginal tax rate 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 a rate of 36% for
corporations and at a marginal tax rate 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.

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 the 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
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 stock through out the tax year in which the dividend is distributed as
well as the previous tax year then, the maximum tax on dividend is 12.5%).  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 stock at all times during the 12-month period preceding such
sale, exchange or other disposition.

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.

120

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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;                                                                                    
| |   |                                                                                                                    
| |  | are
  financial institutions or financial services entities;                                                     
| |   |                                                                                                                    
| |  | hold
  ADSs or ordinary shares as part of a straddle, hedge or conversion
  transaction with other investments;

121

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| |  | 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.

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 $300, or $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.

122

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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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

123

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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 2003. 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.

124

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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.

125

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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, 2003, we had liabilities denominated or linked to foreign
currency in an aggregate amount of approximately NIS 51.6 million, and assets
denominated or linked to foreign currency in an aggregate amount of
approximately NIS 70.1 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, 2003 was NIS
194.4 million).  On the other hand, all
of our revenue (which, for the year ended December 31, 2003, was NIS 545.5
million) is wholly denominated in shekels.

During
the years 2003, 2002 and 2001, 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 2003, we had call options to
buy $24 million and put options to sell $24 million. As a result of the above,
we recorded a financial loss (gain) in our financial statements for the years
ended December 31, 2003, 2002 and 2001, in the amount of about NIS 11.2
million, NIS 0.4 million and NIS (1.5) 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.

In
addition, according to Accounting Standards No. 12 and No. 17, which deal with
discontinuance of the adjustment of financial statements, financial statements
will cease to be adjusted for inflation in Israel beginning January 1,
2004.  Until December 31, 2003, the
Company continued to prepare adjusted financial statements in accordance with
Opinion No. 36 of the Institute of Certified Public Accountants in Israel.  The adjusted amounts included in the
financial statements as of December 31, 2003, will serve as the starting point
for nominal financial reporting beginning January 1, 2004.

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.

126

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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.

Within
90 days prior to the date of this annual report, 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. Based on this evaluation, our principal executive officer and
principal financial officer have concluded that 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.

127

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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
2002 and 2003, we paid audit fees in the aggregate amount of approximately
$94,000 and $84,000, 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 $47,000 and $60,000 for 2002 and 2003,
respectively.   Out of the total amounts
paid for audit fees, we paid Kesselman & Kesselman, a member of
PriceWaterhouse Coopers, aggregate amounts of approximately $47,000 and $24,000
for 2002 and 2003, respectively.  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 $85,000 to
Kesselman & Kesselman in 2002, and the aggregate amount of approximately
$75,000 to Kost Forer Gabbay & Kasierer in 2003. 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

We
paid tax fees in the aggregate amounts of approximately $57,000 and $119,000,
respectively. Out of the total amounts paid for tax fees, we paid approximately
$13,000 and $19,000 to Kesselman and Kesselman in 2002 and 2003,
respectively.  Out of the total amounts
paid for tax fees, we paid approximately $44,000 and $100,000 to Kost Forer
Gabbay & Kasierer in 2002 and 2003, 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

For
2002 we paid Kost Forer Gabbay & Kasierer approximately $15,000 for other
services.   We did not pay any other
fees in 2003.

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.

128

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ITEM
16D.  EXEMPTIONS FROM LISTING STANDARDS
FOR AUDIT COMMITTEES

Not
applicable.

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.

129

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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                                                                                                                                                                                             
|                  |  |                                                                                                                                                                                                                                                   
|***3.1            |  | English
  translation of Shareholders Agreement dated October 18, 1993                                                                                                                                                                            
|                  |  |                                                                                                                                                                                                                                                   
|***3.2            |  | English
  translation of Amendment to Shareholders Agreement dated October 18, 1993,
  dated July 8, 2002                                                                                                                                         
|                  |  |                                                                                                                                                                                                                                                   
|**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)-B  |  | English translation
  of Telecommunications Infrastructure License dated March 27, 2002 granted to
  Matav Infrastructure 2001 L.P.                                                                                                               
|                  |  |                                                                                                                                                                                                                                                   
|**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(p) 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.                                                                                                                         

130

---

---

|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.

|   
|---
|*  
|** 
|***
|  

131

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---

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).

132

---

---

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.

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: personal video
recorder.  Refers to a device, based on
large storage (hard-drive) and an easy-to-use user
interface, which enables digital smart recording/playback of video
content. PVR can also be used as a limited substitute to video on demand
(or VOD) services (while the content is pre-loaded in advance and watched by
the user later-on).  PVRs can either be embedded within a
digital set-top box or function as a stand-alone device.

Subscriber: refers
to a subscriber to a cable television distribution system for cable television
services.

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.

133

---

---

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.

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 video materials
(such as movies, television series) at any time they choose (regardless of the
broadcast line-up of the channel/s). 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. 
Due to its highly demanding bandwidth requirements, VOD services are limited
for implementation on broadband platforms only.

134

---

---

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.
| | --------------------------------
| |                                 
| |                                 
| |                                 
| | Name:                           
| | Title:                          
| |                                 
| | Date:                           
| |                                 
| |                                 
| |                                 
| | Name:                           
| | Title:                          
| |                                 
| | Date:                           

135

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MATAV - CABLE SYSTEMS MEDIA LTD.

FINANCIAL
STATEMENTS

AS OF DECEMBER
31, 2003

ADJUSTED TO THE NIS OF DECEMBER 2003

INDEX

|                                                          |  | Page    
|--------------------------------------------------------- |  | --------
|                                                          |  |         
|                                                          |  |         
|Report of Independent Auditors                            |  | 2 - 3   
|                                                          |  |         
|Balance Sheets - Consolidated
  and the Company           |  | 4 - 7   
|                                                          |  |         
|Statements of Operations -
  Consolidated and the Company |  | 8 - 9   
|                                                          |  |         
|Statements of Changes in Shareholders Equity             |  | 10      
|                                                          |  |         
|Statements of Cash Flows - Consolidated
  and the Company |  | 11 - 15 
|                                                          |  |         
|Notes to Financial Statements                             |  | 16 - 107
|                                                          |  |         
|Appendix to Financial Statements                          |  | 108     

- - - - - - - - - - - - - - - -

---

---

| | n | Kost Forer Gabbay & Kasierer3 Aminadav St.
  Tel-Aviv 67067, Israel | n | Phone: 972-3-6232525
  Fax:    972-3-5622555
| | - | ------------------------------------------------------------------- | - | --------------------------------------------

REPORT OF INDEPENDENT AUDITORS

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, 2003 and 2002 and the consolidated
balance sheets as such dates and the related statements of operations, changes
in shareholders equity and cash flows - Company and consolidated - for each of
the two years in the period ended December 31, 2003. These financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. The
financial statements for the year ended December 31, 2001 were audited by other
auditors whose report dated March 13, 2002, expressed an unqualified opinion on
those statements.

We did not
audit the financial statements of a jointly controlled Company whose assets
included in the consolidation constitute approximately 5.7% of total
consolidated assets as of December 31, 2003. Also, we did not audit the
financial statements of certain affiliates, the investment in which, at equity,
amounted to adjusted NIS 65,373 thousand and adjusted NIS 19,736 thousand
as of December 31, 2003 and 2002, respectively, and the Companys equity in
their earnings amounted to adjusted NIS 42,105 thousand and adjusted NIS
10,910 thousand for the years ended December 31, 2003 and 2002, respectively.
The financial statements of those companies were audited by other auditors,
whose reports have been furnished to us, and our opinion, insofar as it relates
to amounts included for those companies, is based on the reports of the other
auditors.

We
conducted our audits in accordance with generally accepted auditing standards
in Israel, including those prescribed by the Auditors Regulations (Auditors
Mode of Performance), 1973 and in accordance with 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 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, 2003
and 2002 and the consolidated results of operations, changes in shareholders
equity and cash flows  of the Company and consolidated - for each of the two
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in Israel, which differ in certain respects from
U.S. generally accepted accounting principles (as restated, see Note 26 to the
consolidated financial statements).

As
explained in Note 2b, the financial statements referred to above are presented
in values adjusted for the changes in the general purchasing power of the
Israeli currency, in accordance with pronouncements of the Institute of
Certified Public Accountants in Israel.

Without
qualifying our opinion, we draw attention to the matters described in Note 15
regarding claims filed against the Company and its subsidiaries.

|Tel-Aviv,
  Israel
  March 30, 2004
  Except for Note 24 as to which the date is June 30, 2004 | KOST FORER GABBAY & KASIERER
  A Member of Ernst & Young Global
|---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------

F-2

---

---

---

| | Kesselman & Kesselman
Certified Public Accountants (Isr.)
Trade Tower, 25 Hamered Street
Tel Aviv 68125 Israel
P.O Box 452 Tel Aviv 61003
Telephone +972-3-7954555
Facsimile +972-3-7954556
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# REPORT OF INDEPENDENT
AUDITORS

To the shareholders of

# MATAV  CABLE
SYSTEMS MEDIA LTD.

We have audited the consolidated
statements of operations, changes in shareholders equity and cash flows for the year
ended December 31, 2001 of Matav - Cable Systems Media Ltd. (the Company)
and its subsidiaries. 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 an associated company, the Companys share in the losses of which, is
adjusted NIS 1,792,000 in 2001. The financial statements of the associated company
were audited by other independent auditors, whose report has been furnished to us, and our
opinion, insofar as it relates to amounts included for this company, is based solely on
the report of the other independent auditors.

We conducted our audits in accordance
with auditing standards generally accepted in Israel and in the United States, including
those prescribed by the Israeli Auditors (Mode of Performance) Regulations, 1973. 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 Companys Board of Directors and management, as
well as evaluating the overall financial statement presentation. We believe that our
audits and the report of the other independent auditors provide a reasonable basis for our
opinion.

In our opinion, based upon our audits
and the report of the other independent auditors, the financial statements referred to
above present fairly, in all material respects, the Company and its subsidiaries
consolidated results of operations, the changes in shareholders equity and cash
flows for the year ended December 31, 2001, in conformity with accounting principles
generally accepted in Israel.

Accounting principles generally
accepted in Israel vary in certain respects from accounting principles generally accepted
in the United States. The application of the latter would have affected the determination
of net income for the year ended December 31, 2001, to the extent summarized in note 26.

As explained in note 1b, the
financial statements referred to above are presented in values adjusted for the changes in
the general purchasing power of the Israeli currency, in accordance with pronouncements of
the Institute of Certified Public Accountants in Israel.

Without qualifying our opinion, we
draw attention to claims filed against the Company and one of its subsidiaries, as
described in note 15.

|Tel-Aviv, Israel
     March 13, 2002 |  | Kesselman & Kesselman
Certified Public Accountants (Isr.)
|------------------------------------ |  | ---------------------------------------------------------

F-3

---

---

|                                     |                                 
|------------------------------------ | --------------------------------
|                                     | MATAV - CABLE SYSTEMS MEDIA LTD.
|CONSOLIDATED BALANCE SHEETS          |                                 
|                                    
|Adjusted to the NIS of December 2003 |                                 

|                                                |  |      |  |                |           |              |  |           |  | Convenience
  translation
  (Note 2c) |        
|----------------------------------------------- |  | ---- |  | -------------- | --------- | ------------ |  | --------- |  | ------------------------------------- | -------
|                                                |  |      |  | December 31,   |           |              | 
|                                                |  |      |  |                |           | December 31, | 
|                                                |  |      |  | 2002           |           | 2003         |  | 2003      | 
|                                                |  |      |  |                |           |              |  |           | 
|                                                |  | Note |  | Adjusted NIS   |           | U.S. dollars | 
|                                                |  |      |  |                |           |              | 
|                                                |  |      |  | (In thousands) |          
|                                                |  |      |  |                |           |              |  |           |  |                                       |        
|ASSETS                                          |  |      |  |                |           |              |  |           |  |                                       |        
|                                                |  |      |  |                |           |              |  |           |  |                                       |        
|CURRENT ASSETS:                                 |  |      |  |                |           |              |  |           |  |                                       |        
|Cash
  and cash equivalents                     |  |      |  |                | 7,604     |              |  | 37,948    |  |                                       | 8,666  
|Trade
  receivables                             |  | 4a   |  |                | 68,697    |              |  | 83,151    |  |                                       | 18,989 
|Other
  accounts receivable                     |  | 4b   |  |                | 17,837    |              |  | 19,765    |  |                                       | 4,514  
|                                                |  |      |  |                |           |              |  |           |  |                                       |        
|                                                |  |      |  |                |           |              |  |           |  |                                       |        
|                                                |  |      |  |                | 94,138    |              |  | 140,864   |  |                                       | 32,168 
|                                                |  |      |  |                |           |              |  |           |  |                                       |        
|INVESTMENTS
  AND LONG-TERM
       RECEIVABLES: |  |      |  |                |           |              |  |           |  |                                       |        
|Investments
  in affiliates                     |  | 5b   |  |                | 22,400    |              |  | 66,807    |  |                                       | 15,256 
|Investment
  in other company                   |  | 5c   |  |                | 16,241    |              |  | 16,241    |  |                                       | 3,709  
|Long-term
  loans granted to employees          |  |      |  |                | 611       |              |  | -         |  |                                       | -      
|Severance
  pay fund, net                       |  | 12   |  |                | 316       |              |  | -         |  |                                       | -      
|Investment
  in limited partnerships            |  | 6    |  |                | -         |              |  | 2,057     |  |                                       | 470    
|Rights
  to broadcast movies and programs       |  | 7    |  |                | -         |              |  | 34,927    |  |                                       | 7,976  
|Other
  receivables                             |  |      |  |                | -         |              |  | 885       |  |                                       | 202    
|                                                |  |      |  |                |           |              |  |           |  |                                       |        
|                                                |  |      |  |                |           |              |  |           |  |                                       |        
|                                                |  |      |  |                | 39,568    |              |  | 120,917   |  |                                       | 27,613 
|                                                |  |      |  |                |           |              |  |           |  |                                       |        
|FIXED
  ASSETS:                                 |  | 8    |  |                |           |              |  |           |  |                                       |        
|Cost                                            |  |      |  |                | 1,987,219 |              |  | 2,028,447 |  |                                       | 463,222
|Less
  - accumulated depreciation               |  |      |  |                | 995,221   |              |  | 1,151,622 |  |                                       | 262,987
|                                                |  |      |  |                |           |              |  |           |  |                                       |        
|                                                |  |      |  |                |           |              |  |           |  |                                       |        
|                                                |  |      |  |                | 991,998   |              |  | 876,825   |  |                                       | 200,234
|                                                |  |      |  |                |           |              |  |           |  |                                       |        
|                                                |  |      |  |                |           |              |  |           |  |                                       |        
|OTHER ASSETS
  AND DEFERRED CHARGES,
       NET |  | 9    |  |                | 6,922     |              |  | 3,946     |  |                                       | 901    
|                                                |  |      |  |                |           |              |  |           |  |                                       |        
|                                                |  |      |  |                |           |              |  |           |  |                                       |        
|                                                |  |      |  |                | 1,132,626 |              |  | 1,142,552 |  |                                       | 260,916
|                                                |  |      |  |                |           |              |  |           |  |                                       |        

The accompanying notes are an integral part
of the financial statements.

F-4

---

---

|                                     |                                 
|------------------------------------ | --------------------------------
|                                     | MATAV - CABLE SYSTEMS MEDIA LTD.
|CONSOLIDATED BALANCE SHEETS          |                                 
|                                    
|Adjusted to the NIS of December 2003 |                                 

|                                                                                                                                                          |  |      |  |                |           |              |  |           |   | Convenience translation
  (Note 2c) |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | -------------- | --------- | ------------ |  | --------- | - | ----------------------------------- | -------
|                                                                                                                                                          |  |      |  | December 31,   |           |              | 
|                                                                                                                                                          |  |      |  |                |           | December 31, | 
|                                                                                                                                                          |  |      |  | 2002           |           | 2003         |  | 2003      |  
|                                                                                                                                                          |  |      |  |                |           |              |  |           |  
|                                                                                                                                                          |  | Note |  | Adjusted NIS   |           | U.S. dollars | 
|                                                                                                                                                          |  |      |  |                |           |              | 
|                                                                                                                                                          |  |      |  | (In thousands) |          
|LIABILITIES
  AND SHAREHOLDERS EQUITY                                                                                                                    |  |      |  |                |           |              |  |           |   |                                     |        
|CURRENT
  LIABILITIES:                                                                                                                                    |  |      |  |                |           |              |  |           |   |                                     |        
|Bank
  credit                                                                                                                                             |  | 10   |  |                | 514,123   |              |  | 435,403   |   |                                     | 99,430 
|Current
  maturities of debentures                                                                                                                        |  | 14   |  |                | 33,730    |              |  | 33,701    |   |                                     | 7,696  
|Trade
  payables                                                                                                                                          |  | 11a  |  |                | 84,056    |              |  | 94,699    |   |                                     | 21,626 
|Jointly
  controlled entity - current account                                                                                                             |  |      |  |                | 2,682     |              |  | 17,690    |   |                                     | 4,040  
|Other
  accounts payable                                                                                                                                  |  | 11b  |  |                | 84,607    |              |  | 158,982   |   |                                     | 36,306 
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                | 719,198   |              |  | 740,475   |   |                                     | 169,097
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|LONG-TERM
  LIABILITIES:                                                                                                                                  |  |      |  |                |           |              |  |           |   |                                     |        
|Loans
  and debentures (net of current maturities):                                                                                                       |  |      |  |                |           |              |  |           |   |                                     |        
|Loans
  from bank and others                                                                                                                              |  | 13   |  |                | 142,085   |              |  | 127,403   |   |                                     | 29,094 
|Debentures                                                                                                                                                |  | 14   |  |                | 99,462    |              |  | 66,145    |   |                                     | 15,105 
|Customers
  deposits for converters, net of
            accumulated
  amortization                                                                       |  | 2l   |  |                | 24,809    |              |  | 25,675    |   |                                     | 5,863  
|Severance
  pay liability, net                                                                                                                            |  | 12   |  |                | -         |              |  | 2,106     |   |                                     | 481    
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                | 266,356   |              |  | 221,329   |   |                                     | 50,543 
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|COMMITMENTS,
  CONTINGENT LIABILITIES
            AND COLLATERALS                                                                                         |  | 15   |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|SHAREHOLDERS
  EQUITY:                                                                                                                                   |  |      |  |                |           |              |  |           |   |                                     |        
|Share
  capital:                                                                                                                                          |  | 16   |  |                |           |              |  |           |   |                                     |        
|Ordinary
  shares of NIS 1.00 par value -
                 authorized:
  100,000,000 shares; issued and
                 outstanding:
  30,203,918 shares |  |      |  |                | 48,882    |              |  | 48,882    |   |                                     | 11,163 
|Additional
  paid-in capital                                                                                                                              |  |      |  |                | 401,329   |              |  | 375,538   |   |                                     | 85,758 
|Accumulated
  deficit                                                                                                                                     |  |      |  |                | (238,222  | )            |  | (243,672  | ) |                                     | (55,645
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                | 211,989   |              |  | 180,748   |   |                                     | 41,276 
|Less
  - cost of Company shares held by subsidiary
            (December 31,
  2002 - 1,343,497 shares)                                                   |  |      |  |                | (64,917   | )            |  | -         |   |                                     | -      
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                | 147,072   |              |  | 180,748   |   |                                     | 41,276 
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                | 1,132,626 |              |  | 1,142,552 |   |                                     | 260,916
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        

The accompanying notes are an integral part
of the financial statements.

F-5

---

---

|                                     |                                 
|------------------------------------ | --------------------------------
|                                     | MATAV - CABLE SYSTEMS MEDIA LTD.
|BALANCE SHEETS - THE COMPANY         |                                 
|                                    
|Adjusted to the NIS of December 2003 |                                 

|                                                         |  |      |  |                |           |              |  |           |  | Convenience translation
  (Note 2c) |        
|-------------------------------------------------------- |  | ---- |  | -------------- | --------- | ------------ |  | --------- |  | ----------------------------------- | -------
|                                                         |  |      |  | December 31,   |           |              | 
|                                                         |  |      |  |                |           | December 31, | 
|                                                         |  |      |  | 2002           |           | 2003         |  | 2003      | 
|                                                         |  |      |  |                |           |              |  |           | 
|                                                         |  | Note |  | Adjusted NIS   |           | U.S. dollars | 
|                                                         |  |      |  |                |           |              | 
|                                                         |  |      |  | (In thousands) |          
|ASSETS                                                   |  |      |  |                |           |              |  |           |  |                                     |        
|CURRENT
  ASSETS:                                        |  |      |  |                |           |              |  |           |  |                                     |        
|Cash
  and cash equivalents                              |  |      |  |                | 7,444     |              |  | 35,879    |  |                                     | 8,193  
|Trade
  receivables                                      |  | 4a   |  |                | 47,635    |              |  | 45,400    |  |                                     | 10,368 
|Other
  accounts receivable                              |  | 4b   |  |                | 12,677    |              |  | 19,431    |  |                                     | 4,437  
|                                                         |  |      |  |                |           |              |  |           |  |                                     |        
|                                                         |  |      |  |                |           |              |  |           |  |                                     |        
|                                                         |  |      |  |                | 67,756    |              |  | 100,710   |  |                                     | 22,998 
|                                                         |  |      |  |                |           |              |  |           |  |                                     |        
|INVESTMENTS
  AND LONG-TERM
       RECEIVABLES:          |  |      |  |                |           |              |  |           |  |                                     |        
|Investments
  in subsidiaries and long-term     accounts |  | 5a   |  |                | 265,908   |              |  | 247,348   |  |                                     | 56,485 
|Investments
  in affiliates                              |  | 5b   |  |                | 29,170    |              |  | 75,992    |  |                                     | 17,354 
|Investment
  in other company                            |  | 5c   |  |                | 16,227    |              |  | 16,227    |  |                                     | 3,706  
|Long-term
  loans granted to employees                   |  |      |  |                | 464       |              |  | -         |  |                                     | -      
|Severance
  pay fund, net                                |  | 12   |  |                | 405       |              |  | -         |  |                                     | -      
|Other
  receivables                                      |  |      |  |                | -         |              |  | 885       |  |                                     | 202    
|                                                         |  |      |  |                |           |              |  |           |  |                                     |        
|                                                         |  |      |  |                |           |              |  |           |  |                                     |        
|                                                         |  |      |  |                | 312,174   |              |  | 340,452   |  |                                     | 77,747 
|                                                         |  |      |  |                |           |              |  |           |  |                                     |        
|                                                         |  |      |  |                |           |              |  |           |  |                                     |        
|FIXED
  ASSETS:                                          |  | 8    |  |                |           |              |  |           |  |                                     |        
|Cost                                                     |  |      |  |                | 1,430,108 |              |  | 1,429,183 |  |                                     | 326,372
|Less
  - accumulated depreciation                        |  |      |  |                | 704,438   |              |  | 816,948   |  |                                     | 186,560
|                                                         |  |      |  |                |           |              |  |           |  |                                     |        
|                                                         |  |      |  |                |           |              |  |           |  |                                     |        
|                                                         |  |      |  |                | 725,670   |              |  | 612,235   |  |                                     | 139,812
|                                                         |  |      |  |                |           |              |  |           |  |                                     |        
|                                                         |  |      |  |                |           |              |  |           |  |                                     |        
|OTHER ASSETS
  AND DEFERRED
       CHARGES, NET          |  | 9    |  |                | 2,497     |              |  | 1,330     |  |                                     | 304    
|                                                         |  |      |  |                |           |              |  |           |  |                                     |        
|                                                         |  |      |  |                |           |              |  |           |  |                                     |        
|                                                         |  |      |  |                | 1,108,097 |              |  | 1,054,727 |  |                                     | 240,860
|                                                         |  |      |  |                |           |              |  |           |  |                                     |        

The accompanying notes are an integral part
of the financial statements.

