----

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

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

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

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

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

----

|                            |                      |                          |
|---------------------------------|---------------------------|-------------------------------|
| Large Accelerated Filer ☐ | Accelerated Filer ☒ | Non-Accelerated Filer ☐ |

----

|                                                                                       |   |
|--------------------------------------------------------------------------------------------|--------|
| ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                              | 5      |
| ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                            | 5      |
| ITEM 3. KEY INFORMATION                                                                    | 5      |
| ITEM 4. INFORMATION ON THE COMPANY                                                         | 30     |
| ITEM 4A. UNRESOLVED STAFF COMMENTS                                                         | 74     |
| ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                       | 74     |
| ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                         | 106    |
| ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                                  | 130    |
| ITEM 8. FINANCIAL INFORMATION                                                              | 134    |
| ITEM 9. THE OFFER AND LISTING                                                              | 140    |
| ITEM 10. ADDITIONAL INFORMATION                                                            | 141    |
| ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                        | 153    |
| ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                            | 156    |
| ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                                   | 156    |
| ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 156    |
| ITEM 15. CONTROLS AND PROCEDURES                                                           | 156    |
| ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                                 | 158    |
| ITEM 16B. CODE OF ETHICS                                                                   | 158    |
| ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                           | 158    |
| ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                       | 159    |
| ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS           | 159    |
| ITEM 16F. CHANGE IN REGISTRANT'S CERTIFYING ACOUNTANT                                      | 159    |
| ITEM 16G. CORPORATE GOVERNANCE                                                             | 159    |
| ITEM 17. FINANCIAL STATEMENTS                                                              | 159    |
| ITEM 18. FINANCIAL STATEMENTS                                                              | 159    |
| ITEM 19. EXHIBITS                                                                          | 159    |

----

----

|                                                         |   | Year ended December 31,                                |    |
|--------------------------------------------------------------|--------|--------------------------------------------------------|---------|
|                                                              |        | 2012                                                   |         |  | 2013 |  |  | 2014 |  |  | 2015 |  |  | 2016 |  |  | 2016 |   |
|                                                         |   | New Israeli Shekels in millions(except per share data) |    |   | US$ in millions(1) |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Consolidated Statement of Income Data                        |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues, net                                           |   |                                                   | 5,572   |   |   |   | 4,519 |   |   |   | 4,400 |   |   |   | 4,111 |   |   |   | 3,544 |   |   |   | 922 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of revenues                                        |   |                                                   | 4,031   |   |   |   | 3,510 |   |   |   | 3,419 |   |   |   | 3,472 |   |   |   | 2,924 |   |   |   | 760 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                            |   |                                                   | 1,541   |   |   |   | 1,009 |   |   |   | 981 |   |   |   | 639 |   |   |   | 620 |   |   |   | 162 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling and marketing expenses                          |   |                                                   | 551     |   |   |   | 462 |   |   |   | 438 |   |   |   | 417 |   |   |   | 426 |   |   |   | 111 |   |
| General and administrative expenses                     |   |                                                   | 236     |   |   |   | 217 |   |   |   | 193 |   |   |   | 223 |   |   |   | 263 |   |   |   | 68 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income with respect to Settlement agreement with Orange      |   |                                                   | -       |   |   |   | - |   |   |   | - |   |   |   | 61 |   |   |   | 217 |   |   |   | 56 |   |
| Other income, net                                       |   |                                                   | 111     |   |   |   | 79 |   |   |   | 50 |   |   |   | 47 |   |   |   | 45 |   |   |   | 12 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating profit                                        |   |                                                   | 865     |   |   |   | 409 |   |   |   | 400 |   |   |   | 107 |   |   |   | 193 |   |   |   | 51 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Finance income                                          |   |                                                   | 21      |   |   |   | 29 |   |   |   | 3 |   |   |   | 13 |   |   |   | 13 |   |   |   | 3 |   |
| Finance expenses                                        |   |                                                   | 255     |   |   |   | 240 |   |   |   | 162 |   |   |   | 156 |   |   |   | 118 |   |   |   | 31 |   |
| Finance costs, net                                      |   |                                                   | 234     |   |   |   | 211 |   |   |   | 159 |   |   |   | 143 |   |   |   | 105 |   |   |   | 28 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Profit (loss) before income tax                         |   |                                                   | 631     |   |   |   | 198 |   |   |   | 241 |   |   |   | (36 | ) |   |   | 88 |   |   |   | 23 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income tax expenses                                     |   |                                                   | 153     |   |   |   | 63 |   |   |   | 79 |   |   |   | 4 |   |   |   | 36 |   |   |   | 9 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Profit (loss) for the year                              |   |                                                   | 478     |   |   |   | 135 |   |   |   | 162 |   |   |   | (40 | ) |   |   | 52 |   |   |   | 14 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings (loss) per ordinary share and per ADS               |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic:                                                  |   |                                                   | 3.07    |   |   |   | 0.87 |   |   |   | 1.04 |   |   |   | (0.26 | ) |   |   | 0.33 |   |   |   | 0.09 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted                                                 |   |                                                   | 3.07    |   |   |   | 0.86 |   |   |   | 1.04 |   |   |   | (0.26 | ) |   |   | 0.33 |   |   |   | 0.09 |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares outstanding (in thousands) |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                         |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic:                                                  |   |                                                   | 155,646 |   |   |   | 155,687 |   |   |   | 155,802 |   |   |   | 156,081 |   |   |   | 156,268 |   |   |   | 156,268 |   |
| Diluted (for calculation above):                        |   |                                                   | 155,773 |   |   |   | 156,199 |   |   |   | 156,400 |   |   |   | 156,081 |   |   |   | 158,096 |   |   |   | 158,096 |   |

----

|                                       |   | Year ended December 31,                                |   |
|--------------------------------------------|--------|--------------------------------------------------------|--------|
|                                       |   | 2012                                                   |   |   | 2013 |   |   | 2014 |   |   | 2015 |   |   | 2016 |   |   | 2016 |   |
|                                       |   | New Israeli Shekels in millions(except per share data) |   |   | US$ inmillions (1) |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Financial Data                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures (2)              |   |                                                   | 558    |   |   |   | 413 |   |   |   | 434 |   |   |   | 271 |   |   |   | 202 |   |   |   | 53 |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjusted EBITDA (3)                   |   |                                                   | 1,602  |   |   |   | 1,114 |   |   |   | 1,096 |   |   |   | 876 |   |   |   | 834 |   |   |   | 217 |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividend per share (4)                |   |                                                   | 1.03   |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Statement of Cash Flow Data                |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities  |   |                                                   | 1,705  |   |   |   | 1,539 |   |   |   | 951 |   |   |   | 922 |   |   |   | 945 |   |   |   | 245 |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash used in investing activities      |   |                                                   | (471   | ) |   |   | (498 | ) |   |   | (431 | ) |   |   | (356 | ) |   |   | (639 | ) |   |   | (166 | ) |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net cash used in financing activities      |   |                                                   | (1,218 | ) |   |   | (1,108 | ) |   |   | (338 | ) |   |   | (303 | ) |   |   | (516 | ) |   |   | (134 | ) |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance Sheet Data (at year end)           |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets                        |   |                                                   | 2,120  |   |   |   | 1,703 |   |   |   | 1,817 |   |   |   | 2,185 |   |   |   | 2,339 |   |   |   | 608 |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non current assets                    |   |                                                   | 4,297  |   |   |   | 3,784 |   |   |   | 3,679 |   |   |   | 3,341 |   |   |   | 2,858 |   |   |   | 744 |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property and equipment                |   |                                                   | 1,990  |   |   |   | 1,791 |   |   |   | 1,661 |   |   |   | 1,414 |   |   |   | 1,207 |   |   |   | 314 |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| License and other intangible assets        |   |                                                   | 1,217  |   |   |   | 1,167 |   |   |   | 1,079 |   |   |   | 956 |   |   |   | 793 |   |   |   | 206 |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                              |   |                                                   | 407    |   |   |   | 407 |   |   |   | 407 |   |   |   | 407 |   |   |   | 407 |   |   |   | 106 |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred income tax asset             |   |                                                   | 36     |   |   |   | 12 |   |   |   | 14 |   |   |   | 49 |   |   |   | 41 |   |   |   | 10 |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                          |   |                                                   | 6,417  |   |   |   | 5,487 |   |   |   | 5,496 |   |   |   | 5,526 |   |   |   | 5,197 |   |   |   | 1,352 |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities (5)               |   |                                                   | 1,525  |   |   |   | 1,374 |   |   |   | 1,385 |   |   |   | 1,765 |   |   |   | 1,607 |   |   |   | 418 |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term liabilities (5)             |   |                                                   | 4,151  |   |   |   | 3,239 |   |   |   | 3,072 |   |   |   | 2,741 |   |   |   | 2,479 |   |   |   | 645 |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities                     |   |                                                   | 5,676  |   |   |   | 4,613 |   |   |   | 4,457 |   |   |   | 4,506 |   |   |   | 4,086 |   |   |   | 1,063 |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shareholders' equity                  |   |                                                   | 741    |   |   |   | 874 |   |   |   | 1,039 |   |   |   | 1,020 |   |   |   | 1,111 |   |   |   | 289 |   |
|                                       |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities and shareholders' equity |   |                                                   | 6,417  |   |   |   | 5,487 |   |   |   | 5,496 |   |   |   | 5,526 |   |   |   | 5,197 |   |   |   | 1,352 |   |

| (1) | The NIS figures at December 31, 2016, and for the period then ended have been translated throughout this annual report into dollars using the representative exchange rate of the dollar at December 31, 2016 (USD 1 = NIS 3.845). The translation was made solely for convenience, is supplementary information, and is distinguished from the financial statements. The translated dollar figures should not be construed as a representation that the Israeli currency amounts actually represent, or could be converted into, dollars. See also "Item 3A. Key Information – Selected Financial Data – Exchange Rate Data". |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| (2) | Capital Expenditures represent additions to property and equipment (see Note 10 to our consolidated financial statements) and intangible assets (see Note 11 to our consolidated financial statements). |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  (3) | Adjusted EBITDA as reviewed by the CODM represents Earnings Before Interest (finance costs, net), Taxes, Depreciation and Amortization (including amortization of intangible assets, deferred expenses-right of use and impairment charges) and Other expenses (mainly amortization of share based compensation). Adjusted EBITDA is not a financial measure under IFRS and may not be comparable to other similarly titled measures for other companies. Adjusted EBITDA may not be indicative of the Group's historic operating results nor is it meant to be predictive of potential future results. The usage of the term "Adjusted EBITDA" is to highlight the fact that the Amortization includes amortization of deferred expenses – right of use and amortization of employee share based compensation and impairment charges; it is fully comparable to EBITDA information which has been previously provided for prior periods. |
|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | The dividend per share was calculated in respect of the period for which it was announced. For the years ended December 31, 2013, 2014, 2015 and 2016, no dividend was declared by the Company. During 2012, the Company declared a dividend in the amount of approximately NIS 160 million, or NIS 1.03 per share. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|                                                     |   | Year ended December 31,         |   |
|----------------------------------------------------------|--------|---------------------------------|--------|
|                                                     |   | 2012                            |   |   | 2013 |   |   | 2014 |   |   | 2015 |   |   | 2016 |   |   | 2016 |   |
|                                                     |   | New Israeli Shekels in millions |   |   | US$ inmillions (1) |   |
|                                                     |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reconciliation Between Profit (Loss) and Adjusted EBITDA |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Profit (Loss)                                       |   |                            | 478    |   |   |   | 135 |   |   |   | 162 |   |   |   | (40 | ) |   |   | 52 |   |   |   | 14 |   |
| Depreciation and amortization expenses                   |   |                            | 726    |   |   |   | 700 |   |   |   | 689 |   |   |   | 753 |   |   |   | 595 |   |   |   | 154 |   |
| Finance costs, net                                       |   |                            | 234    |   |   |   | 211 |   |   |   | 159 |   |   |   | 143 |   |   |   | 105 |   |   |   | 28 |   |
| Income tax expenses                                      |   |                            | 153    |   |   |   | 63 |   |   |   | 79 |   |   |   | 4 |   |   |   | 36 |   |   |   | 9 |   |
| Other (*)                                                |   |                            | 11     |   |   |   | 5 |   |   |   | 7 |   |   |   | 16 |   |   |   | 46 |   |   |   | 12 |   |
|                                                     |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjusted EBITDA (2)                                 |   |                            | 1,602  |   |   |   | 1,114 |   |   |   | 1,096 |   |   |   | 876 |   |   |   | 834 |   |   |   | 217 |   |

| (1) | The translations of NIS amounts into US dollars appearing throughout this annual report have been made at the exchange rate on December 31, 2016, of NIS 3.845 = US$1.00 as published by the Bank of Israel, unless otherwise specified. See "Item 3A. Key Information – Selected Financial Data – Exchange Rate Data". |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Adjusted EBITDA as reviewed by the CODM represents Earnings Before Interest (finance costs, net), Taxes, Depreciation and Amortization (including amortization of intangible assets, deferred expenses-right of use and impairment charges) and Other expenses (mainly amortization of share based compensation). Adjusted EBITDA is not a financial measure under IFRS and may not be comparable to other similarly titled measures for other companies. Adjusted EBITDA may not be indicative of the Group's historic operating results nor is it meant to be predictive of potential future results. The usage of the term "Adjusted EBITDA" is to highlight the fact that the Amortization includes amortization of deferred expenses – right of use and amortization of employee share based compensation and impairment charges; it is fully comparable to EBITDA information which has been previously provided for prior periods. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  (*) | Mainly amortization of employee share based compensation. |
|-----------|-----------------------------------------------------------|

----

|                                                               |   | At December 31, |   |
|--------------------------------------------------------------------|--------|-----------------|--------|
|                                                               |   | 2014            |   |   | 2015 |   |   | 2016 |   |
|                                                               |   |            |   |   |   |   |   |   |   |
| Cellular Industry Data                                             |   |            |   |   |   |   |   |   |   |
|                                                               |   |            |   |   |   |   |   |   |   |
| Estimated population of Israel (in millions) (1)              |   |            | 8.3    |   |   |   | 8.5 |   |   |   | 8.6 |   |
| Estimated Israeli cellular telephone subscribers (in millions) (2) |   |            | 10.3   |   |   |   | 10.5 |   |   |   | 10.3 |   |
| Estimated Israeli cellular telephone penetration (3)          |   |            | 124    | % |   |   | 124 | % |   |   | 120 | % |

|                                                                                 |   | Year ended December 31, |   |
|--------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                 |   | 2012                    |   |   | 2013 |   |   | 2014 |   |   | 2015 |   |   | 2016 |   |
|                                                                                 |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Partner Data                                                                         |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cellular subscribers (000's) (at period end) (4)                                     |   |                    | 2,976  |   |   |   | 2,956 |   |   |   | 2,837 |   |   |   | 2,718 |   |   |   | 2,686 |   |
| Pre-paid cellular subscribers (000's) (at period end) (4)                            |   |                    | 874    |   |   |   | 823 |   |   |   | 705 |   |   |   | 562 |   |   |   | 445 |   |
|                                                                                 |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Post-paid cellular subscribers (000's) (at period end) (4)                           |   |                    | 2,102  |   |   |   | 2,133 |   |   |   | 2,132 |   |   |   | 2,156 |   |   |   | 2,241 |   |
|                                                                                 |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share of total Israeli cellular subscribers (at period end) (5)                      |   |                    | 29     | % |   |   | 29 | % |   |   | 28 | % |   |   | 27 | % |   |   | 26 | % |
| Average monthly usage per cellular subscriber ("MOU") (mins.) (6)                    |   |                    | 450    |   |   |   | 522 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average monthly revenue per cellular subscriber including roaming ("ARPU") (NIS) (7) |   |                    | 97     |   |   |   | 83 |   |   |   | 75 |   |   |   | 69 |   |   |   | 65 |   |
| Churn rate for cellular subscribers (8)                                         |   |                    | 38     | % |   |   | 39 | % |   |   | 47 | % |   |   | 46 | % |   |   | 40 | % |
| Number of fixed-lines (000's) (9,10) (at period end)                                 |   |                    | 288    |   |   |   | 299 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ISP subscribers (000's)(10) (at period end)                                          |   |                    | 587    |   |   |   | 583 |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                 |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Estimated cellular coverage of Israeli population (at period end) (11)               |   |                    | 99     | % |   |   | 99 | % |   |   | 99 | % |   |   | 99 | % |   |   | 99 | % |
|                                                                                 |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Number of employees (full time equivalent) (at period end) (12)                      |   |                    | 5,396  |   |   |   | 4,045 |   |   |   | 3,575 |   |   |   | 2,882 |   |   |   | 2,686 |   |

| (1) | The population estimates are as published by the Central Bureau of Statistics in Israel as of December 31, 2016. |
|-----|------------------------------------------------------------------------------------------------------------------|