F-6

---

---

|                                     |                                 
|------------------------------------ | --------------------------------
|                                     | MATAV - CABLE SYSTEMS MEDIA LTD.
|BALANCE SHEETS - THE COMPANY         |                                 
|                                    
|Adjusted to the NIS of December 2003 |                                 

|                                                                                                                                                          |  |      |  |                |           |              |  |           |   | Convenience translation
  (Note 2c) |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | -------------- | --------- | ------------ |  | --------- | - | ----------------------------------- | -------
|                                                                                                                                                          |  |      |  | December 31,   |           |              | 
|                                                                                                                                                          |  |      |  |                |           | December 31, | 
|                                                                                                                                                          |  |      |  | 2002           |           | 2003         |  | 2003      |  
|                                                                                                                                                          |  |      |  |                |           |              |  |           |  
|                                                                                                                                                          |  | Note |  | Adjusted NIS   |           | U.S. dollars | 
|                                                                                                                                                          |  |      |  |                |           |              | 
|                                                                                                                                                          |  |      |  | (In thousands) |          
|LIABILITIES
  AND SHAREHOLDERS
                 EQUITY                                                                                                   |  |      |  |                |           |              |  |           |   |                                     |        
|CURRENT
  LIABILITIES:                                                                                                                                    |  |      |  |                |           |              |  |           |   |                                     |        
|Bank
  credit                                                                                                                                             |  | 10   |  |                | 514,104   |              |  | 394,896   |   |                                     | 90,179 
|Current
  maturities of debentures                                                                                                                        |  | 14   |  |                | 33,730    |              |  | 33,701    |   |                                     | 7,696  
|Trade
  payables                                                                                                                                          |  | 11a  |  |                | 67,421    |              |  | 63,617    |   |                                     | 14,528 
|Subsidiaries
  - current account                                                                                                                          |  |      |  |                | 3,077     |              |  | 15,988    |   |                                     | 3,651  
|Other
  accounts payable                                                                                                                                  |  | 11b  |  |                | 73,185    |              |  | 140,608   |   |                                     | 32,110 
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                | 691,517   |              |  | 648,810   |   |                                     | 148,164
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|LONG-TERM
  LIABILITIES:                                                                                                                                  |  |      |  |                |           |              |  |           |   |                                     |        
|Loans
  and debentures (net of current
            maturities):                                                                                           |  |      |  |                |           |              |  |           |   |                                     |        
|Loans
  from bank and others                                                                                                                              |  | 13   |  |                | 142,085   |              |  | 127,403   |   |                                     | 29,094 
|Debentures                                                                                                                                                |  | 14   |  |                | 101,190   |              |  | 67,402    |   |                                     | 15,392 
|Losses
  over investment in subsidiaries                                                                                                                  |  | 5a   |  |                | 7,886     |              |  | 10,778    |   |                                     | 2,461  
|Customers
  deposits for converters, net of          accumulated
  amortization                                                                          |  | 2l   |  |                | 18,347    |              |  | 18,882    |   |                                     | 4,312  
|Severance
  pay liability, net                                                                                                                            |  | 12   |  |                | -         |              |  | 704       |   |                                     | 161    
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                | 269,508   |              |  | 225,169   |   |                                     | 51,420 
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|COMMITMENTS,
  CONTINGENT
       LIABILITIES AND COLLATERALS                                                                                              |  | 15   |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|SHAREHOLDERS
  EQUITY:                                                                                                                                   |  |      |  |                |           |              |  |           |   |                                     |        
|Share
  capital:                                                                                                                                          |  | 16   |  |                |           |              |  |           |   |                                     |        
|Ordinary
  shares of NIS 1.00 par value -
                 authorized:
  100,000,000 shares; issued
                 and
  outstanding: 30,203,918 shares |  |      |  |                | 48,882    |              |  | 48,882    |   |                                     | 11,163 
|Additional
  paid-in capital                                                                                                                              |  |      |  |                | 401,329   |              |  | 375,538   |   |                                     | 85,758 
|Accumulated
  deficit                                                                                                                                     |  |      |  |                | (238,222  | )            |  | (243,672  | ) |                                     | (55,645
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                | 211,989   |              |  | 180,748   |   |                                     | 41,276 
|Less - cost
  of Company shares held by
       subsidiary (December 31, 2002  1,343,497
       shares)                                                   |  |      |  |                | (64,917   | )            |  | -         |   |                                     | -      
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                | 147,072   |              |  | 180,748   |   |                                     | 41,276 
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        
|                                                                                                                                                          |  |      |  |                | 1,108,097 |              |  | 1,054,727 |   |                                     | 240,860
|                                                                                                                                                          |  |      |  |                |           |              |  |           |   |                                     |        

The accompanying notes are an integral part
of the financial statements.

F-7

---

---

|                                      |                                 
|------------------------------------- | --------------------------------
|                                      | MATAV - CABLE SYSTEMS MEDIA LTD.
|CONSOLIDATED STATEMENTS OF OPERATIONS |                                 
|                                     
|Adjusted to the NIS of December 2003  |                                 

|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   | Convenience translation
  (Note 2c) |        
|-------------------------------------------------------------------------- |  | ---- |  | --------------------------------------------------------------------- | ------------------------- | ------------ |  | ------- | - | ---- | ------- | - | ----------------------------------- | -------
|                                                                           |  |      |  | Year ended
  December 31,                                             |                           |              | 
|                                                                           |  |      |  |                                                                       | Year ended
  December 31, |             
|                                                                           |  |      |  |                                                                       |                           |             
|                                                                           |  |      |  | 2001                                                                  |                           | 2002         |  | 2003    |   | 2003 |        
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |        
|                                                                           |  | Note |  | Adjusted NIS                                                          |                           | U.S. dollars | 
|                                                                           |  |      |  |                                                                       |                           |              | 
|                                                                           |  |      |  | (In thousands, except 
  earning (loss)
  per ordinary share and ADS) |                          
|                                                                           |  |      |  |                                                                       |                          
|Revenues                                                                   |  | 2j   |  |                                                                       | 469,389                   |              |  | 495,536 |   |      | 545,480 |   |                                     | 124,567
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|Operating
  expenses:                                                      |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|Depreciation                                                               |  |      |  |                                                                       | 142,287                   |              |  | 161,996 |   |      | 160,521 |   |                                     | 36,657 
|Other
  operating expenses                                                 |  | 19a  |  |                                                                       | 341,927                   |              |  | 345,441 |   |      | 306,165 |   |                                     | 69,917 
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|Total
  operating expenses                                                 |  |      |  |                                                                       | 484,214                   |              |  | 507,437 |   |      | 466,686 |   |                                     | 106,574
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|Gross profit
  (loss)                                                      |  |      |  |                                                                       | (14,825                   | )            |  | (11,901 | ) |      | 78,794  |   |                                     | 17,993 
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|Selling,
  marketing, general and
       administrative expenses:          |  | 19b  |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|Selling
  and marketing                                                    |  |      |  |                                                                       | 57,974                    |              |  | 40,643  |   |      | 43,954  |   |                                     | 10,037 
|General
  and administrative                                               |  |      |  |                                                                       | 57,052                    |              |  | 46,137  |   |      | 42,659  |   |                                     | 9,742  
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|                                                                           |  |      |  |                                                                       | 115,026                   |              |  | 86,780  |   |      | 86,613  |   |                                     | 19,779 
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|Operating
  loss                                                           |  |      |  |                                                                       | (129,851                  | )            |  | (98,681 | ) |      | (7,819  | ) |                                     | (1,786 
|Financial
  expenses, net                                                  |  | 19c  |  |                                                                       | (52,088                   | )            |  | (48,089 | ) |      | (83,958 | ) |                                     | (19,173
|Other
  income, net                                                        |  | 19d  |  |                                                                       | 3,053                     |              |  | 278,535 |   |      | 80,996  |   |                                     | 18,496 
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|Income
  (loss) before taxes on income                                     |  |      |  |                                                                       | (178,886                  | )            |  | 131,765 |   |      | (10,781 | ) |                                     | (2,462 
|Taxes on
  income                                                          |  | 17   |  |                                                                       | (434                      | )            |  | 108,851 |   |      | 35,576  |   |                                     | 8,124  
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|Income
  (loss) from operations of the
       Company and its subsidiaries |  |      |  |                                                                       | (178,452                  | )            |  | 22,914  |   |      | (46,357 | ) |                                     | (10,586
|Equity in
  earnings (losses) of
       affiliates, net                    |  | 5    |  |                                                                       | (78,822                   | )            |  | 10,910  |   |      | 40,907  |   |                                     | 9,342  
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|Net income
  (loss) for the year                                           |  |      |  |                                                                       | (257,274                  | )            |  | 33,824  |   |      | (5,450  | ) |                                     | (1,244 
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|Earnings
  (loss) per Ordinary share -
       NIS                          |  | 2p   |  |                                                                       | (8.92                     | )            |  | 1.17    |   |      | (0.19   | ) |                                     | (0.043 
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|Earnings
  (loss) per ADS - NIS                                            |  | 2p   |  |                                                                       | (17.84                    | )            |  | 2.35    |   |      | (0.37   | ) |                                     | (0.085 
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|Weighted
  average number of shares
       outstanding (in thousands)      |  | 2p   |  |                                                                       | 28,834                    |              |  | 28,860  |   |      | 29,347  |   |                                     | 29,347 
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        
|Weighted
  average number of ADS
       outstanding (in thousands)         |  | 2p   |  |                                                                       | 14,417                    |              |  | 14,430  |   |      | 14,674  |   |                                     | 14,674 
|                                                                           |  |      |  |                                                                       |                           |              |  |         |   |      |         |   |                                     |        

The accompanying notes are an integral part
of the financial statements.

F-8

---

---

|                                       |                                 
|-------------------------------------- | --------------------------------
|                                       | MATAV - CABLE SYSTEMS MEDIA LTD.
|STATEMENTS OF OPERATIONS - THE COMPANY |                                 
|                                      
|Adjusted to the NIS of December 2003   |                                 

|                                                                         |  |      |  | Year ended
  December 31,                                             |          | Convenience
  translation
  (Note 2c) | 
|------------------------------------------------------------------------ |  | ---- |  | --------------------------------------------------------------------- | -------- | ------------------------------------- | 
|                                                                         |  |      |  |                                                                       |          |                                      
|                                                                         |  |      |  |                                                                       |          | Year ended
  December 31,             | 
|                                                                         |  |      |  | 2001                                                                  |          | 2002                                  | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|                                                                         |  | Note |  | Adjusted NIS                                                          |          | U.S. dollars                          | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|                                                                         |  |      |  | (In thousands, except 
  earning (loss)
  per ordinary share and ADS) |         
|                                                                         |  |      |  |                                                                       |         
|Revenues                                                                 |  | 2j   |  |                                                                       | 337,583  |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|Operating
  expenses:                                                    |  |      |  |                                                                       |          |                                       | 
|Depreciation                                                             |  |      |  |                                                                       | 103,026  |                                       | 
|Other
  operating expenses                                               |  | 19a  |  |                                                                       | 248,680  |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|Total
  operating expenses                                               |  |      |  |                                                                       | 351,706  |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|Gross profit
  (loss)                                                    |  |      |  |                                                                       | (14,123  | )                                     | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|Selling,
  marketing, general and
       administrative expenses:        |  | 19b  |  |                                                                       |          |                                       | 
|Selling
  and marketing                                                  |  |      |  |                                                                       | 41,913   |                                       | 
|General
  and administrative                                             |  |      |  |                                                                       | 39,960   |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|                                                                         |  |      |  |                                                                       | 81,873   |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|Operating
  loss                                                         |  |      |  |                                                                       | (95,996  | )                                     | 
|Financial
  expenses, net                                                |  | 19c  |  |                                                                       | (36,826  | )                                     | 
|Other
  income, net                                                      |  | 19d  |  |                                                                       | 3,121    |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|Income
  (loss) before taxes on income                                   |  |      |  |                                                                       | (129,701 | )                                     | 
|Taxes on
  income                                                        |  | 17   |  |                                                                       | (2,305   | )                                     | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|Income
  (loss) from operations of the
       Company                    |  |      |  |                                                                       | (127,396 | )                                     | 
|Equity in
  earnings (losses) of
       affiliates and subsidiaries, net |  | 5    |  |                                                                       | (129,878 | )                                     | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|Net income
  (loss) for the year                                         |  |      |  |                                                                       | (257,274 | )                                     | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|Earnings
  (loss) per Ordinary share -
       NIS                        |  | 2p   |  |                                                                       | (8.92    | )                                     | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|Earnings
  (loss) per ADS - NIS                                          |  | 2p   |  |                                                                       | (17.84   | )                                     | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|Weighted
  average number of shares
       outstanding (in thousands)    |  | 2p   |  |                                                                       | 28,834   |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 
|Weighted
  average number of ADS
       outstanding (in thousands)       |  | 2p   |  |                                                                       | 14,417   |                                       | 
|                                                                         |  |      |  |                                                                       |          |                                       | 

The accompanying notes are an integral part
of the financial statements.

F-9

---

---

|                                              |                                 
|--------------------------------------------- | --------------------------------
|                                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY |                                 
|                                             
|Adjusted to the NIS of December 2003          |                                 

|                                                                                                                                    |  | Share
  capital                                     |        | Additional
  paid-in
  capital |  | Accumulated
  deficit |  | Cost of
  Company
  shares held
  by subsidiary |         | Total | 
|----------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------- | ------ | ------------------------------ |  | --------------------- |  | ----------------------------------------------- | ------- | ----- | 
|                                                                                                                                   
|Number of
  shares                                                                                                                  |  | Amount                                             
|                                                                                                                                    |  |                                                     |        |                                |  |                       |  |                                                 |         |       | 
|                                                                                                                                    |  | Adjusted
  NIS                                      |       
|                                                                                                                                    |  |                                                     |       
|                                                                                                                                    |  | (In
  thousands)                                    |       
|                                                                                                                                    |  |                                                     |        |                                |  |                       |  |                                                 |         |       | 
|Balance
  at January 1, 2001                                                                                                        |  |                                                     | 28,785 |                                |  | 47,403                |  |                                                 | 335,100 |       | 
|Loss
  for the year                                                                                                                 |  |                                                     | -      |                                |  | -                     |  |                                                 | -       |       | 
|Exercise
  of stock options by
            employees and
  exercise of
            series 1 warrants
  (Note 16b
            and c) |  |                                                     | 49     |                                |  | 52                    |  |                                                 | 2,037   |       | 
|Acquisition
  and exercise of
            Company Series 1
  warrants
            by subsidiary                                     |  |                                                     | 1,370  |                                |  | 1,427                 |  |                                                 | 64,517  |       | 
|                                                                                                                                    |  |                                                     |        |                                |  |                       |  |                                                 |         |       | 
|                                                                                                                                    |  |                                                     |        |                                |  |                       |  |                                                 |         |       | 
|Balance
  at December 31, 2001                                                                                                      |  |                                                     | 30,204 |                                |  | 48,882                |  |                                                 | 401,654 |       | 
|Loss
  for the year                                                                                                                 |  |                                                     | -      |                                |  | -                     |  |                                                 | -       |       | 
|Sale
  of Company shares held by
            subsidiary                                                                             |  |                                                     | -      |                                |  | -                     |  |                                                 | (325    | )     | 
|                                                                                                                                    |  |                                                     |        |                                |  |                       |  |                                                 |         |       | 
|                                                                                                                                    |  |                                                     |        |                                |  |                       |  |                                                 |         |       | 
|Balance
  at December 31, 2002                                                                                                      |  |                                                     | 30,204 |                                |  | 48,882                |  |                                                 | 401,329 |       | 
|Loss
  for the year                                                                                                                 |  |                                                     | -      |                                |  | -                     |  |                                                 | -       |       | 
|Sale
  of Company shares held by
            subsidiary                                                                             |  |                                                     | -      |                                |  | -                     |  |                                                 | (25,791 | )     | 
|                                                                                                                                    |  |                                                     |        |                                |  |                       |  |                                                 |         |       | 
|                                                                                                                                    |  |                                                     |        |                                |  |                       |  |                                                 |         |       | 
|Balance
  at December 31, 2003                                                                                                      |  |                                                     | 30,204 |                                |  | 48,882                |  |                                                 | 375,538 |       | 
|                                                                                                                                    |  |                                                     |        |                                |  |                       |  |                                                 |         |       | 
|                                                                                                                                    |  |                                                     |        |                                |  |                       |  |                                                 |         |       | 
|                                                                                                                                    |  | Convenience translation into U.S. dollars (Note 2c) |       
|                                                                                                                                    |  |                                                     |       
|                                                                                                                                    |  | (In thousands except share amounts)                 |       
|                                                                                                                                    |  |                                                     |       
|                                                                                                                                    |  |                                                     |        |                                |  |                       |  |                                                 |         |       | 
|Balance
  at January 1, 2003                                                                                                        |  |                                                     | 6,897  |                                |  | 11,163                |  |                                                 | 91,649  |       | 
|Loss
  for the year                                                                                                                 |  |                                                     | -      |                                |  | -                     |  |                                                 | -       |       | 
|Sale
  of Company shares held by
            subsidiary                                                                             |  |                                                     | -      |                                |  | -                     |  |                                                 | (5,891  | )     | 
|                                                                                                                                    |  |                                                     |        |                                |  |                       |  |                                                 |         |       | 
|                                                                                                                                    |  |                                                     |        |                                |  |                       |  |                                                 |         |       | 
|Balance
  at December 31, 2003                                                                                                      |  |                                                     | 6,897  |                                |  | 11,163                |  |                                                 | 85,758  |       | 
|                                                                                                                                    |  |                                                     |        |                                |  |                       |  |                                                 |         |       | 

The accompanying notes are an integral part
of the financial statements.

F-10

---

---

|                                      |                                 
|------------------------------------- | --------------------------------
|                                      | MATAV - CABLE SYSTEMS MEDIA LTD.
|CONSOLIDATED STATEMENTS OF CASH FLOWS |                                 
|                                     
|Adjusted to the NIS of December 2003  |                                 

|                                                                                                                      |  | Year ended       |          | Convenience
  translation
  (Note 2c) | 
|--------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | ------------------------------------- | 
|                                                                                                                      |  |                  |          |                                      
|                                                                                                                      |  | December
  31,   |          | Year ended                            | 
|                                                                                                                      |  |                  |          | December
  31,                        | 
|                                                                                                                      |  | 2001             |          | 2002                                  | 
|                                                                                                                      |  |                  |          |                                       | 
|                                                                                                                      |  | Adjusted
  NIS   |          | U.S.
  dollars                        | 
|                                                                                                                      |  |                  |          |                                       | 
|                                                                                                                      |  | (In
  thousands) |         
|Cash flows from operating
  activities:                                                                               |  |                  |          |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|Net
  income (loss) for the year                                                                                      |  |                  | (257,274 | )                                     | 
|Adjustments
  to reconcile net income (loss) to net cash provided
            by (used in)
  operating activities (a) |  |                  | 276,013  |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|Net cash provided by (used
  in) operating activities                                                                 |  |                  | 18,739   |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|Cash flows from investing
  activities:                                                                               |  |                  |          |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|Jointly
  controlled company, proportionally consolidated for the
            first time (b)                          |  |                  | -        |                                       | 
|Purchase
  of fixed assets                                                                                            |  |                  | (253,343 | )                                     | 
|Investment
  in affiliate                                                                                             |  |                  | (3,518   | )                                     | 
|Repayment
  of long-term loans to affiliate                                                                           |  |                  | -        |                                       | 
|Deposit
  in trust, net                                                                                               |  |                  | -        |                                       | 
|Investment
  in other assets                                                                                          |  |                  | (1,066   | )                                     | 
|Proceeds
  from sale of investment in affiliate                                                                       |  |                  | 20,651   |                                       | 
|Proceeds
  from sale of fixed assets                                                                                  |  |                  | 2,012    |                                       | 
|Grant
  of long-term loan for purchase of fixed assets                                                                |  |                  | -        |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|Net cash provided by (used
  in) investing activities                                                                 |  |                  | (235,264 | )                                     | 
|                                                                                                                      |  |                  |          |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|Cash flows from financing
  activities:                                                                               |  |                  |          |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|Exercise
  of stock options by employees and exercise of series 1
            warrants, net of
  issuance costs       |  |                  | 2,089    |                                       | 
|Acquisition
  and exercise of Companys series 1 warrants by a
            subsidiary                                 |  |                  | (261     | )                                     | 
|Sale
  of Company shares held by subsidiary                                                                           |  |                  | -        |                                       | 
|Sale
  of Company debentures by subsidiary                                                                            |  |                  | 23,268   |                                       | 
|Receipt
  of long-term loans from banks and others                                                                    |  |                  | 25,255   |                                       | 
|Repayment
  of long-term loans to banks and others                                                                    |  |                  | (2,139   | )                                     | 
|Redemption
  of debentures                                                                                            |  |                  | (28,501  | )                                     | 
|Short-term
  bank credit, net                                                                                         |  |                  | 195,700  |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|Net cash provided by (used
  in) financing activities                                                                 |  |                  | 215,411  |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|Increase (decrease) in cash
  and cash equivalents                                                                    |  |                  | (1,114   | )                                     | 
|Cash and cash equivalents at
  beginning of year                                                                      |  |                  | 1,608    |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|                                                                                                                      |  |                  |          |                                       | 
|Cash and cash equivalents at
  end of year                                                                            |  |                  | 494      |                                       | 
|                                                                                                                      |  |                  |          |                                       | 

*)          Reclassified.