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

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

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| (4) | In accordance with general practice in the cellular telephone industry, we use the term "subscriber", unless the context otherwise requires, to indicate a telephone or a data or video device, rather than either a bill-paying network customer, who may have a number of telephones connected to the network, or a cellular telephone user who may share a single telephone with a number of other users. "Subscriber" includes our pre-paid customers. A pre-paid subscriber is recognized as such only following the actual use of his pre-paid SIM card and only once they have generated revenues in the amount of at least one shekel (excluding VAT). |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| (6) | We have calculated our average monthly usage per cellular subscriber by (i) dividing, for each month in such period, the total number of minutes of usage, excluding in roaming usage, during such month by the average of the number of our subscribers, and (ii) dividing the sum of such results by the number of months in the relevant period. MOU data includes total incoming minutes to subscribers of those MVNO operators which Partner hosts on its network. Since 2014, in view of the continued increase in the proportion of cellular subscribers with bundled packages that include large or unlimited quantities of minutes (with fair use limits), the Company determined that reporting MOU was no longer beneficial to understanding the results of operation, and therefore the Company ceased reporting MOU figures. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

| (10) | As of the end of 2013, due to market developments, and in particular the increasing prevalence of bundled offerings in the market, the Company determined that the numbers of fixed-line and ISP subscribers no longer provided meaningful insight in the results of operation, and therefore ceased reporting these subscriber figures. |
|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (11) | We measure cellular coverage using computerized models of our network, radio propagation characteristics and topographic information to predict signal levels at two meters above ground level in areas where we operate a network site. According to these coverage results, we estimate the population serviced by our network and divide this by the estimated total population of Israel. Population estimates are published by the Central Bureau of Statistics in Israel. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (12) | A full-time employee is contracted to work a standard 186 hours per month. Part-time employees are converted to full-time equivalents by dividing their contracted hours per month by the full-time standard. The result is added to the number of full-time employees to determine the number of employees on a full-time equivalent basis. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                |   | Year ended December 31, |   |
|---------------------|--------|-------------------------|--------|
|                |   | 2012                    |   |   | 2013 |   |   | 2014 |   |   | 2015 |   |   | 2016 |   |
|                |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average (1)    |   |                    | 3.858  |   |   |   | 3.609 |   |   |   | 3.577 |   |   |   | 3.884 |   |   |   | 3.841 |   |
| High           |   |                    | 4.084  |   |   |   | 3.791 |   |   |   | 3.994 |   |   |   | 4.053 |   |   |   | 3.983 |   |
| Low            |   |                    | 3.700  |   |   |   | 3.471 |   |   |   | 3.402 |   |   |   | 3.761 |   |   |   | 3.746 |   |
| End of period  |   |                    | 3.733  |   |   |   | 3.471 |   |   |   | 3.889 |   |   |   | 3.902 |   |   |   | 3.845 |   |

|  | (1) | Calculated based on the average of the daily exchange rates during the relevant period. |
|--|-----|-----------------------------------------------------------------------------------------|

|       |   | September 2016 |   |   | October 2016 |   |   | November 2016 |   |   | December 2016 |   |   | January 2017 |   |   | February 2017 |   |   | March 2017(through March 23) |   |
|------------|--------|----------------|--------|--------|--------------|--------|--------|---------------|--------|--------|---------------|--------|--------|--------------|--------|--------|---------------|--------|--------|------------------------------|--------|
|       |   |           |   |   |         |   |   |          |   |   |          |   |   |         |   |   |          |   |   |                         |   |
| High  |   |           | 3.786  |   |         |   | 3.856  |          |   |   | 3.876         |   |   |         | 3.867  |   |          |   | 3.860  |                         |   |   | 3.768 |   |   |   | 3.693 |   |
| Low   |   |           | 3.746  |   |         |   | 3.778  |          |   |   | 3.799         |   |   |         | 3.787  |   |          |   | 3.769  |                         |   |   | 3.659 |   |   |   | 3.614 |   |

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|  | 1) | Pursuant to the Anti-Trust Commissioner Approval - as of April 22, 2021, the Anti-Trust Commissioner will be entitled to notify Partner and Hot Mobile that the network sharing is terminated, if at that time the Anti-Trust Commissioner will be of the opinion that PHI or its activities may adversely affect competition, in which case the parties will be required to cease sharing the active part of the shared network within two years and the passive parts within five years from the Anti-Trust Commissioner's notice to that effect; |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2) | In the event we are found to be in breach of any of the conditions set out in the Anti-Trust Commissioner Approval or in the MoU's Approval, the Anti-Trust Commissioner Approval or the MoU Approval might be terminated, which could create significant uncertainty as to the management of the shared radio access network; |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3) | PHI is operating under a special license granted by the Ministry of Communications on August 9, 2015. The term of the license is 10 years from the grant thereof. If the term of the license will not be extended we may not be able to continue sharing the network. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

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

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

----

|  | • | a discount at a rate of up to 50% of the amount that they will have to pay for the frequencies (each addition of 1% market share will grant a discount at a rate of 10%, up to a maximum discount at a rate of 50%, during a period of 5 years); |
|--|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | • | the frequencies would be granted to them for longer license terms than those of the other cellular licensees-each operator received the right to use the frequencies for the period equal to the initial term of their license and a new operator such as Xphone, for a period of 20 years from the time of the grant of such license; and |
|--|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | • | a waiver of HOT Mobile and Golan Telecom's obligation to build an independent network subject to their commitment to invest in a shared network with another operator the same amount that they have committed to invest in their UMTS network. |
|--|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

|  | · | In October 2009, Scailex became our principal shareholder through acquiring the entire interest in the Company of our previous controlling shareholder. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------|

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|  | · | In February 2010, following the District Court's approval, a total amount of NIS 1.4 billion or approximately NIS 9.04 per share was paid on March 18, 2010, to shareholders and ADS holders of record on March 7, 2010, as a special dividend distribution. |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | In March 2011, we acquired all of the outstanding shares of 012 Smile Telecom Ltd., a leading provider of broadband and traditional telecommunications services in Israel. The acquisition of 012 Smile supported our strategy of becoming a leading comprehensive communications group, expanding our range of services and products. |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|  | · | In November 2013, we entered into a 15-year Network Sharing Agreement with HOT Mobile pursuant to which the parties agreed to create a 50-50 limited partnership to operate and develop a cellular network to be shared by both parties (among others, as a result of pooling both parties' radio access network infrastructures to create a single radio access network). The Network Sharing Agreement was approved by the Israeli anti-trust authorities, subject to conditions in May 2014, and by the Ministry of Communications in April 2015. See "Item 4B.9 Our Network". |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | In July 2014, we commercially launched limited 4G services in Israel over a frequency band of only 5 MHz in the 1800 spectrum. |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------|

|  | · | In March 2015, the acting Minister of Communications approved the results of the tender bid process in which we won an additional 5 MHz in the 1800 spectrum (in addition to our 10 MHz frequency bands in the 1800 spectrum). |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | In April 2015, following approval by the Minister of Communications, the Network Sharing Agreement with HOT Mobile entered into effect. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------|

|  | · | In February 2016, we rebranded our products and services that were previously under the "Orange" brand to be under the new "Partner" brand. See "Item 5A.1c Settlement Agreement with Orange Brand Services Ltd." |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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| • | Lack of Migration Barriers, High Churn and Recruitment Rate of Subscribers. The Israeli cellular market to date has limited migration barriers. There is full number portability. Operators are prohibited from selling SIM locked handsets and are no longer able to link the sale of handsets to services. In addition, operators are no longer allowed to charge exit fees from residential or small business customers or offer better tariff plans to new customers. As a result of this, as well as the entrance of new competitors, there is a high rate of churn and recruitment rate of subscribers in the Israeli cellular market. |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • | Cellular Telephone Market Saturation. Since 1994, the market has sustained a rapid annual rate of growth from a 2.6% penetration rate at year-end 1994 to an estimated penetration rate in Israel at December 31, 2016, of 120%, representing approximately 10.3 million subscribers out of an estimated population of approximately 8.6 million. The total number of estimated cellular telephone subscribers includes dormant subscribers and subscribers to multiple networks as well as other subscribers who are not included in the Israeli population figures, such as Palestinians, visitors, and foreign workers. |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • | Multiple Operators in a Small Market. The regulatory changes in the telecommunications industry, particularly with respect to additional entrants that include cellular operators and MVNOs, have created multiple operators in a relatively small market, which has led to a high level of competition in the industry. |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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|  | · | Offer our customers a variety of cellular and fixed-line services as a diversified multi-service communications group. We offer our customers a variety of services that include a wide integrated and customized range of cellular and fixed-line services, as well as infrastructure, ILD services and ISP services. As part of our overall strategy to become a comprehensive telecommunications group, we have begun to deploy an independent fixed-line fiber optic based infrastructure which will allow us to offer our customers faster internet services in Israel, as well as the transmission of advanced and high quality television services. We intend to provide our customers with cyber solutions and IOT (Internet of Things) services. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Launch a television service in the first half of 2017. As part of our strategy to connect our customers "Any place, Any time, Any device" (AAA), we have chosen the Android TV operating system solution for our quality and advanced TV services that we intend to offer to our customers. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|  | · | Customer satisfaction is a key factor to increase customer loyalty and decrease churn. In order to increase customer satisfaction, we constantly strive to provide advanced services at a high level of technology and simplify processes and information by providing our customers with a high level of accessible customer service at our service centers, call centers and digital channels. |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | We strive to remain a central player in the retail sale of handsets and accessories.  We continuously adapt ourselves to the changing needs of our customers, while following new and innovative equipment and accessory developments and changes in the telecommunications market. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Technical leadership and innovation in our cellular network in order to remain at the technological edge. We have the widest 4G coverage compared to other cellular operators as a result of having the largest deployment of 4G cell sites, see Item 4B.9 OUR NETWORK. As part of our strategy to remain the leading telecommunications operator in the cellular market, we intend to continue investing in 2017 in both the shared network with HOT Mobile as well as in our core cellular network, such as by deployment of more advanced technologies, for instance LTE Advanced, all in order to maintain our technological advantage in the market and enable us to offer more advanced services. |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | High Quality Network. We believe that as a result of our investments in upgrading our network, we have the most advanced cellular telecommunications network in Israel through the limited partnership created under the Network Sharing Agreement with HOT Mobile. This limited partnership has enabled us to combine our respective base cellular stations and thus enabled the network to gain denser site grids offering improved coverage and capacity, and thus better quality of service in terms of accessibility, retainability and quality of sound. At the same time, the limited partnership created under the Network Sharing Agreement with HOT Mobile has and is expected to continue to increase network efficiency by reducing the total number of network sites, while improving network coverage and capacity and introducing new technology. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Customer Centric Approach. Since we believe that customer satisfaction is a key concern, we provide a quality customer experience through quick, simple and reliable handling of customer needs and interactions, which we have achieved through investments in technology, offering tailored packages to the various sectors, offering a variety of portfolios of smartphones and tablets, and new communications products as well as training of customer service skills. We offer our customers a variety of self -service options and are planning, as a comprehensive telecommunications company that offers an entire range of telecommunication solutions, to continue expanding our self-service options and other tools as part of our digital transformation. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Variety of Communication Products. We believe that our cellular and fixed-line services, as well as our infrastructure, ISP services, transmission services and ILD services, strengthen our position in the communications market. Offering a variety of combined mobile and fixed-line products and services will enable us to better compete with the bundled services of other players, increase customer loyalty, and serve as an additional source of revenue. |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Strong and Motivated Management Team. We have been able to attract a number of Israeli senior managers from the telecommunications, high-tech and consumer products industries. Our management team is experienced and highly respected and, we believe, well-positioned to manage and lead the Company. |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|  | · | ISP services. As an internet service provider providing access to the World Wide Web, we offer our customers, in addition to access, additional ISP services including email accounts, Wi-Fi networking as well as additional value added services such as anti-virus and anti-spam filtering. We also offer a bundled package that includes infrastructure and ISP access services following the wholesale market reform, and since 2016, we also offer access services over our own optic fiber fixed-line infrastructure in certain parts of the country, with speeds up to 1 GB. Furthermore, we offer our business customers additional tailored value services that combine an entire array of solutions including: network and data infrastructures, advanced information security solutions, integration solutions, designated services for customers with multiple branches and commercial networks, business information storage in a secured and advanced data center and cloud services. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|  | · | ILD services. As an international long distance provider, we offer our residential and business customers international telephony services including direct international dialing services, international and domestic pre-paid and post-paid calling cards, and call-back services. Most of the pre-paid calling cards are sold to foreign workers in Israel. In addition, we offer our business customers international toll-free numbers that offer fixed rates on calls from anywhere in the world. As an international long distance provider, we also provide hubbing traffic routing between network operators for termination of long distance calls outside of Israel. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Transmission. We provide fixed-line transmission and data capacity services. Our fixed-line capacity also includes capacity which we lease from other fixed-line telecommunications service providers as well as inland fiber optic infrastructure and complimentary micro wave radio links. The services we offer include primarily connectivity services, on an SDH (Synchronous Digital Hierarchy) transmission network, by which we provide high quality, dedicated, point-to-point connection for business customers and telecommunications providers, as well as fixed-line services to business customers. We also provide international transmission services to our business customers between Israel and other countries. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | VoB and PRI. The VOB service allows business and residential customers to make and receive telephone calls over the Internet through an internet connection. The PRI is a landline network service connecting organizational switchboards to Partner's network and allows business customers to make multiple calls simultaneously. We offer traditional voice services to business customers throughout Israel. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Television services. In September 2016, we announced that we intend to launch our television services in the first half of 2017 and would provide our customers with an enhanced user interface experience of television services based on an open platform -the Android TV. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|  | • | ISO 9001:2008, which focuses on fulfillment of clients and legal requirements; |
|--|---------|--------------------------------------------------------------------------------|

|  | • | ISO 14001:2004, which coordinates our commitment to habitat and environment; and |
|--|---------|----------------------------------------------------------------------------------|

|  | • | A team of representatives and customer account managers that support small to medium-sized businesses; |
|--|---------|--------------------------------------------------------------------------------------------------------|

|  | • | A team of corporate representatives and customer account managers who support large corporate customers; |
|--|---------|----------------------------------------------------------------------------------------------------------|

|  | • | A Small Medium Enterprises ("SME") sales-force team located in regional offices focuses on individual and small business customers; |
|--|---------|-------------------------------------------------------------------------------------------------------------------------------------|

|  | • | A telemarketing department conducts direct sales by phone (to private and business customers), initiates contacts with prospective customers and coordinates appointments for the sales representatives. |
|--|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| • | Prohibition on exchange of information that is not required for the activities of PHI under the Restrictive Trade Practices Law, 1988 ("Restrictive Trade Practices Law"). See 4B.13e - viii Anti-Trust Regulation."; |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • | Limitations with respect to serving as an officer or employee in either Partner or Hot Mobile concurrent with serving as an officer or employee of PHI and certain cooling off periods were set in case of transition of officers and employees from PHI to the companies. However, this should not prevent PHI from employing employees or officers, who are currently serving as employees or officers in the companies and does not prevent an office holder in Partner or Hot Mobile from serving as a director in PHI's general partner's board of directors; |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • | Rules regarding the administration and documentation of the meetings of PHI organs were set; |
|---------|----------------------------------------------------------------------------------------------|

| • | Either of the companies shall be allowed, at any time and at its sole discretion, to engage in an agreement with a third party for the provision of cellular telecommunications services that involves use of the core network of that company. All of the rights and obligations deriving from such service agreement shall apply solely to that company and PHI shall not be a party to such service agreement and will not be entitled to payments payable pursuant to it; |
|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • | After a period of seven years from the date of the Commissioner's approval or after a period of six years from the issue date of all the approvals of the Ministry of Communications, whichever is earlier, the Commissioner shall be allowed to notify the companies of the cancellation of his resolution, if he has concluded that the establishment of PHI, its existence or operations are liable to be substantively detrimental to the competition ("Cancellation Notice"). If a Cancellation Notice is issued, a graduated layout of dismantling PHI activity was set in the Commissioner resolution, as follows: |
|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | a. | at the end of two years after the issuance of the Cancellation Notice, PHI shall cease all activity apart from the management, maintenance and operation of the passive elements of the network. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | b. | at the end of five years after the issuance of the Cancellation Notice, the companies shall dismantle PHI and shall separate their assets fully and entirely. |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | • | Our radio access network domain consist of 2,005 macro GSM base transceiver stations, 56 micro GSM base transceiver stations and 279 indoor GSM transceiver stations, all linked to 7 base station controllers (HDBSC); |
|--|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | • | 2,126 macro UMTS base transceiver base stations (eNodesBs), 49 micro UMTS base transceiver stations and 737 indoor UMTS transceiver stations, all linked to 21 radio network controllers; |
|--|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | • | 1,676 macro LTE base transceiver base stations (eNodesBs), 10 micro LTE base transceiver stations and 149 indoor LTE transceiver stations. |
|--|---------|--------------------------------------------------------------------------------------------------------------------------------------------|

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| • | erection and operating permits from the Ministry of Environmental Protection; |
|---------|-------------------------------------------------------------------------------|

| • | permits from the Civil Aviation Authority, in certain cases; and |
|---------|------------------------------------------------------------------|

| • | permits from the Israeli Defense Forces. |
|---------|------------------------------------------|

----

----

| Estimated Market Shares*       |   | 2012   |   |   | 2013   |   |   | 2014   |   |   | 2015   |   |   | 2016   |   |
|--------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Partner                   |   |   | 29     | %      |   |   | 29     | %      |   |   | 28     | %      |   |   | 27     | % |   |   | 26 | % |
| Cellcom                   |   |   | 32     | %      |   |   | 31     | %      |   |   | 29     | %      |   |   | 28     | % |   |   | 28 | % |
| Pelephone                 |   |   | 28     | %      |   |   | 26     | %      |   |   | 25     | %      |   |   | 26     | % |   |   | 23 | % |
| HOT Mobile                |   |   | 8      | %      |   |   | 8      | %      |   |   | 10     | %      |   |   | 11     | % |   |   | 14 | % |
| Golan Telecom and others  |   |   | 3      | %      |   |   | 6      | %      |   |   | 8      | %      |   |   | 8      | % |   |   | 9 | % |

----

----

----

----

----

----

|  | · | Use of Passive infrastructures – domestic operators (including Bezeq and HOT) are required to allow all other domestic operators (such as Partner) use of their passive infrastructure; |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Exemption from building permits – domestic operators are now allowed to deploy fixed-line infrastructure without requiring building permits (under certain conditions); |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | · | Multi- Channel Broadcast Distribution through Idan plus System – this reform aims to transform the Digital Terrestrial Television distribution system ("Idan plus") into a multi-channel TV subscription platform, in order to introduce additional competition into the TV market. In this context, it was determined, among others, that the operation of the system in terms of logistics and content, will be conducted by a private operator chosen by a tender. Such an operator may have competitive advantages over OTT TV services, such as those Partner plans to launch. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 1. | It was proposed to differentiate between the regulatory rules that will apply to audio visual content suppliers whose broadcasts are intended mainly for the Israeli public, based on their market share (in terms of income). For example, "narrower regulation" will be imposed upon a "smaller supplier" whose market share exceeds 10%, based on a license that will be granted to it, that will include, among others, classification and marking requirements, accessibility for disabled persons, protection of children and limitations on cross-ownership. "Wide regulation" shall be imposed on a "small and stable" provider that will acquire a market share of 10% for 3 consecutive years and on a material supplier, whose market share exceeds 20%, that will include, among others, investment and broadcast of original production obligations; |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2. | It was proposed to enforce a "must sell" obligation of sports channels and sports content, in accordance with payment arrangements that will be determined by the regulator. It was proposed to regulate the ownership division and other rights applicable to original productions, including "must sell" arrangements/regulations of these contents. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3. | It was proposed to terminate the base package that HOT and Yes must provide and replace it with a core package that will include a wider range of content, including original productions through VOD services; and |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 4. | It was proposed to determine arrangements regarding marketing content and to reduce the investment obligation in original productions that apply to HOT, Yes and commercial broadcasting licensees. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | · | Roaming fees. The Ministry of Communications is evaluating the cost of roaming and may introduce new regulations that would limit fees charged by Israeli cellular companies for calls made by the customers of foreign network operators while they are in Israel and using our network, as well as for calls made by our own customers using their handsets abroad. The Ministry of Communications has requested additional and more specific international roaming data from the cellular companies. Because we consider roaming charges to be a significant source of revenue, such regulatory limits could adversely affect our revenues. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Roaming services. In August 2014, the Ministry of Communications published a hearing aimed at increasing competition in roaming services abroad currently provided by cellular licensees. As part of the hearing, the Ministry proposed to enable every cellular subscriber to receive roaming services abroad from operators which are not his cellular provider (on top of his cellular operator) while keeping his cellular number. These alternative roaming providers include other cellular licensees, MVNOs, ISPs, ILD licensees and fixed telephony licensees. The Ministry of Communications also suggested determining various measures intended to improve transparency and to limit subscriber payments only to the exact volume of services consumed. Such measures include: all roaming calls abroad (incoming and outgoing) would be billed using time units of 1 second; all roaming data sessions would be billed using volume units of 1KB; the billable duration of all voice calls would be from the second in which the call was connected and until it ended (explicitly excluding any wait period from pushing the "call" button until the call is connected). Because we consider roaming charges to be a significant source of revenue, such regulatory limits could adversely affect our revenues. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | · | Frequency fees. The Ministry of Communications is conducting a re-assessment of the frequency fees set forth in the law, which includes the assessment as to its economic value, in order to support effective allocation and the utmost utilization of the frequencies. |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Roaming services during emergencies. In September 2012, the Ministry of Communications published a hearing with respect to roaming during a state of emergency or during a significant continuous malfunction in which the Ministry of Communications considers determining that under certain conditions, upon the Minister of Communications' instruction, cellular operators that have their own network infrastructure, will be required to provide roaming services to the subscribers of other cellular operators that have network infrastructure, whose network has been rendered non-functioning for a significant amount of time following an event resulting from a state of emergency, a telecommunications crisis or during a significant continuous malfunction. The Company submitted its response to the hearing in October 2012. The revenues of the Company would be adversely affected if these proposed new regulations are adopted. |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Intervention in international call market. In October 2013, the Ministry of Communications published a hearing regarding new regulation of the international call market. In the hearing, it was proposed by the Ministry to allow all general licensees (including MVNOs) to provide international call services to their subscribers, with respect to the international destinations which are included in their subscribers' tariff plans and to international destinations for which the tariff is lower or equal to the tariff of a call on the licensee's network ("Included Destinations"). The Ministry of Communications also proposed in the hearing that the general licensees (such as cellular operators) would not be allowed to collect an interconnect fee for outgoing international calls. The Company submitted its response to the hearing in January 2014. In October 2014, the Ministry published a secondary hearing on this matter, in which it proposed that all outgoing international calls which are not to Included Destinations, shall be preceded with a voice message stating the tariff of such call and allowing the subscriber to disconnect without being charged. The Company submitted its response to this secondary hearing in October 2014. The revenues of the Company may be adversely affected if the changes proposed in these hearings are adopted. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Filtering of offensive websites and content. In August 2014, the Ministry of Communications published a hearing regarding proposed amendments to telecommunications licenses granted to various operators, including the Company and its subsidiaries. According to the Telecommunications Law, ISP and cellular licensees, are required to provide a service for filtering of offensive websites and content at no additional cost to the subscriber. The Law also includes provisions which oblige said licensees to inform their subscribers of the dangers of internet use (including offensive websites and content).As part of the hearing, it is proposed to amend the ISP and cellular licenses to include additional requirements to the existing requirements described above. The proposed amendments include, among others, the following matters: (1) detailed specifications of the filtering service; (2) requirements regarding the informational leaflet to be provided to the subscriber; and (3) an obligation to offer filtering software to be installed on any type of terminal equipment. In October 2014, the Company filed its written position seeking to limit the impact of the proposed amendments. In November 2016, the Ministry of Communications sent the operators a request for information regarding the execution of the filtering obligation of offensive websites and content, in light of the complaints received with respect to the implementation of the existing provisions regarding this matter. In this context, the Ministry sought to receive information with respect to, among others, the tools used by the Company to implement the license provisions and the rules and laws by which the filtering is executed. In addition, recently, a number of draft bills have been submitted to the Knesset suggesting broadening the existing requirements regarding content and site filtering. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | · | Consumer protection-call centers. In August 2014, the Ministry of Communications published a hearing regarding proposed amendments to telecommunications licenses granted to various operators, including the Company and its subsidiaries. As part of the hearing, it is proposed to amend the licenses with respect to the quality of service of the licensees' call centers. The amendments include, among others, the following matters: the maximum response times for each call and the average daily response times; recording requirement regarding a billing inquiry, termination of all services or termination of a single service calls; and requirement to issue and to publish on the licensees' websites detailed weekly reports that will include complete data in relation to their conduct regarding response times. The Company submitted its response to the hearing in October 2014. In parallel to the hearing, the Ministry of Communications published a draft memorandum with respect to the Telecommunications Law, according to which a subscriber will be able to sue for a fixed amount of compensation in case a licensee fails to meet the proposed response times and for compensation in case of an over charge in the monthly bill, both without proving damages. The Company submitted its response to the draft memorandum in October 2014. These amendments may have an adverse effect on the Company's results of operations. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Transmission line connections between ISP providers' facilities and fixed-line infrastructure. In April 2015, the Ministry of Communications published a hearing, stating that Bezeq and Hot Telecom (the "infrastructure owners") would not be allowed to oblige ISP providers to purchase "Gigabit Ethernet" services (transmission services which connect ISP's facilities to Bezeq and Hot Telecom's infrastructures) from the infrastructure owners and the ISP providers would be allowed to purchase "Gigabit Ethernet" services from other licensees or perform such connections themselves. As part of the hearing, the Ministry stated that such a practice of the infrastructure owners does not presumably comply with the Telecommunications Law, which states that a licensee will be forbidden to condition the supply of a certain telecommunications service upon the supply of another telecommunications service. The Company submitted its response to this hearing. If the final decision in this hearing process will be as suggested in the hearing, the Company may be positively affected by the results of the hearing. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Change of "Subscriber" definition in numbering plan regarding number portability. In May 2015, the Ministry of Communications published a hearing aimed at amending the definition of a "Subscriber" in the numbering plan regarding number portability ("Number Portability Plan"). According to the hearing, the suggested amendment is meant to increase competition in the cellular market by allowing a subscriber who received his phone number from his employer, to keep the phone number when migrating to another cellular operator. In addition, the Ministry suggests, as part of the hearing, to set certain changes in the Number Portability Plan, with respect to the identification of an applicant to keep his phone number in the event of a change of a cellular operator. The Company submitted its response to this hearing in June 2015. These amendments may have an adverse effect on the Company's results of operations. Despite the fact that a decision has not yet been rendered regarding this hearing, in September 2016, the Ministry published a press report stating that there is no place for the practice where cellular operators allow large businesses to block their employees from porting out their phone numbers. In this report, it was noted that the Ministry is considering forbidding this practice and that it intends to allow business entities that have adopted this practice a period of six months to prepare and settle the issue in employment agreements or otherwise. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Communication facilities in residential buildings. In May 2015, the Ministry of Communications published a hearing with respect to the installation of telecom cables in residential buildings. According to the hearing, the Ministry received several complaints from the IBC - Israel Broadband Company, which indicates that in many residential buildings, all telecom cabinets and ducts are fully occupied by infrastructure deployed by Bezeq and Hot, in a manner that prevents deployment of other infrastructure, including telecom cables, by another company. Accordingly, the Ministry proposed that several orders should apply to HOT and Bezeq in order to remove the barriers for the deployment of telecommunications infrastructure by other telecom providers. The Company submitted its response to this hearing. The Company may be positively affected by the results of the hearing. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | · | Licensing of commerce and import of terminal equipment. In February 2016, the Ministry of Communications published a hearing in which it was proposed to amend regulations that apply to the import of terminal equipment that uses the cellular method, for example, Handsets, tablets, routers etc. As part of the hearing, the Ministry proposes, among others, to expand the technologies to which the exemption from receiving a type approval and commerce license applies, to expand the scope of the exemption also to equipment that is not new and to determine a full exemption from licensing for dealers and store owners in Israel that are not importers. At the same time, it is proposed in the hearing to determine a reporting obligation for cellular equipment importers, to condition the granting of the exemption on the existence of Cell Broadcast technology used for disseminating messages and to confer various authorities to the Ministry of Communications with respect to importers and dealers of cellular equipment, for example the authority to request information, delivery of equipment and temporary suspension of commerce. These amendments may have an adverse effect on the Company's results of operations. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Monitoring and reporting. In April 2016, the Ministry of Communications published two hearings regarding the supervisory powers held by the Ministry and the reporting duties applicable to licensees. In this context, the Ministry plans to terminate the current regulations, which govern the Ministry's supervisory activity given that such powers are now prescribed in the Telecommunications Law.  The Ministry plans to draft new regulations which will outline the Ministry's authority to require various reports from licensees. The Company submitted its response to the hearing in May 2016. These amendments may intensify the regulatory burden applicable to the Company and may have an adverse effect on its results of operations. |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Timing of the establishment of a phone call. In May 2016, the Ministry of Communications published a hearing in which it was proposed to determine that for any service based on a telephone call, the timing for establishment of the call, for the purpose of charging a subscriber, shall be from the moment of creation of a bi-directional connection between the terminal equipment of the calling subscriber and the terminal equipment of the subscriber receiving the call and until the termination of this two-way connection. In accordance with the hearing, any situation in which this directional connection has not yet been established shall not be considered as billable call time, unless specifically excluded as part of the licenses. The Company submitted its response to the hearing in June 2016. These amendments may have an adverse effect on the Company's results of operations. |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Interest for late payment and collection charges. In July 2016, the Ministry of Communications published a hearing aimed at regulating and limiting the manner in which licensees may charge interest for late payments and collection charges from debtors. The hearing proposed, among others, to determine that the telecommunications operator may charge interest for late payment up to a rate set forth in section 1 of the Adjudication of Interest and Linkage Law, also in a case in which legal action was taken against the debtor. In addition, it was proposed to limit the maximum amount that can be collected from subscribers for collection charges. The Company submitted its response to the hearing in September 2016. |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Prohibition of discrimination between subscribers. In August 2016, the Ministry sent a request for information to telecommunication operators, regarding the conditions of the existing licenses that require the provision of services on equal terms and prohibit discrimination between subscribers. In accordance with the request, these provisions should be considered, among others, in light of the reforms that have been executed in the broadcasting market, reduction of transition barriers between operators and transferring to "all inclusive" packages. In this context, the Ministry requested responses to a number of matters including whether it is required to approve deals for new subscribers, whether it is necessary to determine provisions regarding the transparency of deals, whether it is required to confirm the grant of leniencies to new entrants and should the option to collect "transition fees" between plans be terminated. The Company submitted its response to the hearing in September 2016. Some of the suggested changes in this request for information, such as leniencies to new entrants and the ban on transition fees may have an adverse effect on the Company's results of operations. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | · | Regulation in the broadcasting area. In June 2016, a recommendations report of the advisory committee regarding the regulation of the broadcasting sector ("Broadcasting Market Committee") was published. See "Item 4B.13e - iv Committee for the Regulation of the Broadcasting Market ". With respect to some of the recommendations in the report, it was decided in September 2016 on the formation of an inter-office team, that would submit to the Minister of Communications specific recommendations for implementation, after holding a hearing that would allow relevant entities that are interested, in submitting their position. This pertains to two main issues: (1) the "must sell" obligation for the sale of sports channels and content to content providers that operate under a license and the sale of rights to broadcast original productions and (2) an arrangement to terminate the base packages that Yes and HOT are currently obligated to and to expand the base package that they market to a core package. The core package will include, besides the channels that licensees are legally obligated to provide to their subscribers, two additional channels produced in Israel-a sports channel and a kids channel and will also include access to original productions through Video on Demand (VOD) of significant providers. |
|--|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Functional Continuity During Emergencies. In November 2016, the Ministry of Communications published a hearing regarding the preparation of licensees for emergencies and ensuring continuity of the service during a state of emergency. In this context, the Ministry proposed to add to the telecommunication licenses various provisions regarding planning supportive infrastructures at core sites of the companies, for example, power systems, air conditioning, fire detection and extinguishing, emergency lighting and cameras. The Company submitted its response to the hearing in November 2016. These amendments may have an adverse effect on the Company's results of operations. |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|  | i. | The two wireline infrastructure operators that provide retail telecommunication services will be required to offer wholesale services to the other telecommunication providers, that will offer services on the owners' infrastructure (the wholesale market), based on non-discriminatory conditions. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | ii. | The wholesale services tariffs and the terms of agreement shall be determined through negotiations between the two wireline infrastructure operators and the service providers. An infrastructure owner that reaches an agreement with such other provider shall be required to offer the same terms, without discrimination, to all other providers. Affiliates of the infrastructure owner shall also be allowed to purchase wholesale services as long as these will be provided without discrimination to all other providers. |
|--|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | iii. | The Ministry of Communications shall intervene and set the wholesale tariffs and said terms of agreement, in case an agreement has not been reached between the parties within 6 months from the date of the publication of the policy document or if the agreement between the parties includes tariffs or terms that are unreasonable, may harm the competition, may harm the public welfare or may harm the interest of the service provider. |
|--|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|  | i. | Within 9 months of a signed agreement between said parties, the structural separation between the fixed-line infrastructure owner and its international call provider and internet service provider (ISP) affiliates shall be abolished and replaced by an accounting separation. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | ii. | The Minister of Communications shall consider providing leniencies or abolishing the structural separation (and replacing it with an accounting separation) between the fixed-line infrastructure owner and its affiliated cellular operator, in accordance with the development of the wholesale market and the pace of development of competition based on packaged services that combine fixed-line services and cellular services in the private sector. |
|--|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | iii. | In case a proper and appropriate wholesale market does not develop within 24 months from the date of the publication of the policy document, the Minister of Communications shall act to impose a structural separation in the fixed-line infrastructure owners, between the infrastructure and the services provided through this infrastructure to the end-customers. |
|--|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

|  | i. | The Ministry of Communications shall examine imposing a requirement to offer unbundled television services that are included in services packages that include telecommunication services (fixed-line and mobile) or broadband access services, which means a requirement to provide them at the same tariff as part of a service package or separately. |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | ii. | The abolishing of the structural separation with respect to multi-channel television shall be done if there is a reasonable possibility to provide a basic package of television services through the internet by service providers that do not own fixed-line infrastructure. |
|--|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | o | A service provider which loaned or rented terminal equipment to its subscriber, that later becomes a subscriber of another service provider in the wholesale market, will not be able to prevent or limit the continuity of the subscriber's ordinary use of the terminal equipment, for a period of 21 days; |
|--|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | o | The payment to the service provider for the terminal equipment during such interim period will be performed by the subscriber, in a similar manner to its arrangement with its previous service provider (and the subscriber would not pay any payment for such equipment to the new service provider). |
|--|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|  | · | observing the provisions of the Telecommunications Law, the Wireless Telegraphy Ordinance, the regulations and the provisions of our license; |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | acting to continuously improve our mobile telephone services, their scope, availability, quality and technology, and that there has been no act or omission by us harming or limiting competition in the mobile telephone sector; |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | having the ability to continue to provide mobile telephone services of a high standard and to implement the required investments in the technological updating of our system in order to improve the scope of such services, as well as their availability and quality; and |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | using the spectrum allocated to us efficiently, compared to alternative applications. |
|--|--------|---------------------------------------------------------------------------------------|

| • | We have illegally ceased, limited or delayed any one of our services; |
|---------|-----------------------------------------------------------------------|

| • | Any means of control in Partner or control of Partner has been transferred in contravention of our license; |
|---------|-------------------------------------------------------------------------------------------------------------|

| • | We fail to invest the required amounts in the establishment and operation of the mobile radio telephone system in accordance with our undertakings to the Ministry of Communications; |
|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • | We have harmed or limited competition in the area of mobile radio telephone services; |
|---------|---------------------------------------------------------------------------------------|

| • | A receiver or temporary liquidator is appointed for us, an order is issued for our winding up or we have decided to voluntarily wind up; or |
|---------|---------------------------------------------------------------------------------------------------------------------------------------------|

| • | Partner, an Office Holder in Partner or an Interested Party in Partner or an Office Holder in an Interested Party of Partner is an Interested Party in a competing mobile radio telephone operator or is an Office Holder in a competing mobile radio telephone operator or in an interested party in a competing mobile radio telephone operator without first obtaining a permit from the Ministry of Communications to do so or has not fulfilled one of the conditions included in such permit. See "Item 4B.13f Our Mobile Telephone License-Our Permit Regarding Cross Ownership." |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | We must at all times be a company registered in Israel. |
|--|--------|---------------------------------------------------------|

|  | · | Our founding shareholders and their approved substitutes must hold, in the aggregate, at least 26% of each of our means of control. Furthermore, the maintenance of at least 26% of our means of control by our founding shareholders and their approved substitutes allows Partner to be protected from a license breach that would result from a transfer of shares for which the authorization of the Ministry of Communications was required, but not obtained. |
|--|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | · | Israeli entities from among our founding shareholders and their approved substitutes must hold at least 5% of our issued and outstanding share capital and of each of our means of control. "Israeli entities" are defined as individuals who are citizens and residents of Israel and entities formed in Israel and controlled, directly or indirectly, by individuals who are citizens and residents of Israel, provided that indirect control is only through entities formed in Israel, unless otherwise approved by the Israeli Prime Minister or Minister of Communications. |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | At least 10% of our Board of Directors must be appointed by Israeli entities, as defined above, provided that if the Board of Directors is comprised of up to 14 members, only one such director must be so appointed, and if the Board of Directors is comprised of between 15 and 24 members, only two such directors must be so appointed. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | Matters relating to national security shall be dealt with only by a Board of Directors' committee that has been formed for that purpose. The committee includes at least 4 members, of which at least one is an external director. Only directors with the required clearance and those deemed appropriate by Israel's General Security Service may be members of this committee. Resolutions approved by this committee shall be deemed adopted by the Board of Directors. |
|--|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | · | The Ministry of Communications shall be entitled to appoint an observer to the Board of Directors and its committees, subject to certain qualifications and confidentiality undertakings. |
|--|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| • | voting rights in Partner; |
|---------|---------------------------|

| • | the right to appoint a director or managing director of Partner; |
|---------|------------------------------------------------------------------|

| • | the right to participate in Partner's profits; or |
|---------|---------------------------------------------------|

| • | the right to share in Partner's remaining assets after payment of debts when Partner is wound up. |
|---------|---------------------------------------------------------------------------------------------------|