The accompanying notes are an integral part
of the financial statements.

F-11

---

---

|                                      |                                 
|------------------------------------- | --------------------------------
|                                      | MATAV - CABLE SYSTEMS MEDIA LTD.
|CONSOLIDATED STATEMENTS OF CASH FLOWS |                                 
|                                     
|Adjusted to the NIS of December 2003  |                                 

|    |                                                                                                       |  | Year ended     |         | Convenience translation(Note 2c) | 
|--- | ----------------------------------------------------------------------------------------------------- |  | -------------- | ------- | -------------------------------- | 
|    |                                                                                                       |  |                |         |                                 
|    |                                                                                                       |  | December
  31, |         | Year ended                       | 
|    |                                                                                                       |  |                |         | December
  31,                   | 
|    |                                                                                                       |  | 2001           |         | 2002                             | 
|    |                                                                                                       |  |                |         |                                  | 
|    |                                                                                                       |  | Adjusted NIS   |         | U.S. dollars                     | 
|    |                                                                                                       |  |                |         |                                  | 
|    |                                                                                                       |  | (In thousands) |        
|    |                                                                                                       |  |                |         |                                  | 
|(a) | Adjustments to reconcile net
  income (loss) to net cashprovided by (used in) operating
  activities: |  |                |         |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|    | Income and expenses not
  involving cash flows:                                                       |  |                |         |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|    | Equity
  in losses (earnings) of affiliates, net                                                      |  |                | 78,822  |                                  | 
|    | Depreciation
  and amortization                                                                       |  |                | 144,202 |                                  | 
|    | Deferred
  income (expenses) taxes, net                                                               |  |                | 1,538   |                                  | 
|    | Accrued
  severance pay, net                                                                          |  |                | (374    | )                                | 
|    | Loss
  (gain) from:                                                                                   |  |                |         |                                  | 
|    | Changes
  in shareholding in affiliate (including from sale
            of shares of
  affiliates)    |  |                | (5,145  | )                                | 
|    | Write-off
  of investment in other company                                                            |  |                | -       |                                  | 
|    | Sale
  of fixed assets                                                                                |  |                | 2,704   |                                  | 
|    | Linkage
  differences on principal of debentures                                                      |  |                | 375     |                                  | 
|    | Linkage
  differences on principal of long-term loans 
            from banks and
  other, net        |  |                | 1,364   |                                  | 
|    | Erosion
  of deposit in trust                                                                         |  |                | -       |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|    |                                                                                                       |  |                | 223,486 |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|    | Changes in operating asset
  and liability items:                                                     |  |                |         |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|    | Decrease (increase) in trade
  receivables                                                            |  |                | (1,866  | )                                | 
|    | Decrease (increase) in
  affiliate - current accounts                                                 |  |                | 14,046  |                                  | 
|    | Decrease (increase) in other
  accounts receivable                                                    |  |                | 2,873   |                                  | 
|    | Increase (decrease) in trade
  payables                                                               |  |                | 19,822  |                                  | 
|    | Increase in other accounts
  payable                                                                  |  |                | 7,882   |                                  | 
|    | Increase in customers
  deposits for converters, net                                                 |  |                | 9,770   |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|    |                                                                                                       |  |                | 52,527  |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|    |                                                                                                       |  |                | 276,013 |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|(b) | Jointly controlled company,
  proportionally consolidatedfor the first time:                          |  |                |         |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|    | Net working capital (except
  for cash and cash equivalents                                           |  |                | -       |                                  | 
|    | Fixed assets, net                                                                                     |  |                | -       |                                  | 
|    | Investment in limited
  partnerships                                                                  |  |                | -       |                                  | 
|    | Rights to broadcast movies
  and programs                                                             |  |                | -       |                                  | 
|    | Long-term liabilities                                                                                 |  |                | -       |                                  | 
|    | Investment in affiliate                                                                               |  |                | -       |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|    |                                                                                                       |  |                |         |                                  | 
|    |                                                                                                       |  |                | -       |                                  | 
|    |                                                                                                       |  |                |         |                                  | 

*)          Reclassified.

The accompanying notes are an integral part of the financial
statements.

F-12

---

---

|                                      |                                 
|------------------------------------- | --------------------------------
|                                      | MATAV - CABLE SYSTEMS MEDIA LTD.
|CONSOLIDATED STATEMENTS OF CASH FLOWS |                                 
|                                     
|Adjusted to the NIS of December 2003  |                                 

|    |                                                                            |  | Year ended     |        | Convenience translation(Note 2c) | 
|--- | -------------------------------------------------------------------------- |  | -------------- | ------ | -------------------------------- | 
|    |                                                                            |  |                |        |                                 
|    |                                                                            |  | December
  31, |        | Year ended                       | 
|    |                                                                            |  |                |        | December
  31,                   | 
|    |                                                                            |  | 2001           |        | 2002                             | 
|    |                                                                            |  |                |        |                                  | 
|    |                                                                            |  | Adjusted NIS   |        | U.S. dollars                     | 
|    |                                                                            |  |                |        |                                  | 
|    |                                                                            |  | (In thousands) |       
|    |                                                                            |  |                |        |                                  | 
|(c) | Supplementary cash flows
  information:                                    |  |                |        |                                  | 
|    |                                                                            |  |                |        |                                  | 
|    | Cash paid during the year
  for:                                           |  |                |        |                                  | 
|    |                                                                            |  |                |        |                                  | 
|    | Interest                                                                   |  |                | 53,677 |                                  | 
|    |                                                                            |  |                |        |                                  | 
|    |                                                                            |  |                |        |                                  | 
|    | Taxes on income                                                            |  |                | (986   | )                                | 
|    |                                                                            |  |                |        |                                  | 
|    |                                                                            |  |                |        |                                  | 
|(d) | Supplementary information on
  investing activity notinvolving cash flows: |  |                |        |                                  | 
|    |                                                                            |  |                |        |                                  | 
|    | Purchase of fixed assets
  against credit from suppliers                   |  |                | 57,353 |                                  | 
|    |                                                                            |  |                |        |                                  | 

The accompanying notes are an integral part of the financial
statements.

F-13

---

---

|                                       |                                 
|-------------------------------------- | --------------------------------
|                                       | MATAV - CABLE SYSTEMS MEDIA LTD.
|STATEMENTS OF CASH FLOWS - THE COMPANY |                                 
|                                      
|Adjusted to the NIS of December 2003   |                                 

|                                                                                                                      |  |                |          |                |  |               |   |      |          |   | Convenience
  translation(Note 2c) |        
|--------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | -------------- |  | ------------- | - | ---- | -------- | - | ---------------------------------- | -------
|                                                                                                                      |  | Year ended     |          |                | 
|                                                                                                                      |  | December
  31, |          | Year ended     | 
|                                                                                                                      |  |                |          | December
  31, | 
|                                                                                                                      |  | 2001           |          | 2002           |  | 2003          |   | 2003 |         
|                                                                                                                      |  |                |          |                |  |               |   |      |         
|                                                                                                                      |  | Adjusted NIS   |          | U.S. dollars   | 
|                                                                                                                      |  |                |          |                | 
|                                                                                                                      |  | (In thousands) |         
|                                                                                                                      |  |                |         
|Cash flows from operating
  activities:                                                                               |  |                |          |                |  |               |   |      |          |   |                                    |        
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|Net
  income (loss) for the year                                                                                      |  |                | (257,274 | )              |  | 33,824        |   |      | (5,450   | ) |                                    | (1,244 
|Adjustments
  to reconcile net income (loss) to net cash
            provided by (used
  in) operating activities (a) |  |                | 230,362  |                |  | *)
  (121,495 | ) |      | 42,870   |   |                                    | 9,789  
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|Net cash provided by (used
  in) operating activities                                                                 |  |                | (26,912  | )              |  | (87,671       | ) |      | 37,420   |   |                                    | 8,545  
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|Cash flows from investing
  activities:                                                                               |  |                |          |                |  |               |   |      |          |   |                                    |        
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|Purchase
  of fixed assets                                                                                            |  |                | (172,468 | )              |  | (32,324       | ) |      | (12,311  | ) |                                    | (2,811 
|Investment
  in subsidiaries and affiliate (long-term accounts
            and capital
  notes), net                  |  |                | (3,518   | )              |  | (67,287       | ) |      | -        |   |                                    | -      
|Repayment
  of long-term accounts to subsidiaries, net                                                                |  |                | -        |                |  | -             |   |      | 54,396   |   |                                    | 12,422 
|Investment
  in other assets                                                                                          |  |                | (1,066   | )              |  | (186          | ) |      | -        |   |                                    | -      
|Proceeds
  from sale of investment in affiliate, net                                                                  |  |                | 20,656   |                |  | *)
  302,418  |   |      | 113,709  |   |                                    | 25,967 
|Proceeds
  from sale of fixed assets                                                                                  |  |                | 1,842    |                |  | 1,036         |   |      | 1,077    |   |                                    | 246    
|Grant
  of long-term loan for purchase of fixed assets                                                                |  |                | -        |                |  | -             |   |      | (1,394   | ) |                                    | (318   
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|Net cash provided by (used
  in) investing activities                                                                 |  |                | (154,554 | )              |  | 203,657       |   |      | 155,477  |   |                                    | 35,505 
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|Cash flows from financing
  activities:                                                                               |  |                |          |                |  |               |   |      |          |   |                                    |        
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|Exercise
  of stock options by employees and exercise of
            series 1
  warrants, net of issuance costs       |  |                | 2,089    |                |  | -             |   |      | -        |   |                                    | -      
|Acquisition
  and exercise of Companys series 1 warrants by
            a subsidiary                                 |  |                | (261     | )              |  | -             |   |      | -        |   |                                    | -      
|Receipt
  of long-term loans from banks and others                                                                    |  |                | 25,261   |                |  | 6,508         |   |      | 31,676   |   |                                    | 7,234  
|Repayment
  of long-term loans to banks and others                                                                    |  |                | (424     | )              |  | (120,974      | ) |      | (73,522  | ) |                                    | (16,790
|Redemption
  of debentures                                                                                            |  |                | (33,675  | )              |  | (33,637       | ) |      | (33,701  | ) |                                    | (7,696 
|Short-term
  bank credit, net                                                                                         |  |                | 187,955  |                |  | 36,718        |   |      | (89,646  | ) |                                    | (20,472
|Receipt
  of long-term loans from subsidiary                                                                          |  |                | -        |                |  | 2,669         |   |      | 731      |   |                                    | 167    
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|Net cash provided by (used
  in) financing activities                                                                 |  |                | 180,945  |                |  | (108,716      | ) |      | (164,462 | ) |                                    | (37,557
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|Increase (decrease) in cash
  and cash equivalents                                                                    |  |                | (521     | )              |  | 7,270         |   |      | 28,435   |   |                                    | 6,493  
|Cash and cash equivalents at
  beginning of year                                                                      |  |                | 695      |                |  | 174           |   |      | 7,444    |   |                                    | 1,700  
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        
|Cash and cash equivalents at
  end of year                                                                            |  |                | 174      |                |  | 7,444         |   |      | 35,879   |   |                                    | 8,193  
|                                                                                                                      |  |                |          |                |  |               |   |      |          |   |                                    |        

*)          Reclassified.

The accompanying notes are an integral part
of the financial statements.

F-14

---

---

|                                       | MATAV - CABLE SYSTEMS MEDIA LTD.
|-------------------------------------- | --------------------------------
|STATEMENTS OF CASH FLOWS - THE COMPANY |                                 
|                                      
|Adjusted to the NIS of December 2003   |                                 

|    |                                                                                                                            | Year endedDecember 31, |  | Convenience
  translation(Note 2c)
  Year ended |  
|--- | -------------------------------------------------------------------------------------------------------------------------- | ---------------------- |  | ----------------------------------------------- | -
|    |                                                                                                                            |                        |  | December
  31,                                  |  
|    |                                                                                                                            | 2001                   |  | 2002                                            |  
|    |                                                                                                                            |                        |  |                                                 |  
|    |                                                                                                                            | Adjusted NIS           |  | U.S. dollars                                    |  
|    |                                                                                                                            |                        |  |                                                 |  
|    |                                                                                                                            | (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                                                          |                        |  | 129,878                                         |  
|    | Depreciation and
  amortization                                                                                            |                        |  | 103,515                                         |  
|    | Deferred income taxes, net                                                                                                 |                        |  | 1,042                                           |  
|    | Accrued severance pay, net                                                                                                 |                        |  | (490                                            | )
|    | Loss (gain) from:                                                                                                          |                        |  |                                                 |  
|    | Changes
  in shareholding in subsidiary affiliates (including
            proceeds from
  realization of affiliate shares) |                        |  | (5,145                                          | )
|    | Write-off
  of investment in other company                                                                                 |                        |  | -                                               |  
|    | Sale
  of fixed assets                                                                                                     |                        |  | 2,637                                           |  
|    | Linkage differences on
  principal of debentures                                                                           |                        |  | -                                               |  
|    | Linkage differences on
  principal of long-term loans to banks and
       other, net                                       |                        |  | 1,306                                           |  
|    | Erosion of long-term
  accounts and capital note                                                                           |                        |  | -                                               |  
|    |                                                                                                                            |                        |  |                                                 |  
|    |                                                                                                                            |                        |  |                                                 |  
|    |                                                                                                                            |                        |  | 232,743                                         |  
|    |                                                                                                                            |                        |  |                                                 |  
|    |                                                                                                                            |                        |  |                                                 |  
|    | Changes in operating asset
  and liability items:                                                                          |                        |  |                                                 |  
|    |                                                                                                                            |                        |  |                                                 |  
|    | Decrease in trade
  receivables                                                                                            |                        |  | 3,182                                           |  
|    | Decrease (increase) in
  affiliate - current accounts                                                                      |                        |  | (32,600                                         | )
|    | Decrease (increase) in other
  accounts receivable                                                                         |                        |  | (2,272                                          | )
|    | Increase (decrease) in trade
  payables                                                                                    |                        |  | 15,354                                          |  
|    | Increase in other accounts
  payable                                                                                       |                        |  | 6,366                                           |  
|    | Increase in customers
  deposits for converters, net                                                                      |                        |  | 7,589                                           |  
|    |                                                                                                                            |                        |  |                                                 |  
|    |                                                                                                                            |                        |  |                                                 |  
|    |                                                                                                                            |                        |  | (2,381                                          | )
|    |                                                                                                                            |                        |  |                                                 |  
|    |                                                                                                                            |                        |  |                                                 |  
|    |                                                                                                                            |                        |  | 230,362                                         |  
|    |                                                                                                                            |                        |  |                                                 |  
|    |                                                                                                                            |                        |  |                                                 |  
|(b) | Supplementary cash flows
  information:                                                                                    |                        |  |                                                 |  
|    |                                                                                                                            |                        |  |                                                 |  
|    | Cash paid during the year
  for:                                                                                           |                        |  |                                                 |  
|    |                                                                                                                            |                        |  |                                                 |  
|    | Interest                                                                                                                   |                        |  | 53,677                                          |  
|    |                                                                                                                            |                        |  |                                                 |  
|    | Taxes on income                                                                                                            |                        |  | (986                                            | )
|    |                                                                                                                            |                        |  |                                                 |  
|    |                                                                                                                            |                        |  |                                                 |  
|    |                                                                                                                            |                        |  |                                                 |  
|(c) | Supplementary information on
  investing activity not involvingcash flows:                                                 |                        |  |                                                 |  
|    |                                                                                                                            |                        |  |                                                 |  
|    | Purchase of fixed assets
  against credit from suppliers                                                                   |                        |  | 54,941                                          |  
|    |                                                                                                                            |                        |  |                                                 |  

*)          Reclassified.

The accompanying notes are an integral part of the financial
statements.

F-15

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 1:- | GENERAL
|-------- | -------
|         |        
|         | a.     
|         |        
|         |        
|         |        
|         |        
|         |        
|         |        
|         |        
|         |        

F-16

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 1:- | GENERAL (Cont.)
|-------- | ---------------
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                

F-17

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 1:- | GENERAL (Cont.)
|-------- | ---------------
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                

F-18

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 1:- | GENERAL (Cont.)
|-------- | ---------------
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                

F-19

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 1:- | GENERAL (Cont.)
|-------- | ---------------
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                

F-20

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 1:- | GENERAL (Cont.)
|-------- | ---------------
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                

F-21

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 1:- | GENERAL (Cont.)
|-------- | ---------------
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                

F-22

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 1:- | GENERAL (Cont.)
|-------- | ---------------
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                

F-23

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 1:- | GENERAL (Cont.)
|-------- | ---------------
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                
|         |                

F-24

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 1:- | GENERAL (Cont.)                                                                                                                                                                                                                                                
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                
|         | b.                                                                                                                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|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.
|         |                                                                                                                                                                                                                                                                
|         | a.                                                                                                                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                

F-25

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | b.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | c.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        

F-26

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        

F-27

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         |                                        
|         |                                        
|         |                                        

| |                          |                                                                                                                    | Israeli
  CPI |       | Exchange
  rate
  of U.S. dollar | 
| | ------------------------ | ------------------------------------------------------------------------------------------------------------------ | ------------- | ----- | -------------------------------- | 
| |                          |                                                                                                                    |               |       |                                  | 
| | At December 31,:         |                                                                                                                    | points *)     |       | NIS                              | 
| |                          |                                                                                                                    |               |       |                                  | 
| | 2003                     |                                                                                                                    |               | 178.6 |                                  | 
| | 2002                     |                                                                                                                    |               | 182.0 |                                  | 
| | 2001                     |                                                                                                                    |               | 170.9 |                                  | 
| | 2000                     |                                                                                                                    |               | 168.5 |                                  | 
| |                          |                                                                                                                    |               |       |                                  | 
| | Changes during the year: |                                                                                                                    | %             |       | %                                | 
| |                          |                                                                                                                    |               |       |                                  | 
| | 2003                     |                                                                                                                    |               | (1.9  | )                                | 
| | 2002                     |                                                                                                                    |               | 6.5   |                                  | 
| | 2001                     |                                                                                                                    |               | 1.4   |                                  | 
| |                          |                                                                                                                    |               |       |                                  | 
| | *)                       | 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.                            
| |    |                               
| |    | 2.                            
| |    |                               
| |    |                               
| |    |                               
| |    |                               
| |    |                               
| |    |                               
| |    |                               
| |    |                               
| |    |                               
| |    |                               
| |    |                               
| |    |                               
| |    |                               
| |    |                               
| |    |                               
| |    |                               
| |    |                               
| |    | 3.                            
| |    |                               
| |    | 4.                            

F-28

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | e.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | f.                                     
|         |                                        
|         |                                        
|         |                                        
|         | g.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | h.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        

F-29

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------

| |                                                                                         |  | %                   | 
| | --------------------------------------------------------------------------------------- |  | ------------------- | 
| |                                                                                         |  |                     | 
| | 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                                                                              |  | 10                  | 
| | Computers and peripheral
  equipment                                                    |  | 20 - 33             | 
| | Office furniture and equipment                                                          |  | 6 - 10              | 
| | Internet site development                                                               |  | 33                  | 
| | Vehicles                                                                                |  | 15                  | 

| |    |                                                             | Capitalized
  lease fees are amortized by the straight-line method over the term of the
  lease.                                                                                                                                                                                                        
| | -- | ----------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                             |                                                                                                                                                                                                                                                                                                         
| |    |                                                             | 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.                                                                                                                                 
| |    |                                                             |                                                                                                                                                                                                                                                                                                         
| | i. | Other
  assets, long-term receivables and deferred charges:
| |    |                                                             |                                                                                                                                                                                                                                                                                                         
| |    | 1.                                                          | Other assets
  - excess of cost of investment in consolidated subsidiary is attributed to
  exclusive franchise- see d(3) above.                                                                                                                                                                        
| |    |                                                             |                                                                                                                                                                                                                                                                                                         
| |    | 2.                                                          | 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.                                        
| |    |                                                             |                                                                                                                                                                                                                                                                                                         
| |    | 3.                                                          | Other assets
  include payment made in respect of a non-exclusive license to provide
  stationary communications services within Israel. The license charges will be
  amortized by the straight-line method over the period of the license (15
  years).                                               
| |    |                                                             |                                                                                                                                                                                                                                                                                                         
| |    | 4.                                                          | The embedded
  interest component in the present value of the lease fees in respect of
  assets that were leased in a capital leas is presented in the item of
  long-term other receivables and is amortized over the lease term, 5 years.                                                             
| | 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.                                                          | Installations
  revenues obtained from connecting subscribers to the companys cables
  infrastructure are less than related direct selling cost as defined under
  SFAS 51 (Financial reporting by cable television companies). Therefore, such
  revenues are recognized as connections are completed.