----

| • | the founding shareholders or their approved substitutes of Partner continue to hold in the aggregate at least 26% of the means of control of Partner; |
|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

| • | our Articles of Association include the provisions described in this paragraph; |
|---------|---------------------------------------------------------------------------------|

| • | we act in accordance with such provisions; |
|---------|--------------------------------------------|

| • | our Articles of Association provide that an ordinary majority of the voting power at the general meeting of Partner is entitled to appoint all the directors of Partner other than external directors. |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| • | Israeli entities from among our founding shareholders and their approved substitutes must hold at least 5% of our issued share capital and of each of our means of control. |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| • | Neither the general manager of Partner nor a director of Partner may continue to serve in office if he has been convicted of certain legal offenses. |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------|

| • | No trust fund, insurance company, investment company or pension fund that is an Interested Party in Partner may: (a) hold, either directly or indirectly, more than 5% of any means of control in a competing mobile radio telephone operator without having obtained a permit to do so from the Ministry of Communications, or (b) hold, either directly or indirectly, more than 5% of any means of control in a competing mobile radio telephone operator in accordance with a permit from the MoC, and in addition have a representative or appointee who is an Office Holder in a competing mobile radio telephone operator, unless it has been legally required to do so, or (c) hold, either directly or indirectly, more than 10% of any means of control in a competing mobile radio telephone operator, even if it received a permit to hold up to 10% of such means of control. |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • | No trust fund, insurance company, investment company or a pension fund that is an Interested Party in a competing mobile radio telephone operator may: (a) hold, either directly or indirectly, more than 5% of any means of control in Partner, without having obtained a permit to do so from the Ministry of Communications; or (b) hold, directly or indirectly, more than 5% of any means of control in Partner in accordance with a permit from the Ministry of Communications, and in addition have a representative or appointee who is an Office Holder in Partner, unless it has been legally required to do so; or (c) hold, either directly or indirectly, more than 10% of any means of control in Partner, even if it received a permit to hold up to 10% of such means of control. |
|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| • | Partner, an Office Holder or Interested Party in Partner, or an Office Holder in an Interested Party in Partner does not control a competing mobile radio telephone operator, is not controlled by a competing mobile radio telephone operator, by an Office Holder or an Interested Party in a competing mobile radio telephone operator, by an Office Holder in an Interested Party in a competing mobile radio telephone operator, or by a person or corporation that controls a competing mobile radio telephone operator. |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • | A change has occurred in the suitability of Partner to implement the actions and services that are the subject of our license. |
|---------|--------------------------------------------------------------------------------------------------------------------------------|

| • | A change in our license is required in order to ensure effective and fair competition in the telecommunications sector. |
|---------|-------------------------------------------------------------------------------------------------------------------------|

| • | A change in our license is required in order to ensure the standards of availability and grade of service required of Partner. |
|---------|--------------------------------------------------------------------------------------------------------------------------------|

| • | A change in telecommunications technology justifies a modification of our license. |
|---------|------------------------------------------------------------------------------------|

| • | A change in the electromagnetic spectrum needs justifies, in the opinion of the Ministry of Communications, changes in our license. |
|---------|-------------------------------------------------------------------------------------------------------------------------------------|

| • | Considerations of public interest justify modifying our license. |
|---------|------------------------------------------------------------------|

| • | A change in government policy in the telecommunications sector justifies a modification of our license. |
|---------|---------------------------------------------------------------------------------------------------------|

| • | A change in our license is required due to its breach by Partner. |
|---------|-------------------------------------------------------------------|

| • | "Office Holder" means a director, manager, company secretary or any other senior officer that is directly subordinate to the general manager. |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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|                                                         |   | Year ended December 31, |   |
|--------------------------------------------------------------|--------|-------------------------|--------|
|                                                         |   | 2014                    |   |   | 2015 |   |   | 2016 |   |
|                                                         |   |                    |   |   |   |   |   |   |   |
| Revenues (NIS million)                                  |   |                    | 4,440  |   |   |   | 4,111 |   |   |   | 3,544 |   |
| Operating profit (NIS million)                          |   |                    | 400    |   |   |   | 107 |   |   |   | 193 |   |
| Income (loss) before taxes (NIS million)                |   |                    | 241    |   |   |   | (36 | ) |   |   | 88 |   |
| Profit (loss) for the Year (NIS million)                |   |                    | 162    |   |   |   | (40 | ) |   |   | 52 |   |
| Capital expenditures (NIS million)                      |   |                    | 434    |   |   |   | 271 |   |   |   | 202 |   |
| Cash flows from operating activities (NIS million)           |   |                    | 951    |   |   |   | 922 |   |   |   | 945 |   |
| Cash flows from investing activities (NIS million)           |   |                    | (431   | ) |   |   | (356 | ) |   |   | (639 | ) |
| Cellular Subscribers (end of period, thousands)         |   |                    | 2,837  |   |   |   | 2,718 |   |   |   | 2,686 |   |
| Annual cellular churn rate (%)                          |   |                    | 47     | % |   |   | 46 | % |   |   | 40 | % |
| Average monthly revenue per cellular subscriber (ARPU) (NIS) |   |                    | 75     |   |   |   | 69 |   |   |   | 65 |   |

| Non-GAAP Measure           | Calculation                                                                                                                                                                                                                                                                                 | Most Comparable IFRS Financial Measure                                         |
|----------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------|
| Adjusted EBITDA            | Adjusted EBITDA:Profit (Loss)addIncome tax expenses,Finance costs, net,Depreciation and amortization expenses (including amortization of intangible assets, deferred expenses-right of use and impairment charges), Other expenses (mainly amortization of share based compensation).  | Profit (Loss)                                                                  |
| Adjusted EBITDA margin (%) | Adjusted EBITDA margin (%):Adjusted EBITDAdivided byTotal revenues                                                                                                                                                                                                                          |                                                                           |
| Adjusted Free Cash Flow*   | Adjusted Free Cash Flow:Cash flows from operating activitiesdeductCash flows from investing activitiesaddShort-term investment in deposits                                                                                                                                                  | Cash flows from operating activitiesdeductCash flows from investing activities |

----

| Total Operating Expenses (OPEX) | Total Operating Expenses:Cost of service revenuesaddSelling and marketing expensesaddGeneral and administrative expensesdeductDepreciation and amortization expenses,Other expenses (mainly amortization of employee share based compensation) | Sum of:Cost of service revenues,Selling and marketing expenses,General and administrative expenses             |
|---------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------|
| Net Debt                        | Net Debt:Current maturities of notes payable and borrowingsaddNotes payableaddBorrowings from banks and othersdeductCash and cash equivalentsdeductShort-term deposits                                                                         | Sum of:Current maturities of notes payable and borrowings,Notes payable,Borrowings from banks and others  |

|  | * | Adjusted Free Cash Flow measure is fully equivalent to Free Cash Flow measure which was provided in reports for prior periods. |
|--|---|--------------------------------------------------------------------------------------------------------------------------------|

----

----

----

|  | a) | Trade name by NIS 14 million, recorded in selling and marketing expenses; |
|--|----|---------------------------------------------------------------------------|

|  | b) | Customer relationships by NIS 73 million, recorded in selling and marketing expenses; and |
|--|----|-------------------------------------------------------------------------------------------|

|  | c) | Right of use of international fiber optic cables by NIS 148 million, recorded in the cost of revenues. |
|--|----|--------------------------------------------------------------------------------------------------------|

----

|  | (a) | Right of use of international fiber optic cables by NIS 76 million, recorded in cost of revenues; |
|--|-----|--------------------------------------------------------------------------------------------------------|

|  | (b) | Customer relationships by NIS 8 million, recorded in selling and marketing expenses; |
|--|-----|--------------------------------------------------------------------------------------|

|  | (c) | Computers and information systems by NIS 7 million, recorded in cost of revenues; |
|--|-----|-----------------------------------------------------------------------------------|

|  | (d) | Communication network by NIS 5 million, recorded in cost of revenues; and |
|--|-----|---------------------------------------------------------------------------|

|  | (e) | Trade name by NIS 2 million, recorded in selling and marketing expenses. |
|--|-----|--------------------------------------------------------------------------|

|                    |   | As of December 31, |   |
|-------------------------|--------|--------------------|--------|
|                    |   | 2014               |   |   | 2015 |   |   | 2016 |   |
| Terminal growth rate    |   | (negative 0.2%)    |   |   | (negative 0.09%) |   |   |   | 0.5 | % |
| After-tax discount rate |   |               | 10.5   | % |   |   | 10.3 | % |   |   | 9.8 | % |
| Pre-tax discount rate   |   |               | 14.3   | % |   |   | 13.4 | % |   |   | 11.9 | % |

----

----

|  | ● | Transmission, communication and content providers |
|--|---------|---------------------------------------------------|

|  | ● | Cost of equipment and accessories |
|--|---------|-----------------------------------|

|  | ● | Depreciation and amortization (including impairment) |
|--|---------|------------------------------------------------------|

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

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

|  | ● | Network and cable maintenance |
|--|---------|-------------------------------|

|  | ● | Costs of handling, replacing or repairing equipment |
|--|---------|-----------------------------------------------------|

|  | ● | Internet infrastructure and service providers ("ISPs") |
|--|---------|--------------------------------------------------------|

|  | ● | Car kit installation, IT support, and general operating expenses |
|--|---------|------------------------------------------------------------------|

|  | ● | Amortization of rights of use (including impairment) |
|--|---------|------------------------------------------------------|

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

|   | ● | Selling commissions, net |
|--------|---------|--------------------------|

|   | ● | Advertising and marketing |
|--------|---------|---------------------------|

|   | ● | Depreciation and amortization (including impairment) |
|--------|---------|------------------------------------------------------|

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

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

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

|  | ● | Professional fees |
|--|---------|-------------------|

|  | ● | Credit card and other commissions |
|--|---------|-----------------------------------|

|  | ● | Depreciation |
|--|---------|--------------|

----

|  | ● | Unwinding of trade receivables |
|--|---------|--------------------------------|

|  | ● | Capital gain from sale of property and equipment |
|--|---------|--------------------------------------------------|

|  | ● | Interest expenses |
|--|---------|-------------------|

|  | ● | Net foreign exchange rate gains |
|--|---------|---------------------------------|

|  | ● | CPI linkage income |
|--|---------|--------------------|

|  | ● | Interest income from cash equivalents |
|--|---------|---------------------------------------|

|  | ● | Fair value gain from derivative financials instruments, net |
|--|---------|-------------------------------------------------------------|

|  | ● | Number of subscribers |
|--|---------|-----------------------|

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

|  | ● | Churn rate |
|--|---------|------------|

----

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

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

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

----

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

|                 Terminal growth rate     | 0.5%  |
|--------------------------------------------------------------------------------------------------------------------------|-------|
|                 After-tax discount rate  | 9.8%  |
|                 Pre-tax discount rate    | 11.9% |

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

----

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

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

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

|  | (3) | Accounting treatment for the investment in PHI |
|--|-----|------------------------------------------------|

|                                                                    |   | New Israeli Shekels          |   |
|-------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                    |   | Year ended December 31, 2016 |   |
|                                                                    |   | In millions                  |   |
|                                                                         |   | Cellular segment             |   |   | Fixed-line segment |   |   | Elimination |   |   | Consolidated |   |
| Segment revenue – Services                                        |   |                         | 2,080  |   |   |   | 672 |   |   |   |   |   |   | 2,752 |   |
| Inter-segment revenue – Services                                  |   |                         | 19     |   |   |   | 194 |   |   |   | (213 | ) |   |   |   |   |
| Segment revenue – Equipment                                       |   |                         | 729    |   |   |   | 63 |   |   |   |   |   |   |   | 792 |   |
| Total revenues                                                          |   |                         | 2,828  |   |   |   | 929 |   |   |   | (213 | ) |   |   | 3,544 |   |
|                                                                    |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment cost of revenues – Services                               |   |                         | 1,659  |   |   |   | 617 |   |   |   |   |   |   |   | 2,276 |   |
| Inter-segment cost of  revenues - Services                         |   |                         | 192    |   |   |   | 21 |   |   |   | (213 | ) |   |   |   |   |
| Segment cost of revenues – Equipment                              |   |                         | 596    |   |   |   | 52 |   |   |   |   |   |   |   | 648 |   |
| Cost of revenues                                                        |   |                         | 2,447  |   |   |   | 690 |   |   |   | (213 | ) |   |   | 2,924 |   |
| Gross profit                                                            |   |                         | 381    |   |   |   | 239 |   |   |   |   |   |   |   | 620 |   |
|                                                                    |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses (1)                                                  |   |                         | 571    |   |   |   | 118 |   |   |   |   |   |   |   | 689 |   |
| Income with respect to settlement                                       |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| agreement with Orange                                                   |   |                         | 217    |   |   |   |   |   |   |   |   |   |   |   | 217 |   |
| Other income, net                                                       |   |                         | 41     |   |   |   | 4 |   |   |   |   |   |   |   | 45 |   |
| Operating profit                                                        |   |                         | 68     |   |   |   | 125 |   |   |   |   |   |   |   | 193 |   |
| Adjustments to presentation of Segment   Adjusted EBITDA |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      –Depreciation and amortization      |   |                         | 447    |   |   |   | 148 |   |   |   |   |   |   |   | 595 |   |
|     –Other (2)                                |   |                         | 47     |   |   |   | (1 | ) |   |   |   |   |   |   | 46 |   |
| Segment Adjusted EBITDA (3)                                             |   |                         | 562    |   |   |   | 272 |   |   |   |   |   |   |   | 834 |   |
| Reconciliation of profit for the year to Adjusted EBITDA                |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     Profit for the year                             |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 52 |   |
| Depreciation and amortization                                           |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 595 |   |
| Finance costs, net                                                      |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 105 |   |
| Income tax expenses                                                     |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 36 |   |
| Other (2)                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 46 |   |
|    Adjusted EBITDA (3)                                   |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 834 |   |

----

|                                                                                              |   | New Israeli Shekels          |   |
|---------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                              |   | Year ended December 31, 2015 |   |
|                                                                                              |   | In millions                  |   |
|                                                                                              |   | Cellular segment             |   |   | Fixed-line segment |   |   | Elimination |   |   | Consolidated |   |
| Segment revenue – Services                                                                  |   |                         | 2,275  |   |   |   | 717 |   |   |   |   |   |   | 2,992 |   |
| Inter-segment revenue – Services                                                            |   |                         | 22     |   |   |   | 189 |   |   |   | (211 | ) |   |   |   |   |
| Segment revenue – Equipment                                                                 |   |                         | 1,051  |   |   |   | 68 |   |   |   |   |   |   |   | 1,119 |   |
| Total revenues                                                                                    |   |                         | 3,348  |   |   |   | 974 |   |   |   | (211 | ) |   |   | 4,111 |   |
|                                                                                              |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment cost of revenues – Services                                                         |   |                         | 1,856  |   |   |   | 736( | *) |   |   |   |   |   |   | 2,592 |   |
| Inter-segment cost of  revenues – Services                                             |   |                         | 187    |   |   |   | 24 |   |   |   | (211 | ) |   |   |   |   |
| Segment cost of revenues – Equipment                                                        |   |                         | 832    |   |   |   | 48 |   |   |   |   |   |   |   | 880 |   |
| Cost of revenues                                                                                  |   |                         | 2,875  |   |   |   | 808 |   |   |   | (211 | ) |   |   | 3,472 |   |
| Gross profit                                                                                      |   |                         | 473    |   |   |   | 166 |   |   |   |   |   |   |   | 639 |   |
|                                                                                              |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses (1)                                                                            |   |                         | 506    |   |   |   | 134( | *) |   |   |   |   |   |   | 640 |   |
| Income with respect to settlement agreement with Orange                                           |   |                         | 61     |   |   |   |   |   |   |   |   |   |   |   | 61 |   |
| Other income, net                                                                                 |   |                         | 44     |   |   |   | 3 |   |   |   |   |   |   |   | 47 |   |
| Operating profit                                                                                  |   |                         | 72     |   |   |   | 35 |   |   |   |   |   |   |   | 107 |   |
| Adjustments to presentation of Segment    Adjusted EBITDA                     |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      –Depreciation and amortization (including impairment charges) |   |                         | 510    |   |   |   | 243 |   |   |   |   |   |   |   | 753 |   |
|     –Other (2)                                                          |   |                         | 15     |   |   |   | 1 |   |   |   |   |   |   |   | 16 |   |
| Segment Adjusted EBITDA (3)                                                                       |   |                         | 597    |   |   |   | 279 |   |   |   |   |   |   |   | 876 |   |
| Reconciliation of loss for the year to Adjusted EBITDA                                            |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     Loss for the year                                                         |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | (40 | ) |
| Depreciation and amortization (including impairment charges)                                      |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 753 |   |
| Finance costs, net                                                                                |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 143 |   |
| Income tax expenses                                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 4 |   |
| Other (2)                                                                                         |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 16 |   |
|    Adjusted EBITDA (3)                                                             |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 876 |   |

----

----

----

----

----

|                                                                          |   | New Israeli Shekels          |   |
|-------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                          |   | Year ended December 31, 2014 |   |
|                                                                          |   | In millions                  |   |
|                                                                          |   | Cellular segment             |   |   | Fixed-line segment |   |   | Elimination |   |   | Consolidated |   |
| Segment revenue – Services                                              |   |                         | 2,592  |   |   |   | 816 |   |   |   |   |   |   | 3,408 |   |
| Inter-segment revenue – Services                                        |   |                         | 26     |   |   |   | 188 |   |   |   | (214 | ) |   |   |   |   |
| Segment revenue – Equipment                                             |   |                         | 938    |   |   |   | 54 |   |   |   |   |   |   |   | 992 |   |
| Total revenues                                                                |   |                         | 3,556  |   |   |   | 1,058 |   |   |   | (214 | ) |   |   | 4,400 |   |
|                                                                          |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment cost of revenues – Services                                     |   |                         | 1,963  |   |   |   | 692 |   |   |   |   |   |   |   | 2,655 |   |
| Inter-segment cost of  revenues – Services                         |   |                         | 185    |   |   |   | 29 |   |   |   | (214 | ) |   |   |   |   |
| Segment cost of revenues – Equipment                                    |   |                         | 727    |   |   |   | 37 |   |   |   |   |   |   |   | 764 |   |
| Cost of revenues                                                              |   |                         | 2,875  |   |   |   | 758 |   |   |   | (214 | ) |   |   | 3,419 |   |
| Gross profit                                                                  |   |                         | 681    |   |   |   | 300 |   |   |   |   |   |   |   | 981 |   |
|                                                                          |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses (1)                                                        |   |                         | 509    |   |   |   | 122 |   |   |   |   |   |   |   | 631 |   |
| Other income, net                                                             |   |                         | 49     |   |   |   | 1 |   |   |   |   |   |   |   | 50 |   |
| Operating profit                                                              |   |                         | 221    |   |   |   | 179 |   |   |   |   |   |   |   | 400 |   |
| Adjustments to presentation of Segment    Adjusted EBITDA |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      –Depreciation and amortization            |   |                         | 534    |   |   |   | 155 |   |   |   |   |   |   |   | 689 |   |
|     –Other (2)                                      |   |                         | 7      |   |   |   | * |   |   |   |   |   |   |   | 7 |   |
| Segment Adjusted EBITDA (3)                                                   |   |                         | 762    |   |   |   | 334 |   |   |   |   |   |   |   | 1,096 |   |
| Reconciliation of profit for the year to Adjusted EBITDA                      |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Profit for the year                                                           |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 162 |   |
|      Depreciation and amortization                   |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 689 |   |
|      Finance costs, net                              |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 159 |   |
|      Income tax expenses                             |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 79 |   |
|      Other (2)                                       |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 7 |   |
| Adjusted EBITDA (3)                                                           |   |                         |   |   |   |   |   |   |   |   |   |   |   |   | 1,096 |   |

----

----

----

----

----

|             |   | Three months ended |   |
|------------------|--------|--------------------|--------|
| NIS in millions  |   | March 31           |   |   | June 30 |   |   | Sept. 30 |   |   | Dec. 31 |   |
|             |   | (Unaudited)        |   |
| Service Revenues |   |               |   |   |   |   |   |   |   |   |   |   |
|             |   |               |   |   |   |   |   |   |   |   |   |   |
| 2014        |   |               | 876    |   |   |   | 862 |   |   |   | 862 |   |   |   | 808 |   |
| 2015        |   |               | 759    |   |   |   | 757 |   |   |   | 760 |   |   |   | 716 |   |
| 2016        |   |               | 710    |   |   |   | 692 |   |   |   | 698 |   |   |   | 652 |   |

----

|                   | Linkage terms(principal and interest) |   |   |   Annual interest rate |   |   |   Interest payment terms |   |   |   Original issuance date |
|------------------------|---------------------------------------|--------|--------|----------------------------------|--------|--------|------------------------------------|--------|--------|------------------------------------|
| Notes payable series C | CPI                                   |   |   | 3.35% CPI adj.                   |   |   | Semi-annual                        |   |   | April 2010                         |
| Notes payable series D |                                  |   |   | 'Makam'(*) plus 1.2%             |   |   | Quarterly                          |   |   | April 2010                         |
| Notes payable series E |                                  |   |   | 5.5% fixed                       |   |   | Semi-annual                        |   |   | April 2010                         |

| Period                                     |   | Interest rate |   |
|--------------------------------------------|--------|---------------|--------|
| October 1, 2016 to December 30, 2016  |   |          | 1.29   | % |
| July 1, 2016 to September 30, 2016    |   |          | 1.29   | % |
| March 31, 2016 to June 30, 2016       |   |          | 1.31   | % |
| December 31, 2015 to March 30, 2016   |   |          | 1.34   | % |

|                             |   | 2017   |   |   | 2018   |   |   | 2019   |   |   | 2020to 2021 |   |   | Total undiscounted |   |   | Lessofferingexpensesand discounts |   |   | Total discounted |   |
|----------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------------|--------|--------|--------------------|--------|--------|-----------------------------------|--------|--------|------------------|--------|
| New Israeli Shekels in millions  |   |
| Notes payable series C (*)  |   |   | 212    |   |   |   | 212    |   |   |   |        |   |   |               |   |   | 424                               |   |   |             | (1     | ) |   |   | 423 |   |
| Notes payable series D      |   |   | 109    |   |   |   | 109    |   |   |   | 109         |   |   |               | 219    |   |                              |   | 546    |             |   |   | (3 | ) |   |   | 543 |   |
| Notes payable series E      |   |   | 121    |   |   |   |   |   |   |   |        |   |   |               |   |   |                              |   | 121    |             |   |   |  * | * |   |   | 121 |   |
|                             |   |   | 442    |   |   |   | 321    |   |   |   | 109         |   |   |               | 219    |   |                              |   | 1,091  |             |   |   | (4 | ) |   |   | 1,087 |   |

----

|              | Linkage terms(principal and interest) |   |   |   |   Annual interest rate |   |   |   |   Interest payment terms |   |   |   Original reception date |
|-------------------|---------------------------------------|--------|--------|--------|----------------------------------|--------|--------|--------|------------------------------------|--------|--------|-------------------------------------|
|              |                                  |   |   |   |                             |   |   |   |                               |   |   |            |
| Borrowing C  |                                  |   |   |   | 5.7% fixed                       |   |   |   | Annual                             |   |   | June 2010                           |
| Borrowing D  |                                  |   |   |   | 5.7% fixed                       |   |   |   | Annual                             |   |   | June 2010                           |
| Borrowing E  |                                  |   |   |   | Prime minus 0.025%               |   |   |   | Quarterly                          |   |   | May 2011                            |
| Borrowing F  | CPI                                   |   |   |   | 3.42% CPI adj.                   |   |   |   | Quarterly                          |   |   | April 2011                          |
| Borrowing G  |                                  |   |   |   | 3.08% fixed                      |   |   |   | Quarterly                          |   |   | November 2014                       |
| Borrowing H  |                                  |   |   |   | 2.93% fixed                      |   |   |   | Quarterly                          |   |   | November 2014                       |
| Borrowing I       |                                  |   |   |   | 3.17% fixed                      |   |   |   | Quarterly                          |   |   | January 2015                        |
| Borrowing J       |                                  |   |   |   | 2.75% fixed                      |   |   |   | Quarterly                          |   |   | January 2015                        |
| Borrowing K       |                                  |   |   |   | 3.71% fixed                      |   |   |   | Quarterly                          |   |   | March 2015                          |
| Borrowing L       |                                  |   |   |   | 4.25% fixed                      |   |   |   | Semi-annual                        |   |   | March 2015                          |
| Borrowing M       |                                  |   |   |   | 3.884% fixed                     |   |   |   | Quarterly                          |   |   | July 2015                           |
| Borrowing N       |                                  |   |   |   | 4.95% fixed                      |   |   |   | Quarterly                          |   |   | December 2016                       |

|                  |   |   |   |   |   |   |   |   |   |   |              |   |   |       |   |   |   |   |
|-----------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|-------------------|--------|--------|------------|--------|--------|--------|--------|
|                  |   | 2017   |   |   | 2018   |   |   | 2019   |   |   | 2020 to 2021 |   |   | 2022to2023 |   |   | Total  |   |
|                  |   |   |   |   |   |   |   |   |   |   |              |   |   |       |   |   |   |   |
| Borrowing C      |   |   |   |   |   | 25     |   |   |   | 25     |              |   |   | 25         |   |   |   |   |   |   | 75 |   |
| Borrowing D      |   |   |   |   |   | 25     |   |   |   | 25     |              |   |   | 25         |   |   |   |   |   |   | 75 |   |
| Borrowing E      |   |   |   |   |   |   |   |   |   | 152    |              |   |   |       |   |   |   |   |   |   | 152 |   |
| Borrowing F (*)  |   |   |   |   |   |   |   |   |   | 197    |              |   |   |       |   |   |   |   |   |   | 197 |   |
| Borrowing G      |   |   |   |   |   | 20     |   |   |   | 20     |              |   |   | 40         |   |   |   | 20     |   |   |   | 100 |   |
| Borrowing H      |   |   |   |   |   | 20     |   |   |   | 20     |              |   |   | 40         |   |   |   | 20     |   |   |   | 100 |   |
| Borrowing I      |   |   |   |   |   | 30     |   |   |   | 40     |              |   |   | 50         |   |   |   |   |   |   |   | 120 |   |
| Borrowing J      |   |   | 15     |   |   |   | 15     |   |   |   | 15                |   |   |       | 17     |   |   |   |   |   |   |   | 62 |   |
| Borrowing K      |   |   |   |   |   |   | 23     |   |   |   | 30                |   |   |       | 23     |   |   |   |   |   |   |   | 76 |   |
| Borrowing L      |   |   |   |   |   |   | 33     |   |   |   | 33                |   |   |       | 67     |   |   |   | 67 |   |   |   | 200 |   |
| Borrowing M      |   |   | 17     |   |   |   | 33     |   |   |   | 33                |   |   |       | 67     |   |   |   | 50 |   |   |   | 200 |   |
| Borrowing N           |   |   | 25     |   |   |   | 25     |   |   |   | 67                |   |   |       | 133    |   |   |   |   |   |   |   | 250 |   |
|                  |   |   | 57     |   |   |   | 249    |   |   |   | 657               |   |   |       | 487    |   |   |   | 157 |   |   |   | 1,607 |   |

----

----

|  | (1) | The ratio of (a) the amount of all financial obligations of the Company including bank guarantees that the Company has undertaken ("Total Debt") to (b) EBITDA less Capital Expenditures shall not exceed 6.5 (the ratio as of December 31, 2015 and 2016, was 5.5 and 4.5, respectively); and |
|--|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (2) | The ratio of (a) Total Debt to (b) the EBITDA of the Company shall not exceed 4 (the ratio as of December 31, 2015 and 2016, was 3.8 and 3.4, respectively). |
|--|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Reconciliation of cash flows to Adjusted Free Cash Flow |   | Year ended December 31, |   |
|---------------------------------------------------------|--------|-------------------------|--------|
|                                                    |   | 2015                    |   |   | 2016 |   |
|                                                    |   | NIS in millions         |   |
| Cash flows from operating activities               |   |                    | 922    |   |   |   | 945 |   |
| Cash flows from investing activities               |   |                    | (356   | ) |   |   | (639 | ) |
| Short-term investment in deposits                       |   |                    |   |   |   |   | 452 |   |
| Adjusted Free Cash Flow                            |   |                    | 566    |   |   |   | 758 |   |

----

| Current Portion Payable in 2017 as of December 31, 2016 |   | NIS in millions |   |
|---------------------------------------------------------|--------|-----------------|--------|
|                                                    |   |            |   |
| Principal on notes payable                         |   |            | 442    |   |
| Principal on borrowings                                 |   |            | 57     |   |
|                                                    |   |            |   |   |
| Accrued interest on notes payables                 |   |            | 28     |   |
| Accrued interest on long term borrowings           |   |            | 60     |   |
| Total                                              |   |            | 587    |   |

|  | • | Cash on hand; |
|--|---------|---------------|

|  | • | Short-term deposits; |
|--|---------|----------------------|

|  | • | Operating cash flows, net of cash flow used for investing activities; |
|--|---------|-----------------------------------------------------------------------|

|  | • | Existing credit facilities; |
|--|---------|-----------------------------|

|  | • | Off balance sheet loan commitments. |
|--|---------|-------------------------------------|

----

----

----

|                                                                                                          |   | Payments due by period (NIS in millions) |   |
|---------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|
| Contractual Obligations                                                                                       |   | Total                                    |   |   | 2017 |   |   |   | 2018-2019 |   |   |   | 2020-2021 |   |   | 2022 and thereafter |   |
|                                                                                                          |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes Series C*                                                                                          |   |                                     | 445    |   |   |   | 226 |   |   |   | 219 |   |   |   |   |   |   |   |   |
| Notes Series D*                                                                                          |   |                                     | 567    |   |   |   | 116 |   |   |   | 228 |   |   |   | 223 |   |   |   |   |
| Notes Series E*                                                                                          |   |                                     | 128    |   |   |   | 128 |   |   |   |   |   |   |   |   |   |   |   |   |
| Long term borrowings*                                                                                    |   |                                     | 1,805  |   |   |   | 117 |   |   |   | 1,005 |   |   |   | 519 |   |   |   | 164 |   |
|                                                                                                          |   |                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating Leases                                                                                         |   |                                     | 630    |   |   |   | 137 |   |   |   | 193 |   |   |   | 132 |   |   |   | 168 |   |
| Trade payables                                                                                           |   |                                     | 681    |   |   |   | 681 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Payables in respect of employees                                                                         |   |                                     | 81     |   |   |   | 81 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other payables                                                                                           |   |                                     | 18     |   |   |   | 18 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Contribution to defined benefit plan                                                                     |   |                                     | 12     |   |   |   | 12 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commitments to pay for inventory purchases**                                                             |   |                                     | 1,128  |   |   |   | 648 |   |   |   | 480 |   |   |   |   |   |   |   |   |   |
| Commitments to pay for property, equipment purchases and software elements purchases (capital expenditures)** |   |                                     | 20     |   |   |   | 20 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commitments to pay for rights of use**                                                                   |   |                                     | 273    |   |   |   | 46 |   |   |   | 92 |   |   |   | 91 |   |   |   | 44 |   |
| Total Contractual Cash Obligations                                                                       |   |                                     | 5,788  |   |   |   | 2,230 |   |   |   | 2,217 |   |   |   | 965 |   |   |   | 376 |   |

----

| Name of Director                         |   | Age    |   | Position                                |
|------------------------------------------|--------|--------|--------|-----------------------------------------|
|                                     |   |   |   |                                    |
| Adam Chesnoff*                      |   | 51     |   | Chairman of the Board of Directors      |
| Elon Shalev*                        |   | 65     |   | Vice-Chairman of the Board of Directors |
| Dr. Michael J. Anghel (1)(2)(3)(4)  |   | 78     |   | Director                                |
| Barry Ben Zeev (1)(2)(3)(4)         |   | 65     |   | Director                                |
| Fred Gluckman*                      |   | 46     |   | Director                                |
| Barak Pridor*                            |   | 51     |   | Director                                |
| Osnat Ronen (5) (6)                 |   | 54     |   | Director                                |
| Yoav Rubinstein*                    |   | 43     |   | Director                                |
| Arieh Saban*                        |   | 70     |   | Director                                |
| Yehuda Saban                             |   | 37     |   | Director                                |
| Arik Steinberg (1)(2)(4)            |   | 52     |   | Director                                |
| Ori Yaron*                          |   | 51     |   | Director                                |

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

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

|  | (3) | External Director under the Israeli Companies Law (See "Item 6C Board Practices") |
|--|-----|----------------------------------------------------------------------------------------|