F-30

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | k.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        

F-31

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | l.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | m.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | n.                                     
|         |                                        
|         |                                        

F-32

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | o.                                     
|         |                                        
|         |                                        
|         |                                        
|         | p.                                     
|         |                                        
|         |                                        
|         |                                        
|         | q.                                     
|         |                                        
|         |                                        
|         |                                        
|         | r.                                     
|         |                                        
|         |                                        
|         |                                        
|         | s.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | t.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        

F-33

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 3:- | JOINTLY CONTROLLED COMPANY
|-------- | --------------------------
|         |                           
|         | a.                        
|         |                           
|         | b.                        

| |                         |  | December 31,
  2003         |       
| | ----------------------- |  | --------------------------- | ------
| |                         |  |                             |       
| |                         |  | Adjusted NIS
  in thousands |       
| |                         |  |                             |       
| |                         |  |                             |       
| | Current
  assets        |  |                             | 20,520
| |                         |  |                             |       
| |                         |  |                             |       
| | Noncurrent
  assets     |  |                             | 38,125
| |                         |  |                             |       
| |                         |  |                             |       
| | Current
  liabilities   |  |                             | 61,913
| |                         |  |                             |       
| |                         |  |                             |       
| | Long-term
  liabilities |  |                             | 737   
| |                         |  |                             |       

|NOTE 4:- | ACCOUNTS RECEIVABLE
|-------- | -------------------
|         |                    
|         | a.                 

| |                       |                                                  | Consolidated              |        | The Company  | 
| | --------------------- | ------------------------------------------------ | ------------------------- | ------ | ------------ | 
| |                       |                                                  |                           |        |              | 
| |                       |                                                  | December 31,              |        | December 31, | 
| |                       |                                                  |                           |        |              | 
| |                       |                                                  | 2002                      |        | 2003         | 
| |                       |                                                  |                           |        |              | 
| |                       |                                                  | Adjusted NIS in thousands |       
| |                       |                                                  |                           |       
| |                       |                                                  |                           |        |              | 
| | Open accounts (1) (2) |                                                  |                           | 68,350 |              | 
| | Notes and checks      |                                                  |                           | 347    |              | 
| |                       |                                                  |                           |        |              | 
| |                       |                                                  |                           |        |              | 
| |                       |                                                  |                           | 68,697 |              | 
| |                       |                                                  |                           |        |              | 
| |                       |                                                  |                           |        |              | 
| | (1)                   | Net of allowance for
  doubtful accounts         |                           |        | 3,887        | 
| |                       |                                                  |                           |        |              | 
| |                       |                                                  |                           |        |              | 
| | (2)                   | Includes credit cards
  balance in the amount of |                           |        | 20,471       | 
| |                       |                                                  |                           |        |              | 

F-34

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 4:- | ACCOUNTS RECEIVABLE (Cont.)
|-------- | ---------------------------
|         |                            
|         | b.                         

| |                  |  | Consolidated              |        | The Company  | 
| | ---------------- |  | ------------------------- | ------ | ------------ | 
| |                  |  |                           |        |              | 
| |                  |  | December 31,              |        | December 31, | 
| |                  |  |                           |        |              | 
| |                  |  | 2002                      |        | 2003         | 
| |                  |  |                           |        |              | 
| |                  |  | Adjusted NIS in thousands |       
| |                  |  |                           |       
| |                  |  |                           |        |              | 
| | Prepaid expenses |  |                           | 12,063 |              | 
| | Accrued income   |  |                           | 1,699  |              | 
| | Other            |  |                           | 4,075  |              | 
| |                  |  |                           |        |              | 
| |                  |  |                           |        |              | 
| |                  |  |                           | 17,837 |              | 
| |                  |  |                           |        |              | 

|NOTE 5:- | INVESTMENTS IN SUBSIDIAIRES AFFILIATES AND OTHER COMPANY
|-------- | --------------------------------------------------------
|         |                                                         
|         | a.                                                      
|         |                                                         
|         |                                                         

| |                                                  |  | The Company                                                |         
| | ------------------------------------------------ |  | ---------------------------------------------------------- | --------
| |                                                  |  |                                                            |         
| |                                                  |  | December 31,                                               |         
| |                                                  |  |                                                            |         
| |                                                  |  | 2003                                                       |         
| |                                                  |  |                                                            |         
| |                                                  |  | Included in
  investments
  and long-
  term
  receivables |         
| |                                                  |  |                                                            |         
| |                                                  |  | Adjusted NIS in thousands                                  |         
| |                                                  |  |                                                            |         
| |                                                  |  |                                                            |         
| | Cost of shares                                   |  |                                                            | 8,362   
| | Excess of investment
       cost, net            |  |                                                            | -       
| |                                                  |  |                                                            |         
| | Equity in accumulated
       losses (1)          |  |                                                            | (120,578
| |                                                  |  |                                                            |         
| | Equity value                                     |  |                                                            | (112,216
| |                                                  |  |                                                            |         
| |                                                  |  |                                                            |         
| | Long-term loan (2)                               |  |                                                            | 36,903  
| | Long-term accounts (3)                           |  |                                                            | 322,661 
| | Capital notes (4)                                |  |                                                            | -       
| |                                                  |  |                                                            |         
| |                                                  |  |                                                            | 247,348 
| | Cost of Company shares
       held by subsidiary |  |                                                            | -       
| |                                                  |  |                                                            |         
| |                                                  |  |                                                            | 247,348 
| |                                                  |  |                                                            |         
| | Excess of investment
       cost, net            |  |                                                            |         
| | Original amount                                  |  |                                                            | 17,099  
| | Net of accumulated
       amortization           |  |                                                            | 17,099  
| |                                                  |  |                                                            |         
| |                                                  |  |                                                            | -       
| |                                                  |  |                                                            |         

F-35

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

|NOTE 5:- | INVESTMENTS IN SUBSIDIAIRES AFFILIATES AND OTHER COMPANY (Cont.)
|-------- | ----------------------------------------------------------------
|         |                                                                 
|         |                                                                 
|         |                                                                 
|         |                                                                 
|         |                                                                 
|         |                                                                 
|         |                                                                 
|         |                                                                 
|         |                                                                 
|         |                                                                 

| |                                                                                     |  | The
  Company               |        
| | ----------------------------------------------------------------------------------- |  | --------------------------- | -------
| |                                                                                     |  |                             |        
| |                                                                                     |  | December
  31,              |        
| |                                                                                     |  |                             |        
| |                                                                                     |  | 2002                        |        
| |                                                                                     |  |                             |        
| |                                                                                     |  | Adjusted
  NIS in thousands |        
| |                                                                                     |  |                             |        
| |                                                                                     |  |                             |        
| | Balance at the beginning of the
  year                                              |  |                             | 246,804
| | Changes during the year:                                                            |  |                             |        
| | Equity
  in earnings (losses)                                                       |  |                             | (57,357
| | Impairment
  of investment in subsidiary         (MIS)                              |  |                             | -      
| | Sale
  of company shares by subsidiary                                              |  |                             | 1,288  
| | Firstly
  proportionate consolidation of
            jointly
  consolidated company |  |                             | -      
| | Long
  term accounts granted                                                        |  |                             | 67,287 
| | Repayment
  of long term accounts                                                   |  |                             | -      
| | Erosion
  of capital note                                                           |  |                             | -      
| |                                                                                     |  |                             |        
| |                                                                                     |  |                             |        
| | Balance at the end of the year                                                      |  |                             | 258,022
| |                                                                                     |  |                             |        

| | b. | Investments
  in affiliates:
| | -- | ----------------------------
| |    |                             
| |    | 1.                          

| |                                    |  | Consolidated              |        | The Company  | 
| | ---------------------------------- |  | ------------------------- | ------ | ------------ | 
| |                                    |  |                           |        |              | 
| |                                    |  | December 31,              |        | December 31, | 
| |                                    |  |                           |        |              | 
| |                                    |  | 2002                      |        | 2003         | 
| |                                    |  |                           |        |              | 
| |                                    |  | Adjusted NIS in thousands |       
| |                                    |  |                           |       
| |                                    |  |                           |        |              | 
| | Partner, see (2) below             |  |                           | 18,400 |              | 
| | Nonstop Ventures, see    (3) below |  |                           | 2,664  |              | 
| | Hot Vision, see (4)    below       |  |                           | 1,336  |              | 
| |                                    |  |                           |        |              | 
| |                                    |  |                           |        |              | 
| |                                    |  |                           | 22,400 |              | 
| |                                    |  |                           |        |              | 

F-36

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 5:-                     
|                             
|                             

| |                                                                                                             |  | Consolidated                |   | The
  Company  |  
| | ----------------------------------------------------------------------------------------------------------- |  | --------------------------- | - | -------------- | -
| |                                                                                                             |  |                             |   |                |  
| |                                                                                                             |  | December
  31,              |   | December
  31, |  
| |                                                                                                             |  |                             |   |                |  
| |                                                                                                             |  | 2002                        |   | 2003           |  
| |                                                                                                             |  |                             |   |                |  
| |                                                                                                             |  | Adjusted
  NIS in thousands |  
| |                                                                                                             |  |                             |  
| |                                                                                                             |  |                             |   |                |  
| | Balance at the beginning
     of the year                                                                   |  | 20,939                      |   | 22,400         |  
| | Changes during the year:                                                                                    |  |                             |   |                |  
| | Company that
        consolidated for the
        first time by
        proportionate
        consolidation |  | -                           |   | (624           | )
| | Erosion of capital note
        (see Note 5(3))                                                             |  | (294                        | ) | (31            | )
| | Sale of investments                                                                                         |  | (9,155                      | ) | (17,508        | )
| | Equity in earnings                                                                                          |  | 10,910                      |   | 62,840         |  
| | Provision for expected
        dilution                                                                     |  | -                           |   | (270           | )
| |                                                                                                             |  |                             |   |                |  
| | Balance at the end of the
     year                                                                         |  | 22,400                      |   | 66,807         |  
| |                                                                                                             |  |                             |   |                |  

| |  | 2. | Partner:
| |  | -- | --------
| |  |    |         
| |  |    | a)      

| |                                   |  | Consolidated                |  | The
  Company  |  
| | --------------------------------- |  | --------------------------- |  | -------------- | -
| |                                   |  |                             |  |                |  
| |                                   |  | December
  31,              |  | December
  31, |  
| |                                   |  |                             |  |                |  
| |                                   |  | 2002                        |  | 2003           |  
| |                                   |  |                             |  |                |  
| |                                   |  | Adjusted
  NIS in thousands | 
| |                                   |  |                             | 
| |                                   |  |                             |  |                |  
| | Shares:                           |  |                             |  |                |  
| | Cost of shares                    |  | 3,474                       |  | 2,437          |  
| | Equity in accumulated
  earnings  |  | 14,926                      |  | 63,206         |  
| | Provision for expected
  dilution |  | -                           |  | (270           | )
| |                                   |  |                             |  |                |  
| |                                   |  |                             |  |                |  
| |                                   |  | 18,400                      |  | 65,373         |  
| |                                   |  |                             |  |                |  

F-37

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 5:-                     
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-38

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 5:-                     
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-39

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 5:-                     
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-40

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 5:-                     
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-41

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 5:-                     
|                             
|                             
|                             
|                             

| |                                               |  | Consolidated                |   | The
  Company  |  
| | --------------------------------------------- |  | --------------------------- | - | -------------- | -
| |                                               |  |                             |   |                |  
| |                                               |  | December
  31,              |   | December
  31, |  
| |                                               |  |                             |   |                |  
| |                                               |  | 2002                        |   | 2003           |  
| |                                               |  |                             |   |                |  
| |                                               |  | Adjusted
  NIS in thousands |  
| |                                               |  |                             |  
| |                                               |  |                             |   |                |  
| | Shares:                                       |  |                             |   |                |  
| | Cost of shares                                |  | 5                           |   | 5              |  
| | Equity in
  accumulated 
         losses      |  | (10,995                     | ) | (12,194        | )
| | Long-term loans and
         capital notes *) |  | 13,654                      |   | 13,623         |  
| |                                               |  |                             |   |                |  
| |                                               |  |                             |   |                |  
| |                                               |  | 2,664                       |   | 1,434          |  
| |                                               |  |                             |   |                |  

| |  |  |    | *)                                                                                                                                                                  | Include
  long-term loans (bearing interest at the rate of Prime) 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.

F-42

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 5:-                     
|                             
|                             
|                             
|                             

| |                                   |  | Consolidated
  and
  Company |      
| | --------------------------------- |  | ---------------------------- | -----
| |                                   |  |                              |      
| |                                   |  | December
  2002*)            |      
| |                                   |  |                              |      
| |                                   |  | Adjusted
  NIS in thousands  |      
| |                                   |  |                              |      
| |                                   |  |                              |      
| | Shares:                           |  |                              |      
| | Cost of shares                    |  |                              | 72   
| | Equity in undistributed
  profits |  |                              | 1,264
| |                                   |  |                              |      
| |                                   |  |                              |      
| |                                   |  |                              | 1,336
| |                                   |  |                              |      

| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |  | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |    | *)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |  | b) | Hot Vision
  is owned by the CATV companies in Israel (including the Company). It was
  formed in order to jointly acquire sole and exclusive 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, 2003, the Company holds, directly and indirectly, approximately
  26.6% of the issued Ordinary shares 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 shares capital and in voting rights according to the relative share
  of the shareholders in the weighted number of active subscribers in each
  year. Similarly, 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. Similarly, Hot Vision is
  jointly controlled by the cable companies.

F-43

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 5:-                     
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

| |                                                                                                                             |  | Consolidated                |  | The
  Company  | 
| | --------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- |  | -------------- | 
| |                                                                                                                             |  |                             |  |                | 
| |                                                                                                                             |  | December
  31,              |  | December
  31, | 
| |                                                                                                                             |  |                             |  |                | 
| |                                                                                                                             |  | 2002                        |  | 2003           | 
| |                                                                                                                             |  |                             |  |                | 
| |                                                                                                                             |  | Adjusted
  NIS in thousands | 
| |                                                                                                                             |  |                             | 
| | Cost of shares of Barak I.T.C.
      (1995) - International
      Telecommunications Services
      Corp. Ltd. (Barak) *) |  | 16,241                      |  | 16,241         | 
| |                                                                                                                             |  |                             |  |                | 

| |  | *) | Barak, 10%
  of which is 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.
| |  | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |    |                                                                                                                                                                                                                                                                                                            
| |  |    | During 2002,
  the Company wrote-off a part of its investment in Barak, which amounted to
  NIS 8.8 million, inter-alia, by valuation of Barak. This amount was presented
  in other income, net.                                                                                                          

F-44

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 6:-                     
|                             
|                             
|                             
|                             
|                             
|NOTE 7:-                     

| |                                   |  | December
  31,
  2003         |       
| | --------------------------------- |  | ----------------------------- | ------
| |                                   |  |                               |       
| |                                   |  | Adjusted
  NIS
  in thousands |       
| |                                   |  |                               |       
| |                                   |  |                               |       
| | Balance at the end of the year *) |  |                               | 34,927
| |                                   |  |                               |       

| | *) | See also
  Note 5b(4).
| | -- | ----------------------

F-45

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 8:-                     
|                             
|                             

|                                                                 |  | Consolidated                        | 
|---------------------------------------------------------------- |  | ----------------------------------- | 
|                                                                 |  |                                     | 
|                                                                 |  | Cost                                | 
|                                                                 |  |                                     | 
|                                                                 |  |                                     | 
|                                                                 |  |                                     | 
|                                                                 |  | Balance at
  beginning
  of year *) | 
|                                                                 |  |                                     | 
|                                                                 |  | Adjusted NIS in thousands           | 
|                                                                 |  |                                     | 
|                                                                 |  |                                     | 
|Leasehold land (including
      construction plans) (1)          |  | 4,319                               | 
|Buildings (including land) (2)                                   |  | 53,435                              | 
|Cable network                                                    |  | 1,314,716                           | 
|Broadcasting center
      (primarily electronic
      equipment) |  | 132,211                             | 
|Studio equipment                                                 |  | 18,269                              | 
|Converters and modems                                            |  | 380,368                             | 
|Computers and peripheral
      equipment                         |  | 59,819                              | 
|Office furniture and
      equipment                             |  | 11,876                              | 
|Leasehold improvements                                           |  | 5,887                               | 
|Internet site development                                        |  | 1,395                               | 
|Vehicle                                                          |  | 4,924                               | 
|Telephone equipment                                              |  | -                                   | 
|                                                                 |  |                                     | 
|                                                                 |  | 1,987,219                           | 
|                                                                 |  |                                     | 

| | (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 adjusted NIS 21,907 thousand at December
  31, 2003 and 2002, representing cost of buildings on leased land. The lease
  in respect of most of the land is for 49 year period ending in 2040, with an
  option to renew the lease for an 49 additional years. The lease fees have
  been capitalized. Registration of the leases with the Land Registry has not
  yet been completed.
| | *)  | Reclassified.                                                                                                                                                                                                                                                                                                                                                                                                                           

F-46

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 8:-                     

| |                                                               |  | The
  Company               | 
| | ------------------------------------------------------------- |  | --------------------------- | 
| |                                                               |  |                             | 
| |                                                               |  | Cost                        | 
| |                                                               |  |                             | 
| |                                                               |  | Balance at                  | 
| |                                                               |  | beginning                   | 
| |                                                               |  | of year (*)                 | 
| |                                                               |  |                             | 
| |                                                               |  | Adjusted
  NIS in thousands | 
| |                                                               |  |                             | 
| |                                                               |  |                             | 
| | Leasehold land (including
       construction plans) (1)      |  | 4,319                       | 
| | Buildings (including land)
  (2)                              |  | 18,672                      | 
| | Cable network                                                 |  | 990,209                     | 
| | Broadcasting center
  (primarily
       electronic equipment) |  | 64,551                      | 
| | Studio equipment                                              |  | 7,194                       | 
| | Converters and modems                                         |  | 272,081                     | 
| | Computers and peripheral equipment                            |  | 52,942                      | 
| | Office furniture and
  equipment                              |  | 8,699                       | 
| | Leasehold improvements                                        |  | 5,887                       | 
| | Internet site development                                     |  | 1,568                       | 
| | Vehicle                                                       |  | 3,986                       | 
| |                                                               |  |                             | 
| |                                                               |  |                             | 
| |                                                               |  | 1,430,108                   | 
| |                                                               |  |                             | 

| | (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 adjusted NIS 21,907 thousand at December
  31, 2003 and 2002, representing cost of buildings on leased land. The lease
  in respect of most of the land is for 49 year period ending in 2040, with an
  option to renew the lease for an 49 additional years. The lease fees have
  been capitalized. Registration of the leases with the Land Registry has not
  yet been completed.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | *)  | Reclassified.                                                                                                                                                                                                                                                                                                                                                                                                                           

F-47

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 9:-                     

| |                                                                              |  | Consolidated                |  | The
  Company       | 
| | ---------------------------------------------------------------------------- |  | --------------------------- |  | ------------------- | 
| |                                                                              |  |                             |  |                     | 
| |                                                                              |  | Original
  amount           |  | Unamortized balance | 
| |                                                                              |  |                             |  |                     | 
| |                                                                              |  | December
  31,              |  | December
  31       | 
| |                                                                              |  |                             |  |                     | 
| |                                                                              |  | 2002                        |  | 2003                | 
| |                                                                              |  |                             |  |                     | 
| |                                                                              |  | Adjusted
  NIS in thousands | 
| |                                                                              |  |                             | 
| |                                                                              |  |                             |  |                     | 
| | Excess of cost of investment in
     Matav Haifa, see Note 2d                |  | 17,099                      |  | 17,099              | 
| | Deferred charges in respect of
     issuance of debentures, see
     Note 14 |  | 11,393                      |  | 11,393              | 
| | Payment in respect of non-
     exclusive license, see Note
     2(i)        |  | 3,972                       |  | 3,972               | 
| |                                                                              |  |                             |  |                     | 
| |                                                                              |  |                             |  |                     | 
| |                                                                              |  | 32,464                      |  | 32,464              | 
| |                                                                              |  |                             |  |                     | 

|NOTE 10:- | BANK CREDIT
|--------- | -----------

| |                                                          |  | Weighted |  |                             |  |                | 
| | -------------------------------------------------------- |  | -------- |  | --------------------------- |  | -------------- | 
| |                                                          |  | average  |  | Consolidated                |  | The
  Company  | 
| |                                                          |  | interest |  |                             |  |                | 
| |                                                          |  | rate     |  | December
  31,              |  | December
  31, | 
| |                                                          |  |          |  |                             |  |                | 
| |                                                          |  | 2003     |  | 2002                        |  | 2003           | 
| |                                                          |  |          |  |                             |  |                | 
| |                                                          |  | %        |  | Adjusted
  NIS in thousands | 
| |                                                          |  |          |  |                             | 
| |                                                          |  |          |  |                             |  |                | 
| | Short-term credit, see Note 18                           |  | 7        |  | 438,888                     |  | 389,730        | 
| | Current maturities of long-term
      loans, see Note 13 |  |          |  | 75,235                      |  | 45,673         | 
| |                                                          |  |          |  |                             |  |                | 
| |                                                          |  |          |  |                             |  |                | 
| |                                                          |  |          |  | 514,123                     |  | 435,403        | 
| |                                                          |  |          |  |                             |  |                | 

|          | As to
  financial covenant see Note 15a(5).
|--------- | -------------------------------------------
|          |                                            
|NOTE 11:- | ACCOUNTS PAYABLE AND ACCRUALS              

| |    |                  |  | Consolidated                |  | The
  Company  | 
| | -- | ---------------- |  | --------------------------- |  | -------------- | 
| |    |                  |  |                             |  |                | 
| |    |                  |  | December
  31,              |  | December
  31, | 
| |    |                  |  |                             |  |                | 
| |    |                  |  | 2002                        |  | 2003           | 
| |    |                  |  |                             |  |                | 
| |    |                  |  | Adjusted
  NIS in thousands | 
| |    |                  |  |                             | 
| |    |                  |  |                             |  |                | 
| | a. | Trade payables:  |  |                             |  |                | 
| |    |                  |  |                             |  |                | 
| |    | Open accounts    |  | 60,002                      |  | 63,499         | 
| |    | Notes and checks |  | 24,054                      |  | 31,200         | 
| |    |                  |  |                             |  |                | 
| |    |                  |  |                             |  |                | 
| |    |                  |  | 84,056                      |  | 94,699         | 
| |    |                  |  |                             |  |                | 

F-48

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 11:-                    

| |    |                                                  |  | Consolidated                |  | The
  Company  | 
| | -- | ------------------------------------------------ |  | --------------------------- |  | -------------- | 
| |    |                                                  |  |                             |  |                | 
| |    |                                                  |  | December
  31,              |  | December
  31, | 
| |    |                                                  |  |                             |  |                | 
| |    |                                                  |  | 2002                        |  | 2003           | 
| |    |                                                  |  |                             |  |                | 
| |    |                                                  |  | Adjusted
  NIS in thousands | 
| |    |                                                  |  |                             | 
| |    |                                                  |  |                             |  |                | 
| | b. | Other accounts payable:                          |  |                             |  |                | 
| |    |                                                  |  |                             |  |                | 
| |    | Payroll and related expenses                     |  | 7,726                       |  | 6,912          | 
| |    | Provision for vacation pay                       |  | 4,917                       |  | 4,473          | 
| |    | Government authorities (1)                       |  | 52,178                      |  | 96,416         | 
| |    | Advances from trade receivables                  |  | -                           |  | 5,004          | 
| |    | Franchise fees to the
      Government of Israel |  | 5,428                       |  | 11,225         | 
| |    | Accrued interest                                 |  | 4,306                       |  | 1,846          | 
| |    | Accrued expenses (2)                             |  | 10,052                      |  | 16,623         | 
| |    | Deferred taxes                                   |  | -                           |  | 15,630         | 
| |    | Others                                           |  | -                           |  | 853            | 
| |    |                                                  |  |                             |  |                | 
| |    |                                                  |  |                             |  |                | 
| |    |                                                  |  | 84,607                      |  | 158,982        | 
| |    |                                                  |  |                             |  |                | 

| | (1) | Mainly
  includes a provision for taxes in respect of the realization 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 realization of Partner shares in 2002. As of December
  31, 2003, the accumulated tax balance in respect of the above realization in
  the amount of NIS 83 million, was not yet paid due to a dispute with the tax
  authorities.
| |     |                                                                                                                                                                                                                                                                                                                                                    
| |     | The
  financial statements contain a provision for the full tax liability relating
  to exercising Partner shares in 2003 and 2002.                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                    
| | (2) | Consolidated
  and the Company includes balance with interested party in amount of adjusted
  NIS 128 thousand and adjusted NIS 76 thousand at December 31, 2003 and 2002,
  respectively.                                                                                                                                                         

F-49

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 12:-                    
|                             
|                             
|                             
|                             

| |                                   |  | Consolidated                |   | The
  Company  |  
| | --------------------------------- |  | --------------------------- | - | -------------- | -
| |                                   |  |                             |   |                |  
| |                                   |  | December
  31,              |   | December
  31, |  
| |                                   |  |                             |   |                |  
| |                                   |  | 2002                        |   | 2003           |  
| |                                   |  |                             |   |                |  
| |                                   |  | Adjusted
  NIS in thousands |  
| |                                   |  |                             |  
| |                                   |  |                             |   |                |  
| | Amount of severance pay liability |  | 16,323                      |   | 17,272         |  
| | Amount funded                     |  | (16,639                     | ) | (15,166        | )
| |                                   |  |                             |   |                |  
| |                                   |  |                             |   |                |  
| | Unfunded (funded) balance, net    |  | (316                        | ) | 2,106          |  
| |                                   |  |                             |   |                |  

|          | 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, said amounts and the
  related liabilities in respect of which they were provided are not included.
|          |                                                                                                                                                                                                                                                                                                                                      
|          | Severance
  pay expense totaled adjusted NIS 5,748 thousand, adjusted NIS 4,470 thousand
  and adjusted NIS 3,566 thousand in 2003, 2002 and 2001, respectively.                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                      
|NOTE 13:- | LONG-TERM LOANS FROM BANKS AND OTHERS                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                      
|          | a.                                                                                                                                                                                                                                                                                                                                   

| |                                        |  | Consolidated
  and The Company | 
| | -------------------------------------- |  | ------------------------------ | 
| |                                        |  |                                | 
| |                                        |  | Interest
  rate                | 
| |                                        |  |                                | 
| |                                        |  | 31.12.2003                     | 
| |                                        |  |                                | 
| |                                        |  | %                              | 
| |                                        |  |                                | 
| |                                        |  |                                | 
| | From banks  linked to the dollar      |  | Libor+1.5                      | 
| | From banks - linked to the Israeli CPI |  | 5.5-6.2                        | 
| | From others - linked to the dollar     |  | Libor+1.75                     | 
| |                                        |  |                                | 
| |                                        |  |                                | 
| |                                        |  |                                | 
| | Less  current maturities              |  |                                | 
| |                                        |  |                                | 
| |                                        |  |                                | 
| |                                        |  |                                | 
| |                                        |  |                                | 

F-50

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 13:-                    
|                             
|                             

| |                                                      |  | Consolidated and The Company |        
| | ---------------------------------------------------- |  | ---------------------------- | -------
| |                                                      |  |                              |        
| |                                                      |  | December
  31,               |        
| |                                                      |  |                              |        
| |                                                      |  | 2002                         |        
| |                                                      |  |                              |        
| |                                                      |  | Adjusted NIS in thousands    |        
| |                                                      |  |                              |        
| |                                                      |  |                              |        
| | Second year                                          |  |                              | 45,917 
| | Third year                                           |  |                              | 27,597 
| | Forth year                                           |  |                              | 26,181 
| | Fifth year                                           |  |                              | 27,826 
| | Sixth year and thereafter (through 2008)             |  |                              | 14,564 
| |                                                      |  |                              |        
| |                                                      |  |                              |        
| |                                                      |  |                              | 142,085
| |                                                      |  |                              |        
| | As to
  collateral to secure the loans see Note 15c. |  |                              |        
| | As to
  financial covenant see Note 15a(5).          |  |                              |        

|NOTE 14:- | DEBENTURES
|--------- | ----------
|          |           
|          | a.        
|          |           
|          |           
|          |           
|          | b.        

| |                                                                          |  | Consolidated                |  | The
  Company  | 
| | ------------------------------------------------------------------------ |  | --------------------------- |  | -------------- | 
| |                                                                          |  |                             |  |                | 
| |                                                                          |  | December
  31,              |  | December
  31, | 
| |                                                                          |  |                             |  |                | 
| |                                                                          |  | 2002                        |  | 2003           | 
| |                                                                          |  |                             |  |                | 
| |                                                                          |  | Adjusted
  NIS in thousands | 
| |                                                                          |  |                             | 
| |                                                                          |  |                             |  |                | 
| | Debentures outstanding                                                   |  | 134,920                     |  | 101,103        | 
| | Less - discount in respect of
     sale of debentures by
     subsidiary |  | 1,728                       |  | 1,257          | 
| |                                                                          |  |                             |  |                | 
| |                                                                          |  |                             |  |                | 
| |                                                                          |  | 133,192                     |  | 99,846         | 
| | Less - current maturities                                                |  | 33,730                      |  | 33,701         | 
| |                                                                          |  |                             |  |                | 
| |                                                                          |  |                             |  |                | 
| |                                                                          |  | 99,462                      |  | 66,145         | 
| |                                                                          |  |                             |  |                | 

F-51

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-52

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

| |      |  | NIS
  (in thousands) |      
| | ---- |  | -------------------- | -----
| |      |  |                      |      
| |      |  |                      |      
| | 2004 |  |                      | 3,910
| | 2005 |  |                      | 2,715
| | 2006 |  |                      | 2,128
| |      |  |                      |      
| |      |  |                      |      
| |      |  |                      | 8,753
| |      |  |                      |      

F-53

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-54

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS                                       
|--------------------------------------------------------------------
|                                                                    
|                                                                    
|NOTE 15:-COMMITMENTS, CONTINGENT LIABILITIES AND COLLATERALS (Cont.)
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    

F-55

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-56

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15 :-                   
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-57

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-58

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-59

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-60

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-61

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-62

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-63

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-64

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-65

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-66

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-67

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-68

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 15:-                    
|                             
|                             
|                             
|                             
|                             
|NOTE 16:-                    
|                             
|                             
|                             
|                             

| |                                        |  | December
  31, 2003 and 2002 | 
| | -------------------------------------- |  | ---------------------------- | 
| |                                        |  |                              | 
| |                                        |  | Authorized                   | 
| |                                        |  |                              | 
| |                                        |  | Number of
  shares           | 
| |                                        |  |                              | 
| |                                        |  |                              | 
| | Ordinary
  shares 1 NIS par value each |  | 100,000,000                  | 
| |                                        |  |                              | 

| |    | 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.                                  | In November
  1997, the Board of Directors approved an option plan for senior employees
  (the 1997 plan). According to the 1997 plan, 16 senior employees will be
  allotted, without consideration, up to 500,000 options to purchase 500,000
  Ordinary shares of NIS 1 par value of the Company (subject to adjustments).                             
| |    |                                     |                                                                                                                                                                                                                                                                                                                                                             
| |    |                                     | Notwithstanding
  the above, employees who exercise options will not be allotted shares in the
  full amount of the options exercised, but only in the amount which reflects
  the element of the benefit embodied in the options as calculated at the time
  of exercises.                                                                                 
| |    |                                     |                                                                                                                                                                                                                                                                                                                                                             
| |    |                                     | These
  options are exercisable from the following dates: 1/3 of the options - 12
  months after 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 for a period of 24 months from the end of each of the
  above periods (the exercise period).

F-69

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 16:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-70

---

---

MATAV - CABLE SYSTEMS MEDIA LTD.

|NOTES TO FINANCIAL STATEMENTS
|-----------------------------
|                             
|                             
|NOTE 16:-                    
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             

F-71

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 16:- | SHAREHOLDERS EQUITY (Cont.)
|--------- | ----------------------------
|          |                             
|          | c.                          
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|          |                             
|NOTE 17:- | TAXES ON INCOME             
|          |                             
|          | a.                          
|          |                             
|          |                             
|          |                             

F-72

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 17:- | TAXES ON INCOME (Cont.)
|--------- | -----------------------
|          |                        
|          | b.                     
|          |                        
|          |                        

| |                                  |  | Consolidated                                                           |        
| | -------------------------------- |  | ---------------------------------------------------------------------- | -------
| |                                  |  |                                                                        |        
| |                                  |  | For
  temporary
  differences of
  investment in
  affiliate
  company |        
| |                                  |  |                                                                        |        
| |                                  |  | Adjusted NIS in thousands                                             
| |                                  |  |                                                                       
| |                                  |  |                                                                        |        
| | Balance
  at January 1, 2001     |  |                                                                        | -      
| |                                  |  |                                                                        |        
| | Deferred
  tax asset             |  |                                                                        | -      
| | Less
  - valuation allowance     |  |                                                                        | -      
| |                                  |  |                                                                        |        
| |                                  |  |                                                                        |        
| | Balance
  at December 31, 2002   |  |                                                                        | -      
| |                                  |  |                                                                        |        
| | Deferred
  tax asset (liability) |  |                                                                        | (15,630
| | Less
  - valuation allowance     |  |                                                                        | -      
| |                                  |  |                                                                        |        
| |                                  |  |                                                                        |        
| | Balance
  at December 31, 2003   |  |                                                                        | (15,630
| |                                  |  |                                                                        |        
| |                                  |  |                                                                        |        
| |                                  |  | The Company                                                            |        
| |                                  |  |                                                                        |        
| |                                  |  | For
  temporary
  differences of
  investment in
  affiliate
  company |        
| |                                  |  |                                                                        |        
| |                                  |  | Adjusted NIS in thousands                                              |        
| |                                  |  |                                                                        |        
| |                                  |  |                                                                        |        
| | Balance
  at January 1, 2001     |  |                                                                        | -      
| |                                  |  |                                                                        |        
| | Deferred
  tax asset             |  |                                                                        | -      
| | Less
  - valuation allowance     |  |                                                                        | -      
| |                                  |  |                                                                        |        
| |                                  |  |                                                                        |        
| | Balance
  at December 31, 2002   |  |                                                                        | -      
| |                                  |  |                                                                        |        
| | Deferred
  tax asset (liability) |  |                                                                        | (15,630
| | Less
  - valuation allowance     |  |                                                                        | -      
| |                                  |  |                                                                        |        
| |                                  |  |                                                                        |        
| | Balance
  at December 31, 2003   |  |                                                                        | (15,630
| |                                  |  |                                                                        |        

F-73

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 17:- | TAXES ON INCOME (Cont.)
|--------- | -----------------------
|          |                        
|          | c.                     
|          |                        
|          |                        
|          |                        

| |                                                      |  | Consolidated                |       
| | ---------------------------------------------------- |  | --------------------------- | ------
| |                                                      |  |                             |       
| |                                                      |  | Year ended
  December 31,   |       
| |                                                      |  |                             |       
| |                                                      |  | 2001                        |       
| |                                                      |  |                             |       
| |                                                      |  | Adjusted
  NIS in thousands |       
| |                                                      |  |                             |       
| |                                                      |  |                             |       
| | Current                                              |  |                             | (84   
| | Deferred taxes                                       |  |                             | 1,538 
| | For previous years - current                         |  |                             | (1,888
| |                                                      |  |                             |       
| |                                                      |  |                             |       
| |                                                      |  |                             | (434  
| |                                                      |  |                             |       
| |                                                      |  |                             |       
| |                                                      |  | The Company                 |       
| |                                                      |  |                             |       
| |                                                      |  | Year ended
  December 31,   |       
| |                                                      |  |                             |       
| |                                                      |  | 2001                        |       
| |                                                      |  |                             |       
| |                                                      |  | Adjusted
  NIS in thousands |       
| |                                                      |  |                             |       
| |                                                      |  |                             |       
| | Current                                              |  |                             | (4,668
| | Deferred taxes                                       |  |                             | 1,042 
| | For previous years - current                         |  |                             | 1,321 
| |                                                      |  |                             |       
| |                                                      |  |                             |       
| |                                                      |  |                             | (2,305
| |                                                      |  |                             |       
| |                                                      |  |                             |       
| | Current
  taxes are computed at the tax rate of 36%.

F-74

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 17:- | TAXES ON INCOME (Cont.)
|--------- | -----------------------
|          |                        
|          |                        

| |                                                                                                                                |  | Consolidated                |         
| | ------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | --------
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  | Year ended
  December 31,   |         
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  | 2001                        |         
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  | Adjusted
  NIS in thousands |         
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  |                             |         
| | Income
  (loss) before taxes on income, as
     reported in the statement of operations                                        |  |                             | (178,886
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  |                             |         
| | Theoretical
  tax expenses (benefit)                                                                                           |  |                             | (64,400 
| |                                                                                                                                |  |                             |         
| | Increase
  (decrease) in taxes resulting from:                                                                                 |  |                             |         
| |                                                                                                                                |  |                             |         
| | Disallowable
  deductions                                                                                                      |  |                             | 912     
| | Increase
  in taxes in respect of tax losses
     incurred in the reported year for which
     deferred taxes were not created |  |                             | 62,798  
| | Increase
  in taxes in respect of temporary
     differences which deferred taxes were not
     provided                       |  |                             | 2,144   
| | Difference
  in definition of capital and assets   for tax purposes                                                            |  |                             | -       
| | Taxes
  in respect of previous years                                                                                           |  |                             | (1,888  
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  |                             | (434    
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  | The Company                 |         
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  | Year ended
  December 31,   |         
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  | 2001                        |         
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  | Adjusted
  NIS in thousands |         
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  |                             |         
| | Income
  (loss) before taxes on income, as   reported in the statement
  of operations                                         |  |                             | (129,701
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  |                             |         
| | Theoretical
  tax expenses (benefit)                                                                                           |  |                             | (46,713 
| |                                                                                                                                |  |                             |         
| | Increase
  (decrease) in taxes resulting from:                                                                                 |  |                             |         
| |                                                                                                                                |  |                             |         
| | Disallowable
  deductions                                                                                                      |  |                             | 683     
| | Increase
  in taxes in respect of tax losses   incurred in the reported
  year for which   deferred taxes were not
  created   |  |                             | 39,856  
| | Increase
  in taxes in respect of temporary   differences which
  deferred taxes were not   provided                           |  |                             | -       
| | Difference
  in definition of capital and assets   for tax purposes                                                            |  |                             | 2,548   
| | Taxes
  in respect of previous years                                                                                           |  |                             | 1,321   
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  |                             |         
| |                                                                                                                                |  |                             | (2,305  
| |                                                                                                                                |  |                             |         

F-75

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 17:- | TAXES ON INCOME (Cont.)
|--------- | -----------------------
|          |                        
|          | d.                     
|          |                        
|          |                        
|          |                        
|          | e.                     
|          |                        
|          |                        
|          |                        
|          |                        

F-76

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 18:- | LINKAGE TERMS OF MONETARY BALANCES
|--------- | ----------------------------------

| |                                                                             |  | Consolidated                      | 
| | --------------------------------------------------------------------------- |  | --------------------------------- | 
| |                                                                             |  |                                   | 
| |                                                                             |  | December 31, 2002                 | 
| |                                                                             |  |                                   | 
| |                                                                             |  | In or linkedto foreign
  currency | 
| |                                                                             |  |                                   | 
| |                                                                             |  | Adjusted NIS in thousands         | 
| |                                                                             |  |                                   | 
| |                                                                             |  |                                   | 
| | Assets:                                                                     |  |                                   | 
| |                                                                             |  |                                   | 
| | Cash
  and cash equivalents                                                 |  | 6,681                             | 
| | Trade
  receivables                                                         |  | -                                 | 
| | Other
  accounts receivable                                                 |  | -                                 | 
| | Loan
  and capital note to affiliates                                       |  | -                                 | 
| | Long-term
  loans granted to employees                                      |  | -                                 | 
| | Other
  receivables                                                         |  | -                                 | 
| |                                                                             |  |                                   | 
| |                                                                             |  |                                   | 
| |                                                                             |  | 6,681                             | 
| |                                                                             |  |                                   | 
| |                                                                             |  |                                   | 
| | Liabilities:                                                                |  |                                   | 
| |                                                                             |  |                                   | 
| | Short-term
  credit                                                         |  | -                                 | 
| | Trade
  payables                                                            |  | 16,887                            | 
| | Affiliate
  - current accounts                                              |  | -                                 | 
| | Other
  accounts payable                                                    |  | -                                 | 
| | Loans
  from banks and other (including current 
     maturities)           |  | 53,779                            | 
| | Debentures
  (including current maturities)                                 |  | -                                 | 
| | Customers
  deposits for converters, net of 
     accumulated amortization |  | -                                 | 
| |                                                                             |  |                                   | 
| |                                                                             |  |                                   | 
| |                                                                             |  | 70,666                            | 
| |                                                                             |  |                                   | 

F-77

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 18:- | LINKAGE TERMS OF MONETARY BALANCES (Cont.)
|--------- | ------------------------------------------

| |                                                                         |  | The Company                       | 
| | ----------------------------------------------------------------------- |  | --------------------------------- | 
| |                                                                         |  |                                   | 
| |                                                                         |  | December 31, 2002                 | 
| |                                                                         |  |                                   | 
| |                                                                         |  | In or
  linkedto foreign currency | 
| |                                                                         |  |                                   | 
| |                                                                         |  | Adjusted NIS in thousands         | 
| |                                                                         |  |                                   | 
| |                                                                         |  |                                   | 
| | Assets:                                                                 |  |                                   | 
| |                                                                         |  |                                   | 
| | Cash
  and cash equivalents                                             |  | 6,591                             | 
| | Trade
  receivables                                                     |  | -                                 | 
| | Other
  accounts receivable                                             |  | -                                 | 
| | Loan
  and capital note to affiliates                                   |  | -                                 | 
| | Long-term
  loans granted to employees                                  |  | -                                 | 
| |                                                                         |  |                                   | 
| |                                                                         |  |                                   | 
| |                                                                         |  | 6,591                             | 
| |                                                                         |  |                                   | 
| |                                                                         |  |                                   | 
| | Liabilities:                                                            |  |                                   | 
| |                                                                         |  |                                   | 
| | Short-term
  credit                                                     |  | -                                 | 
| | Trade
  payables                                                        |  | 16,887                            | 
| | Affiliate
  - current accounts                                          |  | -                                 | 
| | Other
  accounts payable                                                |  | -                                 | 
| | Loans
  from banks and other (including current   maturities)           |  | 53,779                            | 
| | Debentures
  (including current maturities)                             |  | -                                 | 
| | Customers
  deposits for converters, net of   accumulated amortization |  | -                                 | 
| |                                                                         |  |                                   | 
| |                                                                         |  |                                   | 
| |                                                                         |  | 70,666                            | 
| |                                                                         |  |                                   | 