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

|  | (5) | Independent Director under NASDAQ rules |
|--|-----|-----------------------------------------|

|  | (6) | Appointed by the Israeli founding shareholders  |
|--|-----|------------------------------------------------------|

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

----

----

----

| Name of Officer                  |   | Age    |   | Position                                                      |
|----------------------------------|--------|--------|--------|---------------------------------------------------------------|
|                             |   |   |   |                                                          |
| Isaac Benbenisti                 |   | 52     |   | Chief Executive Officer                                       |
| Yuval Keinan                |   | 42     |   | Deputy Chief Executive Officer                                |
| Ziv Leitman*                |   | 58     |   | Chief Financial Officer                                       |
| Hadar Vismunski-Weinberg**  |   | 43     |   | Vice President, Chief Legal Counsel & Corporate Secretary |
| Einat Rom                   |   | 51     |   | Vice President, Human Resources & Administration          |
| Zvika Shenfeld              |   | 44     |   | Vice President, Private & Retail Division                 |
| Atara Litvak Shacham        |   | 45     |   | Vice President Marketing & Growth Engines Division        |
| Liran Dan                        |   | 38     |   | Vice President Strategy & Business Development            |
| Raz Bartov                       |   | 39     |   | Vice President Technologies & IT Division                 |
| Noach Hacker                     |   | 35     |   | Vice President Regulations Division                           |

----

----

----

----

----

| Details of the Compensation Recipient |   | Compensation for services(the compensation amounts are displayed in terms of cost forthe Company) (NIS thousands) |   |                          | Othercompensation& vehicle (thecompensationamounts aredisplayed interms of costfor theCompany)(NIS thousands) |   |        | Total(NIS thousands) |   |
|---------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|-------------------------------------------------------------------------------------------------------------------|--------|-------------|----------------------|--------|
| Name                                  |   | Position                                                                                                          |   | Payroll &Related expenses |                                                                                                              |   | AnnualBonus |                 |   | Share based payments |   |   | Other |   |   |   |   |
| Isaac Benbenisti                      |   | Chief Executive Officer                                                                                           |   |                          | 2,339                                                                                                             |   |        |                 | 1,804  |   |   |   | 4,680 | (1)(11) |   |   | 665 | (2)  |   |   | 9,488 | (3)  |
| Yuval Keinan                          |   | Deputy Chief Executive Officer                                                                                    |   |                          | 1,737                                                                                                             |   |        |                 | 1,284  |   |   |   | 1,938 | (4)(11) |   |   | 1,595 | (5)  |   |   | 6,554 |   |
| Ziv Leitman                           |   | Chief Financial  Officer                                                                                     |   |                          | 1,316                                                                                                             |   |        |                 | 534    |   |   |   | 1,677 | (6)(11) |   |   | 114 | (7)  |   |   | 3,641 |   |
| Zvika Shenfeld                        |   | Vice President, Private & Retail Division                                                                     |   |                          | 1,083                                                                                                             |   |        |                 | 435    |   |   |   | 1,677 | (8)(11) |   |   | 222 | (9)  |   |   | 3,417 |   |
| Einat Rom                             |   | Vice President, Human Resources & Administration                                                              |   |                          | 1,132                                                                                                             |   |        |                 | 473    |   |   |   | 1,677 | (10) (11) |   |   | 121 | (7)  |   |   | 3,403 |   |

| (1)    | In 2014, 137,200 share options were granted to Mr. Isaac Benbenisti in his capacity as Deputy CEO at the time, with a vesting period of up to four years. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.8 million. Mr. Isaac Benbenisti waived these options and they were cancelled when the terms of service and employment of Mr. Benbenisti as the Company's CEO were approved. In 2015, 1,471,971 share options were granted to Mr. Isaac Benbenisti, in his capacity as the Company's CEO with a vesting period of up to three years at an exercise price of NIS 18.08 that constitutes a premium of 5% on the average share price of the Company, during the 30 days preceding the grant date. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 8 million. Mr. Benbenisti's granted options vest in three tranches: 33% of the entire amount of the options as of October 28, 2016, 33% of the entire amount of options as of October 28, 2017 and the balance of the options as of October 28, 2018. Mr. Benbenisti's eligibility to exercise each of the above detailed tranches will be available to him until October 27, 2021. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (2)    | "Other compensation" includes: expenses for retirement that were accumulated during the reporting period of this Annual Report and will be paid only upon retirement and vehicle expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (3)    | For further information regarding the CEO's compensation see above under CEO Compensation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (4)    | In 2016, 269,000 share options and 114,000 restricted shares were granted to Mr. Yuval Keinan with a vesting period of up to three years. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 1.3 million and the fair value of the restricted shares was approximately NIS 2 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (5)    | "Other compensation" includes: expenses for retirement that were accumulated during the reporting period of this Annual Report and will be paid only upon retirement; vehicle expenses and a special signing grant in a total of NIS 550 thousand, which was approved by the Compensation Committee and the Board of Directors in September 2015, according to article 5.5.3 of the Company's Compensation Policy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

----

| (6)    | In 2014, 68,600 share options and 29,130 restricted shares were granted to Mr. Ziv Leitman with a vesting period of up to four years. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.4 million and the fair value of the restricted shares was approximately NIS 0.7 million. As of March 23, 2017, the share price was NIS 20.25 whereas the option exercise price (dividend adjusted) is NIS 25.95. As long as the option exercise price is higher than the market share price, the grant of the options has no actual value for Mr. Ziv Leitman; however a restricted share has the value of the share price. In 2015, an additional 161,369 share options and 76,378 restricted shares were granted to Mr. Ziv Leitman with a vesting period of up to three years. In accordance with a resolution of the Compensation Committee and the Board of Directors in January 2017, those share options and restricted shares that are due to vest or be earned on November 2018, will vest or be earned in accordance with the vesting or earning schedule after the termination date of Mr. Leitman's employment and could be exercised within three months from their vesting or earning date. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.9 million and the fair value of the restricted shares was approximately NIS 1.4 million. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (7)    | Represents vehicle expenses only                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (8)    | In 2014, 68,600 share options and 29,130 restricted shares were granted to Mr. Zvika Shenfeld with a vesting period of up to four years. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.4 million and the fair value of the restricted shares was approximately NIS 0.7 million. As of March 23, 2017, the share price was NIS 20.25 whereas the option exercise price (dividend adjusted) is NIS 25.95. As long as the option exercise price is higher than the market share price, the grant of the options has no actual value for Mr. Shenfeld; however a restricted share has the value of the share price. In 2015, an additional 161,369 share options and 76,378 restricted shares were granted to Mr. Shenfeld with a vesting period of up to three years. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.9 million and the fair value of the restricted shares was approximately NIS 1.4 million.                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (9)    | "Other compensation" includes: expenses for retirement that were accumulated during the reporting period of this Annual Report and will be paid only upon retirement and vehicle expenses;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (10)   | In 2014, 68,600 share options and 29,130 restricted shares were granted to Ms. Einat Rom with a vesting period of up to four years. The theoretical fair value of the share options (according to Black-Scholes model) as measured on the day of the grant was approximately NIS 0.4 million and the fair value of the restricted shares was approximately NIS 0.7 million. As of March 23, 2017, the share price was NIS 20.25 whereas the option exercise price (dividend adjusted) is NIS 25.95. As long as the option exercise price is higher than the market share price, the grant of the options has no actual value for Ms. Rom; however a restricted share has value of the share price. In 2015, an additional 161,369 share options and 76,378 restricted shares were granted to Ms. Rom with a vesting period of up to three years. The theoretical fair value of the share options (according to Black-Scholes model) as measured of the grant was approximately NIS 0.9 million and the fair value of the restricted shares was approximately NIS 1.4 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (11)   | These sums represent the relative portion of the expenses of all option and restricted share allocations recorded during the reported period and include expenses for the 2016 vesting period of options and restricted shares (including those which have not fully vested yet).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

----

----

----

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

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

|  | – | According to applicable Israeli legal requirements, the establishment or amendment of certain stock option or purchase plans require the approval of the company's Board of Directors and approval of the shareholders' meeting only for the grant of equity compensation to the Chief Executive Officer, directors or controlling partners. We received an exemption from the requirement set out in NASDAQ Rule 5635(c) that listed companies receive shareholder approval when certain stock option or purchase plans are to be established or materially amended, or certain other equity compensation arrangement made or materially amended, based on the fact that the NASDAQ requirement is inconsistent with the applicable Israeli legal requirements described above. |
|--|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | – | The Israeli Companies Law, requires that at least two members of the Board of Directors satisfy the conditions of  "external directors", which also satisfies the conditions of an Israeli independent director ("bilty taluy"). Two of our twelve directors are external directors and satisfy the conditions of both Israeli independent directors and independent directors according to NASDAQ criteria. Two additional directors, (who are not external directors) satisfy the conditions of independent directors according to NASDAQ criteria, one of whom satisfies the conditions of an Israeli independent director. However, the requirement of NASDAQ Rule 5605(b), that a majority of the Board of Directors be comprised of independent directors, is thus not satisfied. |
|--|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

----

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

|  | 2. | Reasonable legal expenses, including attorney fees, incurred by the Office Holder or which he was ordered to pay by an authorized court in the context of a proceeding filed against him by Partner or on Partner's behalf or by a third party, in a criminal proceeding in which he was acquitted or in a criminal proceeding in which he was convicted of an offense which does not require criminal intent; |
|--|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|  | 4. | Payment to an injured party as a result of a violation set forth in Section 52.54(a)(1)(a) of the Israeli Securities Law, including by indemnification in advance or expenses incurred in connection with a proceeding ("halich") under Chapters H3, H4 or I1 of the Israeli Securities Law, or under Chapter 4 of Part 9 of the Israeli Companies Law, in connection with any affairs, including reasonable legal expenses, which term includes attorney fees, including by indemnification in advance; and |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 5. | Expenses, including reasonable legal fees, including attorney fees, incurred by an Office Holder with respect to a proceeding in accordance with the Restrictive Trade Practices Law- 1988 ("Restrictive Trade Practices Law"). |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

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

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

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

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

----

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

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

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

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

|  | (5) | Expenses, including reasonable legal expenses fees, including attorney fees, incurred by the Office Holder with respect to a proceeding in accordance with the Restrictive Trade Practices Law. |
|--|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (6) | Any other matter in respect of which it is permitted or will be permitted under any law to insure the liability of an Office Holder in the Company. |
|--|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------|

|                                           |   | At December 31, |   |
|------------------------------------------------|--------|-----------------|--------|
|                                           |   |            | 2014   | ** |   |   | 2015 | ** |   |   | 2016 |   |
|                                           |   |            |   |   |   |   |   |   |   |   |   |   |
| Customer service*                         |   |            | 1,835  |   |   |   | 1,655 |   |   |   | 1,463 |   |
|                                           |   |            |   |   |   |   |   |   |   |   |   |   |
| Sales and sales support*                  |   |            | 605    |   |   |   | 434 |   |   |   | 457 |   |
| Information technology (including Engineering) |   |            | 633    |   |   |   | 365 |   |   |   | 337 |   |
| Marketing and Content                     |   |            | 65     |   |   |   | 53 |   |   |   | 56 |   |
| Finance                                   |   |            | 87     |   |   |   | 71 |   |   |   | 71 |   |
| Human Resources, Administration & Security |   |            | 119    |   |   |   | 96 |   |   |   | 94 |   |
| Operations & Logistics                |   |            | 157    |   |   |   | 134 |   |   |   | 132 |   |
| Remaining operations                      |   |            | 74     |   |   |   | 73 |   |   |   | 76 |   |
|                                           |   |            |   |   |   |   |   |   |   |   |   |   |
| TOTAL                                     |   |            | 3,575  |   |   |   | 2,882 |   |   |   | 2,686 |   |

----

----

| Weighted average exercise price (NIS) |   |   | Number of outstanding options held |   |      | Option expiration Year |   |
|---------------------------------------|--------|--------|------------------------------------|--------|-----------|------------------------|--------|
|                                  | 43.93  |   |                               |   | 373,970   |                   |   |   | 2020 |   |
|                                  | 19.61  |   |                               |   | 3,065,413 |                   |   |   | 2021 |   |
|                                  | 17.83  |   |                               |   | 340,480   |                   |   |   | 2022 |   |
|                                  | 20.75  |   |                               |   | 294,704   |                   |   |   | 2023 |   |
|                                  | 21.78  |   |                               |   | 4,074,567 |                   |   | TOTAL |   |

----

----

|                                                     |   | Through December 31, 2016 |        |
|----------------------------------------------------------|--------|---------------------------|-------------|
|                                                     |   | Number of options         |        |   | Number of RSAs2 |   |
| Granted                                                  |   |                      | 30,102,849  |   |   |   | 3,791,622 |   |
| Shares issued upon exercises and vesting                 |   |                      | (6,111,330  | ) |   |   | (864,412 | ) |
|                                                     |   |                      |        |   |   |   |   |   |
| Cancelled upon net exercises, expiration and forfeitures |   |                      | (12,705,618 | ) |   |   | (971,796 | ) |
| Outstanding                                              |   |                      | 11,285,901  |   |   |   | 1,955,414 |   |
| Of which:                                                |   |                      |        |   |   |   |   |   |
| Exercisable                                              |   |                      | 5,912,904   |   |   |   | - |   |
| Vest in 2017                                             |   |                      | 2,535,575   |   |   |   | 916,070 |   |
| Vest in 2018                                             |   |                      | 2,481,751   |   |   |   | 890,588 |   |
| Vest in 2019                                             |   |                      | 355,671     |   |   |   | 148,756 |   |

----

----

| Name                                   |   | Shares beneficially owned |        |   | Issued Shares (1)% |   |   | Issued and Outstanding Shares (1)% |   |
|----------------------------------------|--------|---------------------------|-------------|--------|--------------------|--------|--------|------------------------------------|--------|
| S.B. Israel Telecom Ltd.(2)       |   |                      | 48,050,000  |   |               |   | 29.92  |                               |   |   | 30.18 |   |
| Phoenix-Excellence Group (3)      |   |                      | 13,118,690  |   |               |   | 8.17   |                               |   |   | 8.24 |   |
| Meitav Dash Group (4)             |   |                      | 7,986,967   |   |               |   | 4.97   |                               |   |   | 5.02 |   |
| Psagot Investment House Ltd. (5)  |   |                      | 15,879,724  |   |               |   | 9.89   |                               |   |   | 9.97 |   |
| Menora Mivtachim Holdings Ltd. (6)     |   |                      | 8,179,476   |   |               |   | 5.09   |                               |   |   | 5.14 |   |
| Treasury shares (7)               |   |                      | 1,394,511   |   |               |   | 0.87   |                               |   |   | - |   |
| Public (8)                        |   |                      | 66,000,873  |   |               |   | 41.09  |                               |   |   | 41.45 |   |
| Total                             |   |                      | 160,610,241 |   |               |   | 100.00 |                               |   |   | 100.00 |   |