F-78

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 19:- | SUPPLEMENTARY INFORMATION OF THE STATEMENTS OF OPERATIONS
|--------- | ---------------------------------------------------------
|          |                                                          
|          | a.                                                       

| |                                                                       |  | Consolidated              |  | The Company             | 
| | --------------------------------------------------------------------- |  | ------------------------- |  | ----------------------- | 
| |                                                                       |  |                           |  |                         | 
| |                                                                       |  | Year ended December 31,   |  | Year ended December 31, | 
| |                                                                       |  |                           |  |                         | 
| |                                                                       |  | 2001                      |  | 2002                    | 
| |                                                                       |  |                           |  |                         | 
| |                                                                       |  | Adjusted NIS in thousands | 
| |                                                                       |  |                           | 
| |                                                                       |  |                           |  |                         | 
| | Payroll and related expenses                                          |  | 41,136                    |  | 31,763                  | 
| | Royalties and other payments   to the Government                      |  | 21,945                    |  | 20,631                  | 
| | Royalties in respect of films   and programs - paid
  to Hot   Vision |  | 69,718                    |  | 61,763                  | 
| | Programs and other   Broadcasts                                       |  | 157,213                   |  | 181,172                 | 
| | Subscribers maintenance                                              |  | 18,841                    |  | 17,619                  | 
| | Other                                                                 |  | 33,074                    |  | 32,493                  | 
| |                                                                       |  |                           |  |                         | 
| |                                                                       |  |                           |  |                         | 
| |                                                                       |  | 341,927                   |  | 345,441                 | 
| |                                                                       |  |                           |  |                         | 
| |                                                                       |  |                           |  |                         | 

| | b. | Selling,
  marketing, general and administrative expenses:
| | -- | ----------------------------------------------------------

| | Selling and marketing:                                                             |  |         |   |        |   |        |   |        |   |        |   |        |  
| | ---------------------------------------------------------------------------------- |  | ------- | - | ------ | - | ------ | - | ------ | - | ------ | - | ------ | -
| |                                                                                    |  |         |   |        |   |        |   |        |   |        |   |        |  
| | Payroll and related expenses                                                       |  | 17,817  |   | 15,832 |   | 15,539 |   | 13,082 |   | 11,191 |   | 10,446 |  
| | Advertising                                                                        |  | 28,650  |   | 10,218 |   | 14,698 |   | 20,245 |   | 8,952  |   | 8,457  |  
| | Sales promotion                                                                    |  | 11,507  |   | 14,593 |   | 13,717 |   | 8,586  |   | 8,981  |   | 7,975  |  
| |                                                                                    |  |         |   |        |   |        |   |        |   |        |   |        |  
| |                                                                                    |  |         |   |        |   |        |   |        |   |        |   |        |  
| |                                                                                    |  | 57,974  |   | 40,643 |   | 43,954 |   | 41,913 |   | 29,124 |   | 26,878 |  
| |                                                                                    |  |         |   |        |   |        |   |        |   |        |   |        |  
| | General and administrative:                                                        |  |         |   |        |   |        |   |        |   |        |   |        |  
| |                                                                                    |  |         |   |        |   |        |   |        |   |        |   |        |  
| | Payroll and related expenses                                                       |  | 22,144  |   | 20,777 |   | 16,596 |   | 16,207 |   | 10,735 |   | 12,718 |  
| | Office rent and maintenance                                                        |  | 11,344  |   | 9,687  |   | 7,894  |   | 8,308  |   | 7,687  |   | 4,692  |  
| | Professional fees                                                                  |  | 4,362   |   | 4,600  |   | 1,199  |   | 3,158  |   | 3,100  |   | 3,011  |  
| | Legal fees                                                                         |  | 5,690   |   | 2,383  |   | 1,547  |   | 4,081  |   | 2,383  |   | 1,182  |  
| | Amortization of excess of cost
     of investment in Matav
     Haifa              |  | 1,420   |   | 1,420  |   | 894    |   | -      |   | -      |   | -      |  
| | Allowance for doubtful
     accounts and write-off of
     bad debts *)            |  | 2,823   |   | 2,065  |   | 5,300  |   | 2,124  |   | 1,452  |   | 3,590  |  
| | Other                                                                              |  | 9,269   |   | 5,205  |   | 9,229  |   | 6,082  |   | 4,542  |   | 3,095  |  
| |                                                                                    |  |         |   |        |   |        |   |        |   |        |   |        |  
| |                                                                                    |  |         |   |        |   |        |   |        |   |        |   |        |  
| |                                                                                    |  | 57,052  |   | 46,137 |   | 42,659 |   | 39,960 |   | 29,899 |   | 28,288 |  
| |                                                                                    |  |         |   |        |   |        |   |        |   |        |   |        |  
| |                                                                                    |  |         |   |        |   |        |   |        |   |        |   |        |  
| |                                                                                    |  | 115,026 |   | 86,780 |   | 86,613 |   | 81,873 |   | 59,023 |   | 55,166 |  
| |                                                                                    |  |         |   |        |   |        |   |        |   |        |   |        |  
| | *) The changes in allowance     for doubtful accounts are     composed as follows: |  |         |   |        |   |        |   |        |   |        |   |        |  
| | Balance
  at beginning of
            year                                         |  | 2,951   |   | 4,575  |   | 3,887  |   | 2,392  |   | 3,633  |   | 2,898  |  
| | Write-off
  of bad debt                                                            |  | (1,199  | ) | (2,753 | ) | (5,937 | ) | (883   | ) | (2,187 | ) | (3,993 | )
| | Increase
  during the year                                                         |  | 2,823   |   | 2,065  |   | 5,300  |   | 2,124  |   | 1,452  |   | 3,590  |  
| |                                                                                    |  |         |   |        |   |        |   |        |   |        |   |        |  
| |                                                                                    |  |         |   |        |   |        |   |        |   |        |   |        |  
| | Balance at end of year                                                             |  | 4,575   |   | 3,887  |   | 3,250  |   | 3,633  |   | 2,898  |   | 2,495  |  
| |                                                                                    |  |         |   |        |   |        |   |        |   |        |   |        |  

F-79

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 19:- | SUPPLEMENTARY INFORMATION OF THE STATEMENTS OF OPERATIONS (Cont.)
|--------- | -----------------------------------------------------------------
|          |                                                                  
|          | c.                                                               

| |                                                     |  | Consolidated              |   | The Company             |  
| | --------------------------------------------------- |  | ------------------------- | - | ----------------------- | -
| |                                                     |  |                           |   |                         |  
| |                                                     |  | Year ended December 31,   |   | Year ended December 31, |  
| |                                                     |  |                           |   |                         |  
| |                                                     |  | 2001                      |   | 2002                    |  
| |                                                     |  |                           |   |                         |  
| |                                                     |  | Adjusted NIS in thousands |  
| |                                                     |  |                           |  
| |                                                     |  |                           |   |                         |  
| | Expenses:                                           |  |                           |   |                         |  
| |                                                     |  |                           |   |                         |  
| | In respect of debentures and
       long-term loans |  | 23,771                    |   | 25,032                  |  
| | In respect of short-term credit
       *)           |  | 21,124                    |   | 10,328                  |  
| | Bank commissions                                    |  | 6,052                     |   | 6,595                   |  
| | Other                                               |  | 2,681                     |   | 7,254                   |  
| |                                                     |  |                           |   |                         |  
| |                                                     |  |                           |   |                         |  
| |                                                     |  | 53,628                    |   | 49,209                  |  
| |                                                     |  |                           |   |                         |  
| | Income:                                             |  |                           |   |                         |  
| |                                                     |  |                           |   |                         |  
| | Interest on a bank deposit                          |  | -                         |   | (1,120                  | )
| | Interest on loan to an affiliate                    |  | (1,540                    | ) | -                       |  
| |                                                     |  |                           |   |                         |  
| |                                                     |  |                           |   |                         |  
| |                                                     |  | (1,540                    | ) | (1,120                  | )
| |                                                     |  |                           |   |                         |  
| |                                                     |  |                           |   |                         |  
| |                                                     |  | 52,088                    |   | 48,089                  |  
| |                                                     |  |                           |   |                         |  
| |                                                     |  |                           |   |                         |  
| | *)     Net
  of erosion of monetary items, net.    

| | d. | Other income
  (expenses), net:
| | -- | -------------------------------

| | Gain (losses) from:                                                                                                |  |        |   |         |   |        |   |        |   |         |   |        |  
| | ------------------------------------------------------------------------------------------------------------------ |  | ------ | - | ------- | - | ------ | - | ------ | - | ------- | - | ------ | -
| | Changes in shareholding in
       affiliate (including from sale
       of shares of affiliate)                    |  | 5,145  |   | 295,933 |   | 96,662 |   | 5,145  |   | 302,418 |   | 97,876 |  
| | Write-off of
  investment in
            other companies                                                           |  | -      |   | (8,962  | ) | -      |   | -      |   | (8,830  | ) | -      |  
| | Sale of fixed assets                                                                                               |  | (2,704 | ) | (44     | ) | (1,428 | ) | (2,636 | ) | (92     | ) | (1,209 | )
| | Settlement of a claim                                                                                              |  | (973   | ) | (235    | ) | -      |   | (973   | ) | (235    | ) | -      |  
| | Gain from transfer of
       Company Internet subscribes
       to another Internet services 
       provider, net |  | 1,585  |   | -       |   | -      |   | 1,585  |   | -       |   | -      |  
| | Merger expenses related to the 
       cable companies                                                             |  | -      |   | (2,801  | ) | (4,487 | ) | -      |   | (2,801  | ) | (4,487 | )
| | Adjustments of amortization
       for deposits converters
       liabilities and other                            |  | -      |   | (5,356  | ) | (4,001 | ) | -      |   | (3,434  | ) | (2,803 | )
| | Retroactive refund of royalties                                                                                    |  | -      |   | -       |   | 4,151  |   | -      |   | -       |   | 4,151  |  
| | Write-off of fixed assets                                                                                          |  | -      |   | -       |   | (8,528 | ) | -      |   | -       |   | (6,429 | )
| | Other                                                                                                              |  | -      |   | -       |   | (1,373 | ) | -      |   | (452    | ) | (2,158 | )
| |                                                                                                                    |  |        |   |         |   |        |   |        |   |         |   |        |  
| |                                                                                                                    |  |        |   |         |   |        |   |        |   |         |   |        |  
| |                                                                                                                    |  | 3,053  |   | 278,535 |   | 80,996 |   | 3,121  |   | 286,574 |   | 84,941 |  
| |                                                                                                                    |  |        |   |         |   |        |   |        |   |         |   |        |  

F-80

---

---

|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, |  
| | ------------------------------------------------------------------------------------------------------ |  | ------------------------- | -
| |                                                                                                        |  |                           |  
| |                                                                                                        |  | 2001                      |  
| |                                                                                                        |  |                           |  
| |                                                                                                        |  | Loss                      |  
| |                                                                                                        |  |                           |  
| |                                                                                                        |  | Adjusted NIS in thousands |  
| |                                                                                                        |  |                           |  
| |                                                                                                        |  |                           |  
| | Number of shares and the
       net income (loss)
       according to statements
       of operations. |  | (257,274                  | )
| |                                                                                                        |  |                           |  
| |                                                                                                        |  |                           |  
| | *)          Net
  of the shares held by a subsidiary.                                                 

|NOTE 21:- | BUSINESS SEGMENTS                                                                                                                                                                                                                                                        
|--------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                          
|          | a.                                                                                                                                                                                                                                                                       
|          |                                                                                                                                                                                                                                                                          
|          | b.                                                                                                                                                                                                                                                                       
|          |                                                                                                                                                                                                                                                                          
|          | c.                                                                                                                                                                                                                                                                       
|          |                                                                                                                                                                                                                                                                          
|          | The
  liabilities of a segment include all operating liabilities deriving from
  operating activities of the segment and mainly of trade payables and other
  accounts payable. Assets and liabilities of the segment do not include income
  tax assets and liabilities.

F-81

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 21:- | BUSINESS SEGMENTS (Cont.)
|--------- | -------------------------

| |                                                |  | Year ended
  December 31, 2003 |       
| | ---------------------------------------------- |  | ------------------------------ | ------
| |                                                |  |                                |       
| |                                                |  | Internet                       |       
| |                                                |  |                                |       
| |                                                |  | Adjusted
  NIS in thousands    |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Sales to
  external customers                  |  |                                | 34,403
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Total
  revenues                               |  |                                | 34,403
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Result of
  segments (operating (loss) income) |  |                                | 10,436
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Unallocated
  financial expenses, net          |  |                                |       
| | Other
  income, net                            |  |                                |       
| | Taxes on
  income                              |  |                                |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Income
  (loss) after taxes on income          |  |                                |       
| | Equity in
  earnings (losses) of affiliates    |  |                                |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Loss                                           |  |                                |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Other
  information                            |  |                                |       
| |                                                |  |                                |       
| | The segments
  assets                          |  |                                | 78,090
| | Unallocated
  common assets                    |  |                                |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Total
  consolidated assets                    |  |                                |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | The segments
  liabilities                     |  |                                | 15,963
| | Unallocated
  common liabilities               |  |                                |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Total
  consolidated liabilities               |  |                                |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Capital
  investments                          |  |                                | 38,131
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Depreciation
  and amortization                |  |                                | 6,792 
| |                                                |  |                                |       

F-82

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 21:- | BUSINESS SEGMENTS (Cont.)
|--------- | -------------------------

| |                                                |  | Year ended
  December 31, 2002 |       
| | ---------------------------------------------- |  | ------------------------------ | ------
| |                                                |  |                                |       
| |                                                |  | Internet                       |       
| |                                                |  |                                |       
| |                                                |  | Adjusted
  NIS in thousands    |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Sales to
  external customers                  |  |                                | 9,124 
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Total
  revenues                               |  |                                | 9,124 
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Result of
  segments (operating (loss) income) |  |                                | (7,724
| |                                                |  |                                |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Unallocated
  financial expenses, net          |  |                                |       
| | Other
  income, net                            |  |                                |       
| | Taxes on
  income                              |  |                                |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Income after
  taxes on income                 |  |                                |       
| | Equity in earnings
  of affiliates             |  |                                |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Net income                                     |  |                                |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Other
  information                            |  |                                |       
| |                                                |  |                                |       
| | The segments
  assets                          |  |                                | 39,297
| | Unallocated
  common assets                    |  |                                |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Total
  consolidated assets                    |  |                                |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | The segments
  liabilities                     |  |                                | 10,369
| | Unallocated
  common liabilities               |  |                                |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Total
  consolidated liabilities               |  |                                |       
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Capital
  investments                          |  |                                | 36,073
| |                                                |  |                                |       
| |                                                |  |                                |       
| | Depreciation
  and amortization                |  |                                | 5,893 
| |                                                |  |                                |       

F-83

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 22:- | TRANSACTIONS WITH INTERESTED PARTIES
|--------- | ------------------------------------

| |                             |                                                                             | Consolidated and the Company | 
| | --------------------------- | --------------------------------------------------------------------------- | ---------------------------- | 
| |                             |                                                                             |                              | 
| |                             |                                                                             | Year ended
  December 31,    | 
| |                             |                                                                             |                              | 
| |                             |                                                                             | 2001                         | 
| |                             |                                                                             |                              | 
| |                             |                                                                             | Adjusted
  NIS in thousands  | 
| |                             |                                                                             |                              | 
| | a.                          | Salaries and profit sharing
  grant:                                        |                              | 
| |                             |                                                                             |                              | 
| |                             | 1. To unemployed directors:                                                 |                              | 
| |                             |                                                                             |                              | 
| |                             | Payments                                                                    |                              | 
| |                             |                                                                             |                              | 
| |                             |                                                                             |                              | 
| |                             | Number
  of recipients                                                      |                              | 
| |                             |                                                                             |                              | 
| |                             |                                                                             |                              | 
| |                             | 2. Employed interested parties:                                             |                              | 
| |                             |                                                                             |                              | 
| |                             | Cost
  of salaries (1)                                                      |                              | 
| |                             |                                                                             |                              | 
| |                             |                                                                             |                              | 
| |                             | Number
  of recipients                                                      |                              | 
| |                             |                                                                             |                              | 
| |                             |                                                                             |                              | 
| | b.                          | Expenses:                                                                   |                              | 
| |                             |                                                                             |                              | 
| |                             | Rental and services to
  shareholders affiliate                             |                              | 
| |                             |                                                                             |                              | 
| |                             |                                                                             |                              | 
| |                             | Payment to supplier                                                         |                              | 
| |                             |                                                                             |                              | 
| |                             |                                                                             |                              | 
| |                             | Operating commissions                                                       |                              | 
| |                             |                                                                             |                              | 
| |                             | Costs related to set up of
  infrastructure,
      included in fixed assets |                              | 
| |                             |                                                                             |                              | 
| |                             |                                                                             |                              | 
| |                             | Professional services                                                       |                              | 
| |                             |                                                                             |                              | 
| |                             |                                                                             |                              | 
| | (1) See also
  Note 16b(3). |                                                                             |                              | 

F-84

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 23:- | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
|--------- | -----------------------------------------
|          |                                          
|          | a.                                       
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          | b.                                       
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          | c.                                       
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          
|          |                                          

F-85

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

# NOTE 24:- SUBSEQUENT
EVENTS

| | a. | In Februay, 2004 Delek Investments and Assets Ltd. acquired approximately 17.99%
                    of the Companys outstanding shares from Danker Investments Ltd. . In
                    addition, Dankner granted Delek an option for two years to purchase additional
                    shares of the Company constituting, as of the date of the agreement, 2% of the
                    issued and outstanding share capital of the Company.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 31, 2004, the members of the Dankner and Gineo families the controlling shareholders
of Dankner Investments Ltd. (Dankner) the Companys major shareholder,
signed an agreement with Delek Real Estate Ltd. (a subsidiary of Delek) for the purchase
of such shares, constituting 87.5% of the outstanding ordinary shares of Dankner. The
transaction is subject to a number of approvals, including the approval of the Controller
of Restrictive Business Practices and the Cable and Satellite Broadcasting Council. The
agreement also provides that in the event the conditions to the aforesaid sale are not met
by a specified date, subject to certain other conditions, Delek Real Estate Ltd. will
purchase shares of Dankner from the other parties to the agreement representing 20-25% of
Dankners outstanding ordinary shares. On June 15, 2004, Delek Real Estate Ltd.
purchased 25% of the issued share capital of Dankner. With respect to the purchase of the
remaining shares to arrive at the total 87.5% referred to above, so far the approval of
the Council and the Ministry of Communications have been obtained.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
February 2004 the Company announced that it engaged in preliminary negotiations with Tevel
Israel International Communications Ltd. (Tevel) and with Tevels
shareholders to purchase all of Tevels cable assets, including Tevels holdings
in Golden Channels and Co. and in Tevels subsidiaries that have cable broadcasting
and access to fast-internet licenses (Tevels Communications Assets)
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company was evaluating a few alternatives for the execution of the transaction, including
the possibility of the Company to purchase Tevels Communications Assets in exchange
for assuming certain of Tevels liabilities to banks and simultaneously issuance of
shares to Tevel.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
the signing of the Memorandum of Agreement with Partner, (see below), these negotiations
with Tevel and its shareholders, shall be conducted at this stage in the context of
Matav-Partner transaction.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 14, 2004 the Company and its shareholders, Dankner and Delek entered into a
memorandum of agreement with a leading Israeli mobile communications operator, Partner
pursuant to which Partner shall invest up to $ 137 million in the Company for up to 40%
share of the Company equity, and control of the Company. The memorandum will become
binding only upon approval of the Board of Directors of each company. The transaction is
subject to significant prerequisites which include, inter alia:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Execution
of a definitive agreement and completion of due diligence by Partner;
| | - | -------------------------------------------------------------------------------

| | - | Distribution
to the  shareholders  of Partner shares  currently held by the Company
                            ("the Distribution");
| | - | -------------------------------------------------------------------------------------------------------------------------------------

F-86

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

# NOTE 24:- SUBSEQUENT
EVENTS (Cont.)

| | - | Receipt
of  significant  additional  subscriber  base by the Company from  existing providers;
| | - | ----------------------------------------------------------------------------------------------

| | - | An
agreement for commercial cooperation between Partner and the Company;
| | - | ------------------------------------------------------------------------

| | - | Satisfactory
agreements with the lenders of each of the companies;
| | - | ------------------------------------------------------------------

| | - | Approval
of the Company shareholders of an amendment of the Articles of Association of the
Company, and Confirmation that Dankner, Delek and Partner will not be deemed a group
of borrowers of the Company, for purposes of Israeli banking regulations, as a
result of the transaction.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Upon
closing of the proposed Partner investment in the Company, the holdings of Delek and
Dankner will each be diluted to approximately 12%. Each of Delek and Dankner will have an
option during the two years following the closing to purchase up to an additional 6% of
the Company shares from Partner at a price to be determined on the basis of the price of
Matav shares and the price of the Partner shares received by Matav shareholders as a
distribution from the Company, during the option period. In addition, Partner will have
the option at the end of the two year option period to repurchase Matav shares from Delek
and Dankner at a material premium over the Delek and Dankner option price, so that
Partners holding in the Company will be at least 2% greater than that of Delek and
Dankner together, should they exercise their options.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the two years following the closing for as long as Delek and Dankner hold the Company
shares, and subject to certain conditions, Partner will receive from Delek and Dankner
limited proxies that will grant Partner voting power in the aggregate of 50.01% of the
voting shares of the Company, and has agreed to vote in favor of two directors designated
on behalf of each of Delek and Dankner for as long as each of them holds at least 5% of
the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company reviews the tax implications of the Distribution on the Company and its
shareholders and estimates that the total tax liability to the Company, based on the value
of Partner shares as of today, will amount to approximately $ 27 million.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company also estimates that if the transaction will be completed, the equity of the
Company will increase by approximately $ 100 million.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | The
parties undertook to negotiate with the intent of entering into a definitive agreement
until May 15, 2004. However, there was no assurance that a definitive agreement will be
concluded, or that all the prerequisites for closing will be fulfilled.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 15, 2004, the Company announced that the time framework set for the execution of a
definitive agreement to acquire holdings of the Company by Partner Communications Company
Ltd., has expired and the memorandum of agreement signed on March 15, 2004 has no legal
effect. However, the parties announced that they intend to continue discussions in an
effort to reach an agreement. There is no assurance that such an agreement shall be
concluded. Simultaneously, the Company conducts negotiations concerning the possibility of
acquiring the cable operations and assets of Tevel, as stated above.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-87

---

---

# NOTE 24:- SUBSEQUENT
EVENTS

| | b. | On
June 16, 2004, the Company issued an immediate report to the Israel
               securities Authority and the Tel-Aviv Stock Exchange stating that the
three                Israeli cable television operators decided to strengthen their
cooperation by                performing an operational merger. The operational merger
contemplates the                merging of the marketing, sales, engineering, customer
service, operations and                information systems activities of the three cable
companies. The board of                directors of the Company will be convened shortly
to discuss and approve the                operational changes.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | In
February 2004, a subsidiary of the Company received tax assessments for the
               years 1999  2001 (see Note 15(2)f). In addition, subsequent to the
dispute                with the tax authorities as described in Notes 11b(1) and 15g, a
subsidiary of                the Company received in May 2004 assessments for tax years
1998-2002, under                which it is required to pay additional amount of NIS 6.6
million (not including                interest and CPI linkage) with respect of the
assessments for the tax years 1998                 2001. The tax assessment 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 in the financial statement as of                December 31, 2003 and
2002. In addition, with respect to 2002 tax assessment a                deficiency
penalty was imposed on the Company in the amount of NIS 18 million
               including linkage and interest. Managements opinion, based on the
               evaluation of its external advisers, has well founded arguments against
the                penalty and therefore no provision has been made in the Companys
accounts                for the above-mentioned deficit penalty claim.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | During
March till June 2004, 36,483 options of the 2003 plan were exercised to
               13,750 shares of NIS 1 par value each. In April 2004, 37,235 options of
the 2001                plan were exercised to 2,809 shares of NIS 1 par value each (see
also Note16                (b)).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Updating
contingent liabilities:
| | -- | --------------------------------

| | 1) | The
class action concerning content of Sport Channels (see also Note 15b(1)(c)):
| | -- | --------------------------------------------------------------------------------

| | On
May 27, 2004, the Tel-Aviv District Court denied a motion for this class action.
| | -----------------------------------------------------------------------------------

| | 2) | The class action deals with the issue of not granting penetration discount as
          opposed to the directives of the franchise and in respect of the limitation,
          which the Restrictive Trade Practices Court imposed on the increase of
          subscriber fees (see also Note 15b(1)(d)):
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 23, 2004, the Company submitted its response to this petition, whereby with
respect to the first allegation of the petitioners, the Company clarified that the clear
and defined objective of the increase of the subscriber fees that was determined by the
Restrictive Trade Practices Court was not a determination of new subscriber fees, as
defined in the franchise.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-88

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

# NOTE 24:- SUBSEQUENT
EVENTS (Cont.)

| | The
Company claimed that the Restrictive Trade Practices Court determined a ceiling for the
increase only to prevent the cable companies from rolling over to the public the
arrangement fee they the Company required to pay, by an immediate increase of the
subscriber fees up to the ceiling. In addition, whereas the Company already granted a
penetration discount of 10% in regions, which are the object of the claim prior to
rendering the Ruling, the petitioners allegation implies that it was to grant a double
discount than the one intended by the Minister of Communications, and such a conclusion is
unreasonable and is not consistent with the provisions of the Ruling.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
to the second allegation of the petitioners, the Company responded that an increase of the
subscriber fees a day after the Ruling was rendered, was only a result of linking the
subscriber fees to the CPI, pursuant to the provisions of the franchise and the Bezeq
Regulations (Franchises)  1987, and such an increase was permitted in the ICP
arrangement and pursuant to the Ruling.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and the petitioner have reached an agreement according to which the lawsuit will
be stricken in consideration for the payment by us of the petitioners legal expenses
in an immaterial amount.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | Claim
filed by AGICOA (see also note 15b(2)(b)):
| | -- | ------------------------------------------------

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

| | On
January 19, 2004, Tevels trustee notified the Court of the cessation of this
proceeding 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. The
plaintiff has objected to the notice of the trustee to cease these proceedings, and
claimed that it has the right to continue its proceedings against Tevel and Gvanim. The
plaintiff applied to the court overseeing Tevels insolvency proceedings to request
permission to continue in the proceeding against Tevel and Gvanim, despite the stay of
proceedings and arrangement of creditors that has since entered into effect, to instruct
the trustee to reserve a sum out of the trust fund of Tevel and Gvanim to cover the cost
of the proceedings until their resolution, and to change the trustees decision to
postpone the proof of the debt that is the subject of the action as part of the stay of
proceedings.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-89

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

# NOTE 24:- SUBSEQUENT
EVENTS (Cont.)

| | The
plaintiff and the trustee subsequently reached an agreement that the trustees
decision to cease the proceedings referred to above would be delayed until the court
overseeing Tevels insolvency proceedings would render its decision in the interim
proceedings before it. On March 29, 2004, the court overseeing Tevels insolvency
proceedings rendered its decision in the interim proceedings. The court overseeing
Tevels insolvency proceedings denied the plaintiffs request to allow it to
continue its action against Tevel and Gvanim because, even if a debt was adjudicated
against them for matters occurring prior to the stay of proceedings, such remedy would be
meaningless because there is not monetary source from which the plaintiff could recover
the debt, and the court overseeing Tevels insolvency proceedings denied the
plaintiffs request that funds be reserved out of the trust account because this
would delay or frustrate the arrangement of creditors, and the court overseeing
Tevels insolvency proceedings determined to allow the plaintiff to submit another
proof of debt to the trustee which would be based upon the statutory compensation to which
it is entitled for the matters which preceded the stay of proceedings. The court
overseeing Tevels insolvency proceedings gave the plaintiff 14 days to submit the
aforementioned proof of debt. On April 28, 2004, the plaintiff submitted a request for a
re-review to the court overseeing Tevels insolvency proceedings with respect to the
aforesaid decision, and requested an extension for the submission of the proof of debt
until the determination in the request for a re-review, and the court agreed. On May 27,
2004, Tevels trustee submitted its response to the request for the re-review and on
June 7, 2004, the plaintiff submitted its response. The parties are now awaiting the
decision of the court overseeing Tevels insolvency proceedings on the request for
the re-review.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | Claim
filed by Eshkolot (see also Note 15b(2)(c)):
| | -- | --------------------------------------------------

| | On
or about the date of filing the principal lawsuit, the parties commenced negotiations in
order to forward the case to arbitration. On May 2, 2004, the parties entered into an
agreement to arbitrate the disputes pending before the District Court, and the parties
agreed to resolve the antitrust claims in the framework of the arbitration. Accordingly,
on May 11, 2004, Eshkolot submitted an application, with the agreement of the parties and
in light of the arbitration agreement referred to above, to have the petitions to the
Restrictive Business Practices Court, as detailed in Notes 1(4)(b) and 15(b)(2)(d),
cancelled in order to transfer the petition to the arbitration. The application for the
temporary injunction that was pending before the court was dismissed and is not to be
considered in the arbitration. On May 13, 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. On June 2, 2004, the first arbitration hearing was held, and
at such hearing dates were set for the submission of statements of claims and defenses.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the opinion of Companys management, based on the opinion of its legal counsel in
view of the early stages of the proceeding, at this time, the prospects of the arbitration
proceedings cannot be estimated.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys management included in the financial statements as of March 31, 2004 a
provision, which in its opinion, reflects adequately the Companys exposure in
respect of this claim.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-90

---

---

|                              |                                 
|----------------------------- | --------------------------------
|                              | MATAV - CABLE SYSTEMS MEDIA LTD.
|NOTES TO FINANCIAL STATEMENTS |                                 
|                             

# NOTE 24:- SUBSEQUENT
EVENTS (Cont.)

| | 5) | Appeal against the decision of the controller for approval of the merger of the
          cable companies (see also Note 1 (4)(a)):
| | -- | -----------------------------------------------------------------------------------------------------------------------------------

| | On
June 9, 2004, the Court dismissed the appeal submitted by YES, subject to the cancellation
of a provision in the approval of the Controller to the merger of the Israeli cable
television operators which provided that a presumption existed that the purchase of
exclusive local broadcasting rights for a period of up to two years was appropriate for
receipt of an exemption from the requirement to receive the approval of the Controller or
the Restrictive Trade Practices Court.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 25:- | A SUMMARY OF THE  FINANCIAL
  STATEMENTS IN NOMINAL VALUE
|--------- | ---------------------------------------------------------
|          |                                                          
|          | a.                                                       

| |                                                      |  | December 31,     |          
| | ---------------------------------------------------- |  | ---------------- | ---------
| |                                                      |  |                  |          
| |                                                      |  | 2002             |          
| |                                                      |  |                  |          
| |                                                      |  | NIS in thousands |          
| |                                                      |  |                  |          
| | ASSETS                                               |  |                  |          
| |                                                      |  |                  |          
| | CURRENT
  ASSETS:                                    |  |                  |          
| | Cash
  and cash equivalents                          |  |                  | 7,586    
| | Trade
  receivables                                  |  |                  | 48,546   
| | Other
  accounts receivable                          |  |                  | 12,919   
| |                                                      |  |                  |          
| |                                                      |  |                  |          
| |                                                      |  |                  | 69,051   
| |                                                      |  |                  |          
| | INVESTMENTS
  AND LONG-TERM RECEIVABLES:             |  |                  |          
| | Investments
  in affiliates                          |  |                  | 14,453   
| | Investment
  in other company                        |  |                  | 16,536   
| | Investments
  in subsidiaries and long-term accounts |  |                  | 238,661  
| | Long-term
  loans granted to employees               |  |                  | 473      
| | Severance
  pay fund, net                            |  |                  | 413      
| | Other
  receivables                                  |  |                  | -        
| |                                                      |  |                  |          
| |                                                      |  |                  |          
| |                                                      |  |                  | 270,536  
| |                                                      |  |                  |          
| |                                                      |  |                  |          
| | FIXED
  ASSETS:                                      |  |                  |          
| | Cost                                                 |  |                  | 1,089,664
| | Less
  - accumulated depreciation                    |  |                  | 446,330  
| |                                                      |  |                  |          
| |                                                      |  |                  |          
| |                                                      |  |                  | 643,334  
| |                                                      |  |                  |          
| |                                                      |  |                  |          
| | OTHER ASSETS
  AND DEFERRED CHARGES, NET             |  |                  | 2,148    
| |                                                      |  |                  |          
| |                                                      |  |                  |          
| |                                                      |  |                  | 985,069  
| |                                                      |  |                  |          

F-91

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 25:- | A SUMMARY OF THE  FINANCIAL
  STATEMENTS IN NOMINAL VALUE (Cont.)
|--------- | -----------------------------------------------------------------

| |                                                                               |  | December 31,     |         
| | ----------------------------------------------------------------------------- |  | ---------------- | --------
| |                                                                               |  |                  |         
| |                                                                               |  | 2002             |         
| |                                                                               |  |                  |         
| |                                                                               |  | NIS in thousands |         
| |                                                                               |  |                  |         
| | LIABILITIES
  AND SHAREHOLDERS EQUITY                                        |  |                  |         
| |                                                                               |  |                  |         
| | CURRENT
  LIABILITIES:                                                        |  |                  |         
| | Bank
  credit                                                                 |  |                  | 523,931 
| | Current
  maturities of debentures                                            |  |                  | 34,375  
| | Trade
  payables                                                              |  |                  | 68,710  
| | Jointly
  controlled entity - current account                                 |  |                  | 1,940   
| | Other
  accounts payable                                                      |  |                  | 74,513  
| |                                                                               |  |                  |         
| |                                                                               |  |                  |         
| |                                                                               |  |                  | 703,469 
| |                                                                               |  |                  |         
| | LONG-TERM
  LIABILITIES:                                                      |  |                  |         
| | Loans
  and debentures (net of current maturities):                           |  |                  |         
| | Loans
  from bank and others                                                  |  |                  | 144,801 
| | Debentures                                                                    |  |                  | 103,124 
| | Losses
  over investments in subsidiaries                                     |  |                  | 10,568  
| | Customers
  deposits for converters, net of accumulated
        amortization |  |                  | 18,698  
| | Severance
  pay liability                                                     |  |                  | -       
| |                                                                               |  |                  |         
| |                                                                               |  |                  |         
| |                                                                               |  |                  | 277,191 
| |                                                                               |  |                  |         
| |                                                                               |  |                  |         
| |                                                                               |  |                  |         
| | SHAREHOLDERS
  EQUITY:                                                       |  |                  |         
| | Share
  capital:                                                              |  |                  | 30,204  
| | Additional
  paid-in capital                                                  |  |                  | 318,350 
| | Accumulated
  deficit                                                         |  |                  | (281,851
| |                                                                               |  |                  |         
| |                                                                               |  |                  |         
| |                                                                               |  |                  | 66,703  
| | Less
  - cost of Company shares held by subsidiary                            |  |                  | 62,294  
| |                                                                               |  |                  |         
| |                                                                               |  |                  |         
| |                                                                               |  |                  | 4,409   
| |                                                                               |  |                  |         
| |                                                                               |  |                  |         
| |                                                                               |  |                  | 985,069 
| |                                                                               |  |                  |         

F-92

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 25:- | A SUMMARY OF THE  FINANCIAL
  STATEMENTS IN NOMINAL VALUE
|--------- | ---------------------------------------------------------
|          |                                                          
|          | b.                                                       

| |                                                                        |  | Year ended
  December 31, |         
| | ---------------------------------------------------------------------- |  | ------------------------- | --------
| |                                                                        |  |                           |         
| |                                                                        |  | 2001                      |         
| |                                                                        |  |                           |         
| |                                                                        |  | NIS in
  thousands        |         
| |                                                                        |  |                           |         
| |                                                                        |  |                           |         
| | Revenues                                                               |  |                           | 321,877 
| |                                                                        |  |                           |         
| |                                                                        |  |                           |         
| | Operating
  expenses                                                   |  |                           | 315,077 
| |                                                                        |  |                           |         
| |                                                                        |  |                           |         
| | Gross profit                                                           |  |                           | 6,800   
| |                                                                        |  |                           |         
| |                                                                        |  |                           |         
| | Selling,
  marketing, general and administrative
     expenses:        |  |                           |         
| | Selling
  and marketing                                                |  |                           | 39,899  
| | General
  and administrative                                           |  |                           | 38,042  
| |                                                                        |  |                           |         
| |                                                                        |  |                           |         
| |                                                                        |  |                           | 77,941  
| |                                                                        |  |                           |         
| |                                                                        |  |                           |         
| | Operating
  profit (loss)                                              |  |                           | (71,141 
| | Financial
  expenses, net                                              |  |                           | (42,251 
| | Other
  income, net                                                    |  |                           | 3,539   
| |                                                                        |  |                           |         
| |                                                                        |  |                           |         
| | Income
  (loss) before taxes on income                                 |  |                           | (109,853
| | Taxes on
  income                                                      |  |                           | (2,220  
| |                                                                        |  |                           |         
| |                                                                        |  |                           |         
| | Income
  (loss) from operations of the Company                         |  |                           | (107,633
| | Equity in
  earnings (losses) of affiliates and
     subsidiaries, net |  |                           | (117,224
| |                                                                        |  |                           |         
| |                                                                        |  |                           |         
| | Net income
  (loss) for the year                                       |  |                           | (224,857
| |                                                                        |  |                           |         

F-93

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 25:- | A SUMMARY OF THE  FINANCIAL
  STATEMENTS IN NOMINAL VALUE (Cont.)
|--------- | -----------------------------------------------------------------
|          |                                                                  
|          | c.                                                               

| |                                                                                            |  | 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, 2001                                                               |  | 28,785             |  | 254,833                        |   |                                               | (62,808  | )                                               |  |       | -      
| | Loss
  for the year                                                                        |  | -                  |  | -                              |   |                                               | (224,857 | )                                               |  |       | -      
| | Exercise
  of stock options by
        employees and exercise of
        series 1 warrants |  | 49                 |  | 1,909                          |   |                                               | -        |                                                 |  |       | -      
| | Acquisition
  and exercise of
        Company Series 1 warrants
        by subsidiary      |  | 1,370              |  | 61,985                         |   |                                               | -        |                                                 |  |       | (63,603
| |                                                                                            |  |                    |  |                                |   |                                               |          |                                                 |  |       |        
| |                                                                                            |  |                    |  |                                |   |                                               |          |                                                 |  |       |        
| | Balance
  at December 31, 2001                                                             |  | 30,204             |  | 318,727                        |   |                                               | (287,665 | )                                               |  |       | (63,603
| | Net
  income for the year                                                                  |  | -                  |  | -                              |   |                                               | 5,814    |                                                 |  |       | -      
| | Sale
  of Company shares held by
        subsidiary                                        |  | -                  |  | (377                           | ) |                                               | -        |                                                 |  |       | 1,309  
| |                                                                                            |  |                    |  |                                |   |                                               |          |                                                 |  |       |        
| |                                                                                            |  |                    |  |                                |   |                                               |          |                                                 |  |       |        
| | Balance
  at December 31, 2002                                                             |  | 30,204             |  | 318,350                        |   |                                               | (281,851 | )                                               |  |       | (62,294
| |                                                                                            |  |                    |  |                                |   |                                               |          |                                                 |  |       |        
| | Net
  income for the year                                                                  |  | -                  |  | -                              |   |                                               | 55,268   |                                                 |  |       | -      
| | Sale
  of Company shares held by
        subsidiary                                        |  | -                  |  | (22,911                        | ) |                                               | -        |                                                 |  |       | 62,294 
| |                                                                                            |  |                    |  |                                |   |                                               |          |                                                 |  |       |        
| |                                                                                            |  |                    |  |                                |   |                                               |          |                                                 |  |       |        
| | Balance
  at December 31, 2003                                                             |  | 30,204             |  | 295,439                        |   |                                               | (226,583 | )                                               |  |       | -      
| |                                                                                            |  |                    |  |                                |   |                                               |          |                                                 |  |       |        

F-94

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 26:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND UNITED STATES
  GENERALLY ACCEPTED ACCOUNTING PRINCIPLES                                         
|--------- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                     
|          | The
  financial statements are prepared in accordance with Israeli GAAP. Israeli
  GAAP vary in certain respects from U.S. GAAP, as described below:
|          |                                                                                                                                                     
|          | a.                                                                                                                                                  
|          |                                                                                                                                                     
|          |                                                                                                                                                     
|          |                                                                                                                                                     
|          | b.                                                                                                                                                  
|          |                                                                                                                                                     
|          |                                                                                                                                                     
|          |                                                                                                                                                     
|          |                                                                                                                                                     
|          |                                                                                                                                                     
|          | c.                                                                                                                                                  
|          |                                                                                                                                                     
|          |                                                                                                                                                     
|          |                                                                                                                                                     
|          |                                                                                                                                                     

F-95

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 26:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND UNITED STATES
  GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|--------- | -------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    

| |                                                                |  | December
  31, 2002       |        
| | -------------------------------------------------------------- |  | ------------------------- | -------
| |                                                                |  |                           |        
| |                                                                |  | As
  reported             |        
| |                                                                |  |                           |        
| |                                                                |  | Adjusted NIS in thousands |        
| |                                                                |  |                           |        
| |                                                                |  |                           |        
| | Investment
  in affiliate                                      |  |                           | 12,005 
| |                                                                |  |                           |        
| |                                                                |  |                           |        
| |                                                                |  |                           |        
| | Investment
  in marketable securities
      available-for-sale |  |                           | -      
| |                                                                |  |                           |        
| |                                                                |  |                           |        
| | Deferred
  taxes                                               |  |                           | -      
| |                                                                |  |                           |        
| |                                                                |  |                           |        
| | Accumulated
  deficit                                          |  |                           | 318,971
| |                                                                |  |                           |        
| |                                                                |  |                           |        
| | Comprehensive
  income                                         |  |                           | -      
| |                                                                |  |                           |        

F-96

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 26:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND UNITED STATES
  GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|--------- | -------------------------------------------------------------------------------------------------------------------

| | Statement of
  operations                   |  |                           |       
| | ------------------------------------------- |  | ------------------------- | ------
| |                                             |  |                           |       
| |                                             |  | December 31, 2002         |       
| |                                             |  |                           |       
| |                                             |  | As
  reported             |       
| |                                             |  |                           |       
| |                                             |  | Adjusted NIS in thousands |       
| |                                             |  |                           |       
| |                                             |  |                           |       
| | Net income
  (loss) under U.S. GAAP         |  |                           | 35,456
| |                                             |  |                           |       
| |                                             |  |                           |       
| | Basic
  earnings (loss) per Ordinary shares |  |                           | 1.23  
| |                                             |  |                           |       
| |                                             |  |                           |       
| | Basic
  earnings (loss) per ADS             |  |                           | 2.46  
| |                                             |  |                           |       
| |                                             |  |                           |       
| | Diluted
  earnings per Ordinary shares      |  |                           | 1.23  
| |                                             |  |                           |       
| |                                             |  |                           |       
| | Diluted
  earnings per ADS                  |  |                           | 2.46  
| |                                             |  |                           |       

| | d. | Investment
  in marketable securities available for sale:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Marketable
  securities (the investment in Partner) covered by Statement of Financial
  Accounting Standard No. 115 Accounting for Certain Investments in Debt and
  Equity Securities, (SFAS No. 115) were classified as available-for-sale.
  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 and losses on
  sales of investment and decline in value judged to be other than temporary
  are included in the consolidated statement of operations. When computing
  realized gain or loss, cost, determined on an average basis, is based upon
  the cost of the investment in Partners shares, under the equity method,
  which was zeroed in accordance with US GAAP at the date on which the company
  realized a significant part of its investment in Partners shares (April
  2002) and changed its accounting treatment under US GAAP in respect of that
  investment pursuant to SFAS 115, as investment in marketable securities,
  available-for-sale.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Pursuant to
  SFAS 115, the investment in Partners shares is classified as investment in
  marketable securities available-for-sale.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | According to
  Israeli GAAP, the investment in Partners shares is presented in accordance
  with the equity method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | On November
  3, 2003, the Company realized additional 2.15% of Partners issued and
  outstanding share capital in consideration of adjusted NIS 114.4 million. As
  a result of that realization, the Company recognized a gain under US GAAP of
  approximately adjusted NIS 73.2 million, net of taxes on income, which
  exceeded the capital gain recognized under Israeli GAAP by adjusted NIS
  10,927 thousand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-97

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 26:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND UNITED STATES
  GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|--------- | -------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          | e.                                                                                                                 
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    

F-98

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 26:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND UNITED STATES
  GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|--------- | -------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    

| |                                                 |  | Year ended December 31, |  
| | ----------------------------------------------- |  | ----------------------- | -
| |                                                 |  |                         |  
| |                                                 |  | 2001                    |  
| |                                                 |  |                         |  
| |                                                 |  | Amount of options       |  
| |                                                 |  |                         |  
| |                                                 |  |                         |  
| | Outstanding - beginning of
     the year        |  | 232,000                 |  
| | Granted                                         |  | 770,500                 |  
| | Exercised                                       |  | (12,000                 | )
| | Canceled                                        |  | -                       |  
| | Forfeited                                       |  | (178,500                | )
| |                                                 |  |                         |  
| |                                                 |  |                         |  
| | Outstanding - end of the
     year              |  | 812,000                 |  
| |                                                 |  |                         |  
| |                                                 |  |                         |  
| | Options exercisable at the
     end of the year |  | 71,000                  |  
| |                                                 |  |                         |  

| | 1) | Considering the reprising
  (in August 2001) in respect of the first allotted portion of the 2001 plan.                                                                                                                                                        
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2) | Average exercise prices of
  the first, second and third allotted portions of the 2003 plan were
  calculated based on the assumption that the exercise prices of the second and
  third allotted portions are 90% of the share price, as of December 31, 2003.