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

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| (2) | S.B. Israel Telecom, an affiliate of Saban Capital Group, a private investment firm, based in Los Angeles, California, specializing in the media, entertainment and communications industries held on March 1, 2017, approximately 30.18% of our Issued and Outstanding shares and voting rights. S.B. Israel Telecom also purchased from Scailex Corporation Ltd. ("Scailex") (which in 2016 changed its name to "Suny Cellular Communication Ltd.") 2,983,333 ordinary shares representing another, approximately 1.87% of our Issued and Outstanding shares and voting rights, which shares are to be transferred by Scailex to S.B. Israel Telecom free and clear of any lien on one or more future deferred closing dates, subject to the conditions set forth in the share purchase agreement entered into between Scailex and S.B. Israel Telecom. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Phoenix Holdings Ltd., an Israeli corporation listed on the Tel Aviv Stock Exchange ("Phoenix"), and Excellence Investments Ltd., an Israeli corporation listed on the Tel Aviv Stock Exchange ("Excellence"), which is controlled by Phoenix, hold shares in the Company directly and through its wholly owned subsidiaries. (Phoenix, Excellence and their subsidiaries collectively, the "Phoenix-Excellence Group"). These holdings are held according to the following segmentation: 1,194,845 ordinary shares are held by Excellence Provident and Pension funds; 274,487 ordinary shares are held by Excellence Trust Funds; 1,898,390 ordinary shares are held by Excellence ETFs; 732,864 ordinary shares are held by Phoenix "Nostro" accounts; 21,000 ordinary shares are held by Phoenix Provident and Pension funds; 108,421 ordinary shares are held by Linked insurance policies of Phoenix; 8,488,952 ordinary shares are held by Partnership for Israeli shares; 402,730 ordinary shares are held by Partnership for investing in the TA 100. 1,935,000 shares of the 13,118,690 shares held by the Phoenix-Excellence Group, representing approximately 1.22% of our Issued and Outstanding shares and total voting rights, are registered in the Company's Shareholders Register as part of the shares held by Israeli founding shareholders from among our founding shareholders and their approved substitutes. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Meitav Dash Investments Ltd., an Israeli corporation listed on the Tel Aviv Stock Exchange, holds shares in the Company directly and through its wholly owned subsidiaries (Meitav Dash and their subsidiaries collectively, the "Meitav Dash Group"). These holdings are held according to the following segmentation: 4,607,329 ordinary shares are held by Meitav Dash Provident funds; 1,038,184 ordinary shares are held by Meitav DS Mutual Funds; 2,195,473 ordinary shares are held by Meitav Dash ETFs; 145,981 ordinary shares are held by Meitav Dash Portfolio Management. 805,000 shares of the 7,986,967 shares held by the Meitav Dash Group, representing approximately 0.51% of our Issued and Outstanding shares and total voting rights, are registered in the Company's Shareholders Register as part of the shares held by Israeli founding shareholders from among our founding shareholders and their approved substitutes. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Psagot Investment House Ltd., an Israeli corporation listed on the Tel Aviv Stock Exchange, holds shares in the Company directly and through its wholly owned subsidiaries (Psagot Investment House and their subsidiaries collectively, the "Psagot Investment House"). These holdings are held according to the following segmentation: 4,107,244 ordinary shares are held by portfolio accounts managed by Psagot Securities Ltd.; 7,571,496 ordinary shares are held by Psagot Provident and Pension funds; 2,403,971 ordinary shares are held by Psagot Mutual Funds; 1,764,643 ordinary shares are held by Psagot ETFs ; 32,370 ordinary shares are held by Psagot Insurance. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|  (6) | Menora Mivtachim Holdings Ltd., ("Menora"), an Israeli corporation listed on the Tel Aviv Stock Exchange, holds shares in the Company directly and through its wholly owned subsidiaries. On January 11, 2017, Menora filed a Schedule 13G, reporting holdings of 8,021,993 shares of Partner. On March 16, 2017, Menora informed us that their holdings as of such date were 8,179,476 shares of Partner held as follows: 6,366,690 ordinary shares are held by Menora Mivtachim Provident and Pension funds; 165,216 ordinary shares are held by Menora Mivtachim Vehistadrut Hamehandesim Nihul Kupot Gemel Ltd.; 17,411 ordinary shares are held by Shomera Insurance Company Ltd.; 1,630,159 ordinary shares are held by Menora Mivtachim Insurance Ltd. |
|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7) | Treasury shares do not have a right to dividends or to vote. During 2008, the Company purchased 4,467,990 shares a part of a buy-back plan. Under the Company's 2004 Amended and Restated Equity Incentive Plan, the Company allocated to a trustee on behalf of the Company's employees 2,209,067 restricted shares which were allocated from the treasury shares. As of March 1, 2017, 864,412 restricted shares were earned and are no longer listed as restricted shares. See "Item 6E.2 EQUITY INCENTIVE PLAN". |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8) | The shares under "Public" include 5,317,712 shares held by Israeli founding shareholders from among our founding shareholders and their approved substitutes. These shares, together with 1,935,000 shares held by the Phoenix-Excellence Group and 805,000 shares held by the Meitav Dash Group, represent approximately 5.02% of our issued shares (approximately 5.06% of the Issued and Outstanding Shares). Under the terms of our mobile telephone license, the Israeli founding shareholders from among our founding shareholders and their approved substitutes must hold at least 5% of our issued and outstanding share capital and of each of our means of control. The Israeli founding shareholders must meet the requirements of "Israeli entities" which are defined as individuals who are citizens and residents of Israel and entities formed in Israel and controlled, directly or indirectly, by individuals who are citizens and residents of Israel, provided that indirect control is only through entities formed in Israel, unless otherwise approved by the Minister of Communications. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|         1.   | On September 7, 2010, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company unlawfully charges its customers for services of various content providers, which are sent through text messages (SMS). The total amount claimed from the Company was estimated by the plaintiffs to be approximately NIS 405 million. The claim was certified as a class action in December 2016. In February 2017, the plaintiffs filed an appeal to the Supreme Court, regarding the definition of the group of customers. |
|-----------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|         2.        | On July 15, 2014, a claim and a motion to certify the claim as a class action were filed against the Company and against additional cellular operators and content providers. The claim alleges that the cellular operators, including the Company, breached legal provisions and provisions of their licenses and thereby created a platform that led to the customers' damages alleged in the claim. The total amount claimed against all of the defendants is estimated by the plaintiff to be approximately NIS 300 million. The claim is still in its preliminary stage of the motion to be certified as a class action.   |
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|         3.        | On November 12, 2015, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that Partner required their customers to purchase a router and/or a call adaptor and/or terminal equipment as a condition for using its fixed-line telephony services, not in accordance with the provisions of their licenses. The total amount claimed against Partner is estimated by the plaintiff to be approximately NIS 116 million. The claim is still in its preliminary stage of the motion to be certified as a class action.                                                    |
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|         4.        | On November 12, 2015, a claim and a motion to certify the claim as a class action were filed against 012 Smile. The claim alleges that 012 Smile required their customers to purchase a router and/or a call adaptor and/or terminal equipment as a condition for using its fixed-line telephony services, not in accordance with the provisions of their licenses.The total amount claimed against 012 Smile is estimated by the plaintiff to be approximately NIS 64 million. The claim is still in its preliminary stage of the motion to be certified as a class action.                                                    |
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|         5.   | On January 4, 2016, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that Partner charges its customers the full price of telecommunication packages that are intended for use abroad despite the fact that the packages are not fully utilized and does not allow to transfer the balance to the next trip abroad or to receive a credit for the balance.The total amount claimed against Partner is estimated by the plaintiff to be approximately NIS 234 million. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|         6.        | On September 11, 2016, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that Partner automatically charges its customers that use the maximum volume of their data packages, for additional data volume, without their consent. The total amount claimed against Partner is estimated by the plaintiff to be approximately NIS 250 million. The claim is still in its preliminary stage of the motion to be certified as a class action.                                                                                                                           |

|         1.   | On April 22, 2009, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleged that the Company charged certain customers for certain calls not according to their rate plan. The total amount claimed from the Company was estimated by the plaintiffs to be approximately NIS 187 million. The Parties filed a number of settlement agreements which were submitted for the Court's approval and the latest revised settlement agreement was filed on June 12, 2014 and approved in July 2016. |
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|         2.        | On April 12, 2010, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleged that the Company charged its customers for certain content services without their consent. The total amount claimed from the Company was estimated by the plaintiffs to be approximately NIS 343 million. In March 2016, the parties filed a request to approve a settlement agreement and are waiting for the Court's decision.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
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|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         3.        | On May 23, 2010, a claim and a motion to certify the claim as a class action were filed against the Company and all other cellular operators. The claim alleged that the Company, as well as the other defendants, breached its contractual and/or legal obligation to erect cellular sites in the appropriate scope, quantity and coverage in order to provide cellular services in the required and appropriate quality. The plaintiffs claimed that this omission also caused, among others, monetary damages caused to consumers as a result of lack of sufficient coverage, including call disconnections, insufficient voice quality etc., as well as a significant increase in the non-ionized radiation that the public is exposed to mainly from the cellular telephone handset. In addition, it was claimed that the Company and the other defendants breached their contractual and/or legal obligation to ensure and/or check and/or repair and/or notify the consumer, that after repair and/or upgrade and/or exchange of cellular handsets, the handsets may emit radiation in levels that exceed the levels of radiation as set forth by the manufacturer in the handset data and even exceeds the maximum permitted levels set forth by law. In addition, it was claimed that the Company and the other defendants did not fulfill their obligation to caution and warn the consumers of the risks involved in holding the handset and the proximity of the handset to the body while carrying it and during a phone call. In addition, it was claimed that if the handsets marketed by the Company and the other defendants emit non-ionizing radiation above the permitted level, at any distance from the body, then the marketing and sale of such handsets is prohibited in Israel. The total amount claimed from the Company was estimated by the plaintiffs to be approximately NIS 3.600 billion. In November 2013, the parties filed a request to approve a settlement agreement and in February 2014, the parties filed a request to approve a revised settlement agreement. The settlement agreement also includes a claim and a motion to certify the claim as a class action that was filed in a similar matter as set forth in section 4 below. In July 2014, the Court approved the settlement agreement and in October 2014, the plaintiffs filed an appeal with the Supreme Court. In April 2016, the Court dismissed the appeal. |
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         4.        | On June 6, 2011, a claim and a motion to certify the claim as a class action were filed against the Company and the three other cellular operators. The claim alleged that the Company sold or supplied accessories that are intended for carrying cellular handsets on the body, in a manner that contradicts the instructions and warnings of the cellular handset manufacturers and the recommendations of the Ministry of Health, all this without disclosing the risks entailed in the use of these accessories when they are sold or marketed. The total amount claimed from the Company was estimated by the plaintiffs to be approximately NIS 1,010 million. On November 7, 2013, the parties filed a request to approve a settlement agreement and on February 5, 2014, the parties filed a request to approve a revised settlement agreement. The settlement agreement also included a claim and a motion to certify the claim as a class action that was filed in a similar matter as set forth in section 3 above. In July 2014, the Court approved the settlement agreement and in October 2014, the plaintiffs filed an appeal with the Supreme Court with respect to the Court's decision not to appoint an external examiner regarding the radiation measurement method as well as attorney fees. In April 2016, the Court dismissed the appeal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         5.   | On October 5, 2011, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleged that the Company enabled its customers to subscribe to a content back up service for cellular handsets without informing them in cases in which the handset does not support the service or only partially supports such service. The total amount claimed from the Company was estimated by the plaintiffs to be approximately NIS 117 million. In November 2014, the claim was dismissed and in January 2015, the plaintiff filed an appeal with the Supreme Court. In March 2016, the Court dismissed the appeal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

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|         6.        | On February 6, 2012, a claim and a motion to certify the claim as a class action were filed against the Company and other cellular operators. The claim alleged that the Company, as well as the other defendants did not comply with the requirements set by the Equal Rights for People with Disabilities (Accessibility to Telecommunications Services and Telecommunications Devices) Regulations of 2009. The total amount claimed from the Company was estimated by the plaintiffs to be approximately NIS 120 million. In December 2015, the parties filed a settlement agreement for the Court's approval, which was approved in April 2016.                |
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|         7.   | On November 13, 2013, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleged that the Company increased tariffs for its customers not in accordance with their agreements. The total amount claimed from Partner was estimated by the plaintiff to be NIS 150 million. The parties filed a settlement agreement in October 2015 and are waiting for the Court's decision.                                                                                                                                                                                                                                    |
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         8.        | On March 24, 2014, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleged that the Company did not include in the severance pay calculation for its employees various components that constitute an addition to the salary for the severance pay calculation and thereby acted unlawfully.  The total amount claimed from Partner was estimated by the plaintiff to be approximately NIS 100 million. In November 2015, the plaintiff filed an amended claim and a motion to certify the claim as a class action. In September 2016, the parties filed a settlement agreement for the Court's approval. |
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         9.   | On April 1, 2014, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleged that the Company charged its customers for cellular internet services abroad not in accordance with the subscriber agreement. The claim was estimated by the plaintiff to be approximately NIS 2 Billion. In April 2016, the Court dismissed the claim.                                                                                                                                                                                                                                                                             |
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         10.       | On November 19, 2015, a claim and a motion to certify the claim as a class action were filed against the Company and other cellular operators.  The claim alleged that the Company coordinated prices with other cellular operators of pre-paid plans that it markets, and by doing so prevented competition and breached legal provisions. The total amount claimed against Partner was estimated by the plaintiff to be approximately NIS 6.6 billion. In September 2016, the claim was dismissed. In November 2016, the plaintiff filed an appeal with the Supreme Court and in January 2017, the Court dismissed the appeal.                          |
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         11.       | On December 29, 2015, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleged that Partner charges its customers, while they are abroad, for incoming calls that are transferred to voice mail. The total amount claimed against Partner was estimated by the plaintiff to be approximately NIS 70 million. In January 2017, the Court dismissed the claim.                                                                                                                                                                                                                                                   |
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         12.       | On March 3, 2016, a claim and a motion to certify the claim as a class action were filed against the Company and another cellular operator. The claim alleged that Partner unlawfully charges its customers that are abroad for rejecting an incoming call. The plaintiffs noted that they could not estimate the total amount claimed in the lawsuit, if the lawsuit is certified as a class action On March 2, 2017, the Court dismissed the claim.                                                                                                                                                                                                               |

|         1.   | On July 14, 2010, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that Partner is breaching its contractual and/or legal obligation and/or is acting negligently by charging V.A.T for roaming services that are consumed abroad. The plaintiff demands to return the total amount of V.A.T that was charged by Partner for roaming services that were consumed abroad. The plaintiff also pursued an injunction that will order Partner to stop charging VA.T for roaming services that are consumed abroad. In August 2014, the claim was dismissed and in October 2014, the plaintiff filed an appeal with the Supreme Court. The hearing was held in May 2016 before an expanded panel of seven judges and the parties are waiting for the Court's decision. |
|-----------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|         2.   | On August 8, 2012, a claim and a motion to certify the claim as a class action were filed against 012 Smile and another Internet Service Provider. The claim alleges that the defendants breached certain provisions of their licenses by not offering their services at a unified tariff to all customers. The total amount claimed against 012 Smile, if the lawsuit is certified as a class action, was not stated by the plaintiff. The claim is still in its preliminary stage of the motion to be certified as a class action.                                                                                                                                                                                                |
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|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         3.   | On May 6, 2015, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges, that Partner discriminated between its cellular customers, including between new customers and existing customers, by offering the same type of customers, different terms, not in accordance with the provisions of its license. The plaintiff noted that it cannot estimate the total amount claimed in the lawsuit, if the lawsuit is certified as a class action. The claim is still in its preliminary stage of the motion to be certified as a class action.                                                                                                                                   |
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         4.        | On September 7, 2015, a claim and a motion to certify the claim as a class action were filed against the Company and 012 Smile. The claim alleges that Partner and 012 Smile overcharge its customers according to a special tariff for overseas call destinations that are defined by the Company as special tariff destinations despite the fact that they are fixed-line destinations. The total amount claimed against Partner and 012 Smile if the lawsuit is certified as a class action was not stated by the plaintiff. The parties were referred to mediation.                                                                                                                                                             |
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         5.        | On February 24, 2016, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company harasses recipients by sending advertising messages without receiving their prior approval for this. In addition, the content of the advertisements does not comply with the legal provisions, among others, with respect to the fact that most of the advertising messages do not easily include an option to remove or send a refusal notice.  The total amount claimed against the Company if the lawsuit is certified as a class action was not stated by the plaintiff. The claim is still in its preliminary stage of the motion to be certified as a class action. |
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         6.        | On April 21, 2016, a claim and a motion to certify the claim as a class action were filed against 012 Smile. The claim alleges that 012 Smile's infrastructure does not support data speeds that the Company publishes to its customers. The total amount claimed against the Company if the lawsuit is certified as a class action was not stated by the plaintiff. The claim is still in its preliminary stage of the motion to be certified as a class action.                                                                                                                                                                                                                                                                   |
|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         7.        | On November 1, 2016, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that the Company sends text messages regarding the volume rate of data packages, which unlawfully include advertisement content, intended to encourage purchasing another data package. The total amount claimed against the Company if the lawsuit is certified as a class action was not stated by the plaintiff. The claim is still in its preliminary stage of the motion to be certified as a class action.                                                                                                                                                                                 |

----

|         1.        | On September 11, 2016, a claim and a motion to certify the claim as a class action were filed against 012 Smile and two other international long distance operators. The claim alleges that the defendants charged excessive tariffs from occasional customers for each long distance call minute, contrary to the Telecommunications Law (Telecommunications and Broadcasting), that allows a licensee to charge reasonable payment for a telecommunication service that it provides. The total amount claimed against 012 Smile if the lawsuit is certified as a class action was not stated by the plaintiff. The claim is still in its preliminary stage of the motion to be certified as a class action. |
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|                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|         2.   | On September 29, 2016, a claim and a motion to certify the claim as a class action were filed against the Company. The claim alleges that Partner refunded its customers, in cases where it was apparent that they were overcharged, not in accordance with legal provisions. In addition, the claim alleges that Partner charges some of its customers that subscribe to the "One" service for the provision of this special service even though it was terminated. The plaintiff noted that it cannot estimate the total amount claimed in the lawsuit, should the lawsuit be certified as a class action. The claim is still in its preliminary stage of the motion to be certified as a class action.     |

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|                                |   | NASDAQ      |   |   | Tel Aviv Stock Exchange  |   |
|-------------------------------------|--------|-------------|--------|--------|--------------------------|--------|
|                                |   | ($ per ADS) |   |   | (NIS per ordinary share) |   |
|                                |   | High        |   |   | Low                      |   |   | High |   |   | Low |   |
|                                |   |        |   |   |                     |   |   |   |   |   |   |   |
| 2012                           |   |        | 9.23   |   |                     |   | 3.12 |   |   |   | 35.35 |   |   |   | 12.37 |   |
|                                |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| 2013                                |   |        | 9.75   |   |                     |   | 5.46 |   |   |   | 35.00 |   |   |   | 20.30 |   |
|                                |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| 2014                                |   |        | 9.57   |   |                     |   | 5.05 |   |   |   | 33.10 |   |   |   | 20.14 |   |
|                                |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| 2015                                |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| First Quarter                  |   |        | 4.99   |   |                     |   | 2.72 |   |   |   | 19.54 |   |   |   | 11.05 |   |
| Second Quarter                 |   |        | 2.82   |   |                     |   | 2.18 |   |   |   | 11.43 |   |   |   | 8.50 |   |
| Third Quarter                  |   |        | 5.00   |   |                     |   | 2.52 |   |   |   | 19.65 |   |   |   | 10.01 |   |
| Fourth Quarter                 |   |        | 4.95   |   |                     |   | 3.70 |   |   |   | 19.40 |   |   |   | 14.58 |   |
|                                |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| 2016                                |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| First Quarter                  |   |        | 4.84   |   |                     |   | 4.07 |   |   |   | 19.16 |   |   |   | 16.20 |   |
| Second Quarter                 |   |        | 5.48   |   |                     |   | 4.03 |   |   |   | 20.80 |   |   |   | 15.9 |   |
| Third Quarter                  |   |        | 5.02   |   |                     |   | 4.44 |   |   |   | 19.66 |   |   |   | 17.14 |   |
| Fourth Quarter                 |   |        | 5.08   |   |                     |   | 4.33 |   |   |   | 19.50 |   |   |   | 16.94 |   |
|                                |   |        |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| September 2016                 |   |        | 5.02   |   |                     |   | 4.46 |   |   |   | 19.01 |   |   |   | 17.14 |   |
| October 2016                   |   |        | 4.64   |   |                     |   | 4.33 |   |   |   | 18.00 |   |   |   | 17.17 |   |
| November 2016                  |   |        | 4.85   |   |                     |   | 4.36 |   |   |   | 18.98 |   |   |   | 16.94 |   |
| December 2016                  |   |        | 5.08   |   |                     |   | 4.65 |   |   |   | 19.50 |   |   |   | 18.13 |   |
| January 2017                   |   |        | 5.87   |   |                     |   | 5.09 |   |   |   | 22.34 |   |   |   | 18.44 |   |
| February 2017                  |   |        | 6.25   |   |                     |   | 5.51 |   |   |   | 23.60 |   |   |   | 20.95 |   |
| March 2017 (through March 23)  |   |        | 6.28   |   |                     |   | 5.53 |   |   |   | 23.67 |   |   |   | 20.12 |   |