F-99

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 26:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND UNITED STATES
  GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|--------- | -------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                    
|          |                                                                                                                    

| | Exercise
  price
  (NIS) |  | Options
  outstanding as
  of
  December 31,
  2003 |         | Weighted
  average
  remaining
  contractual life
  (Years) |  | Weighted
  average
  exercise
  price (NIS) |      | Options
  exercisable at
  December 31,
  2003 |  | Weighted
  average
  exercise price of
  exercisable
  options (NIS) |      
| | ------------------------ |  | --------------------------------------------------- | ------- | ----------------------------------------------------------- |  | ------------------------------------------- | ---- | ---------------------------------------------- |  | -------------------------------------------------------------------- | -----
| |                          |  |                                                     |         |                                                             |  |                                             |      |                                                |  |                                                                      |      
| |                          |  |                                                     |         |                                                             |  |                                             |      |                                                |  |                                                                      |      
| | 41.2-52                  |  |                                                     | 71,468  |                                                             |  |                                             | 0.54 |                                                |  |                                                                      | 44.11
| | 26.816-31.734            |  |                                                     | 770,000 |                                                             |  |                                             | 4.08 |                                                |  |                                                                      | 30.09
| |                          |  |                                                     |         |                                                             |  |                                             |      |                                                |  |                                                                      |      
| |                          |  |                                                     |         |                                                             |  |                                             |      |                                                |  |                                                                      |      
| |                          |  |                                                     | 841,468 |                                                             |  |                                             | 3.78 |                                                |  |                                                                      | 31.28
| |                          |  |                                                     |         |                                                             |  |                                             |      |                                                |  |                                                                      |      

| |  | The weighted
  average values of options granted during the years ended December 31, 2001,
  2002 and 2003 were:
| |  | ----------------------------------------------------------------------------------------------------------------

| |                                             |  | For exercise price on the grant date that: |      
| | ------------------------------------------- |  | ------------------------------------------ | -----
| |                                             |  |                                            |      
| |                                             |  | Less than
  market price                   |      
| |                                             |  |                                            |      
| |                                             |  | Year ended
  December 31,                  |      
| |                                             |  |                                            |      
| |                                             |  | 2001                                       |      
| |                                             |  |                                            |      
| |                                             |  |                                            |      
| | Weighted average exercise
  prices          |  |                                            | 48.40
| |                                             |  |                                            |      
| |                                             |  |                                            |      
| | Weighted average fair
  value on grant date |  |                                            | 6.90 
| |                                             |  |                                            |      

| |  | 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 per ordinary share
  and per ADS would have been reduced to the pro forma amounts indicated below:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                     |  | 2001                                               |          | 2002 **)  |  | 2003                                 |  
| | --------------------------------------------------- |  | -------------------------------------------------- | -------- | --------- |  | ------------------------------------ | -
| |                                                     |  |                                                    |          |           |  |                                      |  
| |                                                     |  | As
  reported
  under U.S.
  GAAP *)               |          | Pro forma |  | As
  reported
  under U.S.
  GAAP *) |  
| |                                                     |  |                                                    |          |           |  |                                      |  
| |                                                     |  | Adjusted
  NIS in thousands (except share amounts) |         
| |                                                     |  |                                                    |         
| |                                                     |  |                                                    |          |           |  |                                      |  
| | Net
  income (loss)                                 |  |                                                    | (215,639 | )         |  | (216,762                             | )
| |                                                     |  |                                                    |          |           |  |                                      |  
| |                                                     |  |                                                    |          |           |  |                                      |  
| | EPS
  under U.S. GAAP:                              |  |                                                    |          |           |  |                                      |  
| |                                                     |  |                                                    |          |           |  |                                      |  
| | Basic
  earnings (loss) per
       Ordinary share   |  |                                                    | (7.36    | )         |  | (7.40                                | )
| |                                                     |  |                                                    |          |           |  |                                      |  
| |                                                     |  |                                                    |          |           |  |                                      |  
| | Basic
  earnings (loss) per ADS                     |  |                                                    | (14.72   | )         |  | (14.80                               | )
| |                                                     |  |                                                    |          |           |  |                                      |  
| |                                                     |  |                                                    |          |           |  |                                      |  
| | Diluted
  earnings (loss) per
       Ordinary share |  |                                                    | (7.36    | )         |  | (7.40                                | )
| |                                                     |  |                                                    |          |           |  |                                      |  
| |                                                     |  |                                                    |          |           |  |                                      |  
| | Diluted
  earnings (loss) per ADS                   |  |                                                    | (14.72   | )         |  | (14.80                               | )
| |                                                     |  |                                                    |          |           |  |                                      |  

| |  | *)  | See k(2) and
  l below.     
| |  | --- | ----------------------------
| |  |     |                             
| |  | **) | Restated -
  see Note 26(c).

F-100

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 26:- | EFFECT OF
  MATERIAL DIFFERENCES BETWEEN ISRAELI AND UNITED STATES GENERALLY ACCEPTED
  ACCOUNTING PRINCIPLES (Cont.)
|--------- | ---------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                      
|          | f.                                                                                                                   
|          |                                                                                                                      
|          |                                                                                                                      
|          |                                                                                                                      
|          |                                                                                                                      
|          |                                                                                                                      
|          |                                                                                                                      
|          |                                                                                                                      
|          | g.                                                                                                                   
|          |                                                                                                                      
|          |                                                                                                                      
|          |                                                                                                                      
|          | h.                                                                                                                   
|          |                                                                                                                      
|          |                                                                                                                      
|          |                                                                                                                      
|          |                                                                                                                      
|          |                                                                                                                      
|          | i.                                                                                                                   
|          |                                                                                                                      
|          |                                                                                                                      
|          |                                                                                                                      
|          | j.                                                                                                                   
|          |                                                                                                                      
|          |                                                                                                                      

F-101

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 26:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND UNITED STATES
  GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|--------- | -------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    

F-102

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 26:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND UNITED STATES
  GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|--------- | -------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                    
|          | k.                                                                                                                 
|          |                                                                                                                    
|          |                                                                                                                    

| |                                                                |  | December
  31,                       |  
| | -------------------------------------------------------------- |  | ------------------------------------ | -
| |                                                                |  |                                      |  
| |                                                                |  | 2002                                 |  
| |                                                                |  |                                      |  
| |                                                                |  | As reported
  under
  Israeli
  GAAP |  
| |                                                                |  |                                      |  
| |                                                                |  | Adjusted
  NIS in thousands          |  
| |                                                                |  |                                      |  
| |                                                                |  |                                      |  
| | Investment
  in affiliates                                     |  | 22,400                               |  
| |                                                                |  |                                      |  
| |                                                                |  |                                      |  
| | Investment
  in marketable
      securities available-for-sale |  | -                                    |  
| |                                                                |  |                                      |  
| |                                                                |  |                                      |  
| | Severance
  pay fund                                           |  | 316                                  |  
| |                                                                |  |                                      |  
| |                                                                |  |                                      |  
| | Deferred
  taxes                                               |  | -                                    |  
| |                                                                |  |                                      |  
| |                                                                |  |                                      |  
| | Accrued
  severance pay                                        |  | -                                    |  
| |                                                                |  |                                      |  
| |                                                                |  |                                      |  
| | Debentures
  (including current
      maturities)              |  | (133,192                             | )
| |                                                                |  |                                      |  
| |                                                                |  |                                      |  
| | Shareholders
  equity:                                        |  |                                      |  
| |                                                                |  |                                      |  
| | Additional
  paid-in capital                                   |  | (401,329                             | )
| |                                                                |  |                                      |  
| |                                                                |  |                                      |  
| | Accumulated
  deficit                                          |  | 238,222                              |  
| |                                                                |  |                                      |  
| |                                                                |  |                                      |  
| | Comprehensive
  income                                         |  | -                                    |  
| |                                                                |  |                                      |  

| |  | 2. | Consolidated
  statements of operations:
| |  | -- | ----------------------------------------

| |                                                                                                        |  | Year ended
  December 31,   |         
| | ------------------------------------------------------------------------------------------------------ |  | --------------------------- | --------
| |                                                                                                        |  |                             |         
| |                                                                                                        |  | 2001                        |         
| |                                                                                                        |  |                             |         
| |                                                                                                        |  | Adjusted
  NIS in thousands |         
| |                                                                                                        |  |                             |         
| |                                                                                                        |  |                             |         
| | Net
  income (loss), as reported in consolidated statements of
       operations under Israeli GAAP    |  |                             | (257,274
| | Impact
  of applying U.S. GAAP:                                                                        |  |                             |         
| | Applying
  APB 25 in respect of employee stock options                                                 |  |                             | (16,802 
| | Gain
  from sale of shares of an affiliate, net of taxes on income                                     |  |                             | -       
| | Amortization
  of discount relating to debentures, net of taxes on
       income                       |  |                             | 220     
| | Gain
  from sale of investment in marketable securities available
       for sale, net of income taxes |  |                             | -       
| | Income
  (losses) of affiliate net of taxes on income                                                  |  |                             | 58,217  
| |                                                                                                        |  |                             |         
| |                                                                                                        |  |                             |         
| | Net
  income (loss) under U.S. GAAP                                                                    |  |                             | (215,639
| |                                                                                                        |  |                             |         

| |  | *) | Restated -
  see Note 26(c).
| |  | -- | ----------------------------

F-103

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 26:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND UNITED STATES
  GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (Cont.)
|--------- | -------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                    
|          | l.                                                                                                                 
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    
|          |                                                                                                                    

| |                                                            |  | Year ended
  December 31,                                                    |         
| | ---------------------------------------------------------- |  | ---------------------------------------------------------------------------- | --------
| |                                                            |  |                                                                              |         
| |                                                            |  | 2001                                                                         |         
| |                                                            |  |                                                                              |         
| |                                                            |  | Adjusted
  NIS in thousands
  (except per Ordinary share
  and per ADS data) |         
| |                                                            |  |                                                                              |         
| |                                                            |  |                                                                              |         
| | Net income (loss) under U.S.
  GAAP (see
      k(2) above) |  |                                                                              | (215,639
| |                                                            |  |                                                                              |         
| |                                                            |  |                                                                              |         
| | EPS under U.S. GAAP:                                       |  |                                                                              |         
| |                                                            |  |                                                                              |         
| | Basic earnings (loss) per
  Ordinary share                 |  |                                                                              | (7.36   
| |                                                            |  |                                                                              |         
| |                                                            |  |                                                                              |         
| | Earnings (loss) per ADS                                    |  |                                                                              | (14.72  
| |                                                            |  |                                                                              |         
| |                                                            |  |                                                                              |         
| | Diluted earnings (loss) per
  Ordinary share               |  |                                                                              | (7.36   
| |                                                            |  |                                                                              |         
| |                                                            |  |                                                                              |         
| | Earnings (loss) per ADS                                    |  |                                                                              | (14.72  
| |                                                            |  |                                                                              |         
| |                                                            |  |                                                                              |         
| |                                                            |  |                                                                              |         

| |  | *)        Restated
  - see Note 26(c).
| |  | --------------------------------------

F-104

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 26:- | EFFECT OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED
  ACCOUNTING PRINCIPLES IN ISRAEL AND THE UNITED STATES (Cont.)
|--------- | ----------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                             
|          |                                                                                                                             

| |                                                                                                                 |  | Year ended
  December 31 |       
| | --------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------
| |                                                                                                                 |  |                          |       
| |                                                                                                                 |  | 2001                     |       
| |                                                                                                                 |  |                          |       
| |                                                                                                                 |  | In
  thousands           |       
| |                                                                                                                 |  |                          |       
| |                                                                                                                 |  |                          |       
| | Weighted
  average number of Ordinary
     shares outstanding, used in computation of
     basic EPS            |  |                          | 29,286
| | Add -
  incremental shares from assumed
     exercise of options                                                |  |                          | -     
| |                                                                                                                 |  |                          |       
| |                                                                                                                 |  |                          |       
| | Weighted
  average number of Ordinary
     shares used in computation of diluted
     earnings (loss) per share |  |                          | 29,286
| |                                                                                                                 |  |                          |       
| |                                                                                                                 |  |                          |       
| | Weighted
  average number of ADSs
     outstanding- used in computation of basic
     earnings (loss) per ADS   |  |                          | 14,643
| | Add -
  incremental ADSs from assumed
     exercise of options                                                  |  |                          | -     
| |                                                                                                                 |  |                          |       
| |                                                                                                                 |  |                          |       
| | Weighted
  average number of ADSs used in
     computation of diluted earnings (loss) per
     ADS              |  |                          | 14,643
| |                                                                                                                 |  |                          |       

| | m. | 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.                                                                                                                                                                                                                                                                                                                                                                                             

F-105

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 26:- | EFFECT OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED
  ACCOUNTING PRINCIPLES IN ISRAEL AND THE UNITED STATES (Cont.)
|--------- | ----------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          | n.                                                                                                                          
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             
|          |                                                                                                                             

F-106

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|NOTES TO FINANCIAL STATEMENTS   
|                                

|NOTE 26:- | EFFECT OF SIGNIFICANT DIFFERENCES BETWEEN GENERALLY ACCEPTED
  ACCOUNTING PRINCIPLES IN ISRAEL AND THE UNITED STATES (Cont.)
|--------- | ----------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                             
|          |                                                                                                                             

F-107

---

---

|MATAV - CABLE SYSTEMS MEDIA LTD.
|--------------------------------
|                                
|APPENDIX TO FINANCIAL STATEMENTS
|                                

SCHEDULE OF PRINCIPAL INVESTEE COMPANIES

|Holding Company            |  | Name of Company                                      |  | Percentage of
  ownership and
  control by holding
  company as of
  December 31,
  2003 |  |                             
|-------------------------- |  | ---------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | ----------------------------
|                           |  |                                                      |  |                                                                                          |  |                             
|                           |  |                                                      |  |                                                                                          |  |                             
|                           |  |                                                      |  |                                                                                          |  |                             
|Matav
  Cable Systems Ltd. |  | Cable
  System Media Haifa-Hadera Ltd.               |  | 100%                                                                                     |  | Subsidiary                  
|                           |  |                                                      |  |                                                                                          |  |                             
|Matav
  Cable Systems Ltd. |  | Matav
  Investments Ltd.                             |  | 100%                                                                                     |  | Subsidiary                  
|                           |  |                                                      |  |                                                                                          |  |                             
|Matav
  Cable Systems Ltd. |  | Matav
  Infrastructures 2001 - Limited
  Partnership |  | 100%                                                                                     |  | Subsidiary                  
|                           |  |                                                      |  |                                                                                          |  |                             
|Matav
  Investments Ltd.   |  | Matav
  Properties Ltd.                              |  | 100%                                                                                     |  | Subsidiary                  
|                           |  |                                                      |  |                                                                                          |  |                             
|                           |  | Partner
  Communication Company Ltd.                 |  | 5.29%                                                                                    |  | Affiliate                   
|                           |  |                                                      |  |                                                                                          |  |                             
|                           |  | Hot
  Vision Ltd.                                    |  | 26.6%                                                                                    |  | Proportionately consolidated
|                           |  |                                                      |  |                                                                                          |  |                             
|                           |  | Nonstop
  Ventures Ltd.                              |  | 50%                                                                                      |  | Affiliate                   

- - - - - - - - - - - - - - - -

108



---

---

# INDEPENDENT
AUDITORS REPORT

# To the Shareholders of

# HOT VISION LTD.

# (Previously: I.C.P.
 Israel Cable Programming Company Ltd.)

We have audited the accompanying
balance sheets of Hot Vision Ltd. (the Company) as of
December 31, 2003 and 2002, 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, 2003. 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 audit.

We conducted our audit in accordance
with generally accepted auditing standards in Israel, including those prescribed by
Auditors Regulations (Auditors Mode of Performance), 1973 and in accordance
with 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 audit provides a fair
basis for our opinion.

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2003 and 2002, and the results of its
operations, the changes in its shareholders equity and its cash flows for each of
the three years in the period ended December 31, 2003, in conformity with generally
accepted accounting principles in Israel, which differ in certain respects to those
followed in the United States to the extent summarized in the Appendix attached hereto.

As explained in Note 1B, the
aforementioned financial statements are presented in values adjusted to reflect the
changes in the general purchasing power of the Israeli currency, in accordance with
pronouncements of the Institute of Certified Public Accountants in Israel.

| |  | Fahn Kanne & Co.

Certified Public Accountants (Isr.)
| |  | -----------------------------------------------------

Tel-Aviv, February 22,
2004

---

---

MATAV  CABLE SYSTEMS MEDIA LTD.

ANNUAL REPORT ON FORM 20-F

FOR THE YEAR ENDED DECEMBER 31, 2003

EXHIBITS

136

---

---

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                                                                                                                                                                                             
|                  |  |                                                                                                                                                                                                                                                   
|***3.1            |  | English
  translation of Shareholders Agreement dated October 18, 1993                                                                                                                                                                            
|                  |  |                                                                                                                                                                                                                                                   
|***3.2            |  | English
  translation of Amendment to Shareholders Agreement dated October 18, 1993,
  dated July 8, 2002                                                                                                                                         
|                  |  |                                                                                                                                                                                                                                                   
|**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)-B  |  | English
  translation of Telecommunications Infrastructure License dated March 27, 2002
  granted to Matav Infrastructure 2001 L.P.                                                                                                               
|                  |  |                                                                                                                                                                                                                                                   
|**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(p) 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.                                                                                                                         

137

---

---

|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

|   
|---
|*  
|** 
|***
|  

138

---

---

EXHIBIT 8

LIST OF SUBSIDIARIES

We have eight significant subsidiaries, all of which are Israeli
entities.

| | Matav Investments Ltd.               
|- | -------------------------------------
|  |                                      
| | Cable Systems Media Haifa-Hadera Ltd.
|  |                                      
| | Matav Infrastructure 2001 L.P.       
|  |                                      
| | Matav Assets Ltd.                    
|  |                                      
| | Matav Infrastructure Ltd.            
|  |                                      
| | Nonstop Ventures Ltd.                
|  |                                      
| | HOT Telecom
  L.P.                   
|  |                                      
| | HOT Telecom
  Ltd.                   

139

---

---

EXHIBIT 10.1

Consent of Independent Auditors

140

---

---

EXHIBIT 12.1

Certification of Principal Executive Officer
pursuant to 17CFR 240.13a-14(a), 
as adopted pursuant to§302 of the Sarbanes-Oxley
Act of 2002

I, Amit Levin, Chief Executive Officer of Matav  Cable Systems Media
Ltd., certify that:

1.
I have reviewed this annual report on Form 20-F of Matav-Cable Systems Media
Ltd.;

2.
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;

4.
The companys other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and
have:

| | a. | Designed
  such disclosure controls and procedures, or caused such disclosure controls
  and procedures to be designed under our supervision, to ensure that material
  information relating to the company, including its consolidated subsidiaries,
  is made known to us by others within those entities, particularly during the
  period in which this report is being prepared;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                      
| | b. | Evaluated
  the effectiveness of the companys disclosure controls and procedures and
  presented in this report our conclusions about the effectiveness of the
  disclosure controls and procedures, as of the end of the period covered by
  this report based on such evaluation; and                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                      
| | c. | Disclosed in
  this report any change in the companys internal control over financial
  reporting that occurred during the period covered by this annual report that
  has materially affected, or is reasonably likely to materially affect, the
  companys internal control over financial reporting; and                                                                        

5. The companys other
certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the companys auditors and the
audit committee of companys board of directors (or persons performing the
equivalent functions):

| | a. | All
  significant deficiencies and material weaknesses in the design or operation
  of internal control over financial reporting which are reasonably likely to
  adversely affect the companys ability to record, process, summarize and
  report financial information; and
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                               
| | b. | Any fraud,
  whether or not material, that involves management or other employees who have
  a significant role in the companys internal control over financial
  reporting.                                                                                                 

Date: June 29, 2004

| | /s/ Amit
  Levin          | 
| | ------------------------- | 
| |                           | 
| |                           | 
| | Amit
  Levin              | 
| | Chief
  Executive Officer | 

141

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EXHIBIT 12.2

Certification of Principal Executive Officer
pursuant to 17CFR 240.13a-14(a), 
as adopted pursuant to§302 of the Sarbanes-Oxley
Act of 2002

I, Shalom Bronstein, Chief Financial Officer of Matav  Cable Systems
Media Ltd., certify that:

1.
I have reviewed this annual report on Form 20-F of Matav-Cable Systems Media
Ltd.;

2.
Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;

4.
The companys other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and
have:

| | a. Designed
  such disclosure controls and procedures, or caused such disclosure controls
  and procedures to be designed under our supervision, to ensure that material
  information relating to the company, including its consolidated subsidiaries,
  is made known to us by others within those entities, particularly during the
  period in which this report is being prepared;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                         
| | b. Evaluated
  the effectiveness of the companys disclosure controls and procedures and
  presented in this report our conclusions about the effectiveness of the
  disclosure controls and procedures, as of the end of the period covered by
  this report based on such evaluation; and                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                         
| | c. Disclosed
  in this report any change in the companys internal control over financial
  reporting that occurred during the period covered by this annual report that
  has materially affected, or is reasonably likely to materially affect, the
  companys internal control over financial reporting; and                                                                        

5. The companys other
certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the companys auditors and the
audit committee of companys board of directors (or persons performing the
equivalent functions):

| | a. All
  significant deficiencies and material weaknesses in the design or operation
  of internal control over financial reporting which are reasonably likely to
  adversely affect the companys ability to record, process, summarize and
  report financial information; and
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                  
| | b. Any
  fraud, whether or not material, that involves management or other employees
  who have a significant role in the companys internal control over financial
  reporting.                                                                                                 

Date: June 29, 2004

| | /s/ Shalom
  Bronstein | 
| | ---------------------- | 
| |                        | 
| | Shalom
  Bronstein