----

----

----

----

----

----

----

| • | General. Israeli law generally imposes a capital gains tax on the sale of capital assets by residents of Israel as defined for Israeli tax purposes, and on the sale of capital assets located in Israel or the sale of direct or indirect rights to assets located in Israel, including on the sale of our Shares by some of our shareholders (see discussion below). The Israeli Income Tax Ordinance distinguishes between "Real Capital Gain" and "Inflationary Surplus". Real Capital Gain is the excess of the total capital gain over Inflationary Surplus computed on the basis of the increase in the CPI between the date of purchase and the date of sale. In 2016, the real capital gain accrued on the sale of our Shares was generally taxed at a rate of 25% for corporations (26.5% for 2014 and 2015, and 24% for 2017) and a rate of up to 25% for individuals. Additionally, if such individual shareholder is considered a "Significant Shareholder" at any time during the 12-month period preceding such sale (i.e., if such individual shareholder holds directly or indirectly, along with others, at least 10% of any means of control in the company, including, among other things, the right to receive profits of the company, voting rights, the right to receive the company's liquidation proceeds and the right to appoint a director), the tax rate will be up to 30%. |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • | Taxation of Israeli Residents |
|---------|-------------------------------|

----

----

----

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

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

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

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

----

----

----

----

|                                                                       |   | As of December 31, (NIS equivalent in millions, except percentages) |   |
|----------------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|
|                                                                       |   | 2016                                                                |   |   | 2015 |   |
|                                                                       |   | Fair Value                                                          |   |   | Book Value |   |   | Fair Value |   |   | Book Value |   |
|                                                                       |   |                                                                |   |   |   |   |   |   |   |   |   |   |
| NIS-denominated debt linked to the CPI (1)                                 |   |                                                                |   |   |   |   |   |   |   |   |   |   |
|                                                                       |   |                                                                |   |   |   |   |   |   |   |   |   |   |
| Long-term fixed Notes payable series B due 2016                       |   |                                                                |   |   |   |   |   |   | 123 |   |   |   | 121 |   |
| Weighted average interest rate payable                                |   |                                                                |   |   |   |   |   |   |   |   |   |   | 3.4 | % |
| Long-term fixed Notes payable series C due 2018                       |   |                                                                | 440    |   |   |   | 423 |   |   |   | 724 |   |   |   | 695 |   |
| Weighted average interest rate payable                                |   |                                                                |   |   |   |   | 3.35 | % |   |   |   |   |   |   | 3.35 | % |
| Long-term borrowing bearing fixed interest                            |   |                                                                | 199    |   |   |   | 197 |   |   |   | 210 |   |   |   | 198 |   |
| Weighted average interest rate payable                                |   |                                                                |   |   |   |   | 3.42 | % |   |   |   |   |   |   | 3.42 | % |
| Other payables (2)                                                    |   |                                                                |   |   |   |   |   |   |   |   | 1 |   |   |   | 1 |   |
|                                                                       |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NIS-denominated debt not linked to the CPI                                 |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term variable interest Notes payable series D due 2021           |   |                                                                | 548    |   |   |   | 543 |   |   |   | 548 |   |   |   | 543 |   |
| Weighted average interest rate payable                                |   |                                                                |   |   |   |   | 1.30 | % |   |   |   |   |   |   | 1.34 | % |
| Long-term fixed Notes payable series E due 2017                       |   |                                                                | 127    |   |   |   | 121 |   |   |   | 399 |   |   |   | 371 |   |
| Weighted average interest rate payable                                |   |                                                                |   |   |   |   | 5.5 | % |   |   |   |   |   |   | 5.5 | % |
| Long-term borrowing bearing variable interest (2)                     |   |                                                                | 152    |   |   |   | 152 |   |   |   | 152 |   |   |   | 152 |   |
| Weighted average interest rate payable                                |   |                                                                |   |   |   |   | 1.6 | % |   |   |   |   |   |   | 1.63 | % |
| Long-term borrowing bearing fixed interest                            |   |                                                                | 162    |   |   |   | 150 |   |   |   | 170 |   |   |   | 150 |   |
| Weighted average interest rate payable                                |   |                                                                |   |   |   |   | 5.7 | % |   |   |   |   |   |   | 5.7 | % |
| Long-term borrowing bearing fixed interest                            |   |                                                                | 195    |   |   |   | 200 |   |   |   | 200 |   |   |   | 200 |   |
| Weighted average interest rate payable                                |   |                                                                |   |   |   |   | 3 | % |   |   |   |   |   |   | 3 | % |
| Long-term borrowing bearing fixed interest                            |   |                                                                | 182    |   |   |   | 182 |   |   |   | 198 |   |   |   | 196 |   |
| Weighted average interest rate payable                                |   |                                                                |   |   |   |   | 3 | % |   |   |   |   |   |   | 3 | % |
| Long-term borrowing bearing fixed interest                            |   |                                                                | 76     |   |   |   | 76 |   |   |   | 75 |   |   |   | 75 |   |
| Weighted average interest rate payable                                |   |                                                                |   |   |   |   | 3.71 | % |   |   |   |   |   |   | 3.71 | % |
| Long-term borrowing bearing fixed interest                            |   |                                                                | 204    |   |   |   | 200 |   |   |   | 203 |   |   |   | 200 |   |
| Weighted average interest rate payable                                |   |                                                                |   |   |   |   | 4.25 | % |   |   |   |   |   |   | 4.25 | % |
| Long-term borrowing bearing fixed interest                            |   |                                                                | 201    |   |   |   | 200 |   |   |   | 200 |   |   |   | 200 |   |
| Weighted average interest rate payable                                |   |                                                                |   |   |   |   | 3.884 | % |   |   |   |   |   |   | 3.884 | % |
| Long-term borrowing bearing fixed interest                                 |   |                                                                | 260    |   |   |   | 250 |   |   |   |   |   |   |   |   |   |
| Weighted average interest rate payable                                     |   |                                                                |   |   |   |   | 4.95 | % |   |   |   |   |   |   |   |   |
| Trade payables and others (2)                                         |   |                                                                | 630    |   |   |   | 630 |   |   |   | 630 |   |   |   | 630 |   |
|                                                                       |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debt denominated in foreign currencies (2)                                 |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                       |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade payables denominated in USD                                     |   |                                                                | 132    |   |   |   | 132 |   |   |   | 117 |   |   |   | 117 |   |
|                                                                       |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade payables denominated in other foreign currencies (mainly Euro)  |   |                                                                | 19     |   |   |   | 19 |   |   |   | 46 |   |   |   | 46 |   |
| Total                                                                 |   |                                                                | 3,527  |   |   |   | 3,475 |   |   |   | 3,995 |   |   |   | 3,894 |   |

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

| (2) | Book value approximates fair value. |
|-----|-------------------------------------|

----

|                         |   | Change |   |   | Equity                          |   |   | Profit |   |
|------------------------------|--------|--------|--------|--------|---------------------------------|--------|--------|--------|--------|
|                         |   |   |   |   | New Israeli Shekels in millions |   |
|                         |   |   |   |   |                            |   |   |   |   |
| December 31, 2016            |   |   |   |   |                            |   |   |   |   |
| Increase in the CPI of  |   |   | 2      | %      |                            |   | (9     | )      |   |   | (9 | ) |
| Decrease in the CPI of  |   |   | (2     | )%     |                            |   | 9      |   |   |   | 9 |   |

|                         |   | Change |   |   | Equity                          |   |   | Profit |   |
|------------------------------|--------|--------|--------|--------|---------------------------------|--------|--------|--------|--------|
|                         |   |   |   |   | New Israeli Shekels in millions |   |
|                         |   |   |   |   |                            |   |   |   |   |
| December 31, 2016            |   |   |   |   |                            |   |   |   |   |
| Increase in the USD of  |   |   | 10     | %      |                            |   | (8     | )      |   |   | (8 | ) |
| Decrease in the USD of  |   |   | (10    | )%     |                            |   | 8      |   |   |   | 8 |   |

----

----

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

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

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

|  | • | provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of our assets |
|--|---------|-----------------------------------------------------------------------------------------------------------------------------------------|

----

|                         |   |            |   |   |            |   |
|------------------------------|--------|-----------------|--------|--------|-----------------|--------|
|                         |   | 2015            |   |   | 2016            |   |
|                         |   | (NIS thousands) |   |   | (NIS thousands) |   |
|                         |   |            |   |   |            |   |
| Audit Fees (1)          |   |            | 2,265  |   |            |   | 2,251 |   |
| Audit-related Fees (2)  |   |            | 441    |   |            |   | 349 |   |
| Tax Fees (3)            |   |            | 436    |   |            |   | 551 |   |
| TOTAL                   |   |            | 3,142  |   |            |   | 3,151 |   |

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

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

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

----

|                      |   |                                                                                                                                                                          |
|---------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit No.               |   | Description                                                                                                                                                                   |
|                      |   |                                                                                                                                                                          |
| 1.1                       |   | Articles of Association last updated and approved on September 28, 2016 (incorporated by reference to Annex D from the Company's Report on Form 6-K filed on August 17, 2016) |
| **1.2                     |   | Partner's Certificate of Incorporation                                                                                                                                        |
| **1.3                     |   | Partner's Memorandum of Association                                                                                                                                           |
| **2.(a).1                 |   | Form of Share Certificate                                                                                                                                                     |
| ^^2.(a).2                 |   | [Reserved]                                                                                                                                                                    |
| ^^^^2.(a)3                |   | Amended and Restated Deposit Agreement Between Partner and Citibank N.A.                                                                                                      |
| ^2.(b).1                  |   | Form of Indenture between Partner and the Trust Company of Union Bank Ltd.                                                                                                    |
| >>>>2.(b).2   |   | Trust Deed                                                                                                                                                                    |
| >>>>2.(b).3   |   | Amendment no. 1 to the Trust Deed of November 26, 2009                                                                                                                        |
| ^4.(a).1                  |   | Restatement of the Relationship Agreement dated April 20, 2005                                                                                                                |
| >>>>4.(a).1.1 |   | Letter of Undertaking by which Scailex entered into the Restated Relationship Agreement with the Company, October 28, 2009                                                    |

----

| +>>4.(a).1.2           |   | Letter of Undertaking by which S.B. Israel Telecom entered into the Restated Relationship Agreement with the Company, January 29, 2013                                                              |
|------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.(a).2                      |   | Integrated version of the General License for the Provision of Mobile Radio Telephone Services using the Cellular Method (MRT) in Israel issued by the Ministry of Communications on April 8, 1998. |
| 4.(a).2.1                    |   | General Unified License of Partner Land-Line Communication Solutions Limited Partnership dated February 11, 2016 as amended through January 11, 2017.                                               |
| **4.(a).4                    |   | License Agreement for use of the Orange Brand in Israel dated September 14, 1998                                                                                                                    |
| #+>4.(a).4.1              |   | Restated Amendment, dated as of January 31, 2012,to the Brand License Agreement dated 14 September 1998                                                                                             |
| #4.(a).4.2                   |   | Settlement Agreement with Orange dated June 26, 2015                                                                                                                                                |
| **4.(a).5                    |   | Brand Support/Technology Transfer Agreement dated July 18, 1999                                                                                                                                     |
| **4.(a).6                    |   | Agreement with Ericsson Radio Systems AB dated May 28, 1998                                                                                                                                         |
| #++4.(a).7                   |   | Agreement with LM Ericsson Israel Ltd. dated November 25, 2002                                                                                                                                      |
| **4.(a).9                    |   | Lease Agreement with Mivnei Taasia dated July 2, 1998                                                                                                                                               |
| ^^^4.(a).13                  |   | Asset Purchase Agreement with Med-1 dated as of January 22, 2006                                                                                                                                    |
| 4.(a).14-60                  |   | [reserved]                                                                                                                                                                                          |
| #+++4.(a).65                 |   | Purchase Agreement with Nortel Networks Israel (Sales and Marketing) Ltd. dated November 12, 2003.                                                                                                  |
| #>>4.(a).67            |   | Swap Agreement with LM Ericsson Israel Ltd. dated December 20, 2007                                                                                                                                 |
| #4.(a).68                    |   | [reserved]                                                                                                                                                                                          |
| #>>>>4.(a).69    |   | Facility Agreement dated November 24, 2009                                                                                                                                                          |
| 4.(a).70                     |   | [reserved]                                                                                                                                                                                          |
| 4.(a).71                     |   | [reserved]                                                                                                                                                                                          |
| >>>>>4.(a) 72 |   | 012 Smile Share Purchase Agreement                                                                                                                                                                  |
| >>>>>4.(a) 73 |   | English translation of the original Hebrew language 012 Smile Credit Facility, dated January 31, 2010                                                                                               |
| 4.(a).74-97                  |   | [reserved]                                                                                                                                                                                          |   |
| #>>>>4.(b).1     |   | Addendum to Lease Agreements from November 1, 2002 and Lease Agreements in Beit Ofek                                                                                                                |   |
| >>>>4.(b).2      |   | Registration Rights Agreement with Scailex                                                                                                                                                          |   |
| +>>>4.(b).3         |   | Registration Rights Agreement with S.B. Israel Telecom Ltd.                                                                                                                                         |   |

----

| +>>6.                   |   | See Note 2x to the consolidated financial statements for information explaining how earnings (loss) per share information was calculated.                                       |
|-------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 8.                            |   | List of Subsidiaries (see "Item 4C – Organizational Structure").                                                                                                          |
| 10.1                          |   | Consent of Kesselman & Kesselman                                                                                                                                            |
| 10.2                          |   | Consent of Giza Singer Even Ltd.                                                                                                                                                |
| 10.3                          |   | Consent of BDO Ziv Haft Consulting &Management Ltd.                                                                                                                         |
| 12.(a).1                      |   | Certification by CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
| 12.(a).2                      |   | Certification by CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
| 13.(a).1                      |   | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                           |
| +>>>>>15.(a).1 |   | Amended and Restated 2004 Equity Incentive Plan as approved by the Board of Directors on March 13, 2016                                                                         |
| 15.(b).1                      |   | Compensation Policy adopted on September 28, 2016 (incorporated by reference to Annex G from the Company's Report on Form 6-K filed on August 17, 2016)                         |

----

| **                    |   | Incorporated by reference to our registration statement on Form F-1 (No. 333-10992).                     |
|-----------------------|--------|----------------------------------------------------------------------------------------------------------|
| ++                    |   | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2002. |
| +++                   |   | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2003. |
| ^                     |   | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2004. |
| ^^                    |   | Incorporated by reference to our registration statement on Form F-6 (No. 333-132680).                    |
| ^^^                   |   | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2005. |
| ^^^^                  |   | Incorporated by reference to our registration statement on Form F-6 (No. 333-177621).                    |
| >                  |   | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2006. |
| >>              |   | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2007. |
| >>>>      |   | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2009. |
| >>>>>  |   | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2010. |
| +>                 |   | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2011. |
| +>>             |   | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2012. |
| +>>>         |   | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2013. |
| +>>>>     |   | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2014. |
| +>>>>> |   | Incorporated by reference to our annual report on Form 20-F for the fiscal year ended December 31, 2015. |
| #                     |   | Confidential treatment requested.                                                                        |

----

|   | Partner Communications Company Ltd. |                      |
|--------|-------------------------------------|---------------------------|
|   |                                |                      |   |
|   | By:                                 | /s/ Isaac Benbenisti |   |
|   |                                | Isaac Benbenisti          |   |
|   |                                | Chief Executive Officer   |   |
|   |                                |                      |   |
|   |                                | March 30, 2017            |   |
|   |                                |                      |   |
|   | By:                                 | /s/ Ziv Leitman      |   |
|   |                                | Ziv Leitman               |   |
|   |                                | Chief Financial Officer   |   |
|   |                                |                      |   |
|   |                                | March 30, 2017            |   |

----

----

|                                                    | Page        |
|---------------------------------------------------------|-------------|
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-3         |
| CONSOLIDATED FINANCIAL STATEMENTS:                      |        |
| Statements of Financial Position                        | F-4 - F-5   |
| Statements of Income                                    | F-6         |
| Statements of Comprehensive Income                      | F-7         |
| Statements of Changes in Equity                         | F-8         |
| Statements of Cash Flows                                | F-9 - F-10  |
| Notes to financial statements                           | F-11 - F-82 |

----

| Tel-Aviv, Israel                                                                              March 29, 2017                                                                            | /s/  Kesselman & KesselmanCertified Public Accountants (Isr.)A member firm of PriceWaterhouseCoopers International Limited |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|

----

|                                   |   |   |   |   | New Israeli Shekels |   |   | Convenience translation into U.S. dollars (note 2b3) |   |
|----------------------------------------|--------|--------|--------|--------|---------------------|--------|--------|------------------------------------------------------|--------|
|                                   |   |   |   |   | December 31,        |   |
|                                   |   |   |   |   | 2015                |   |   | 2016                                                 |   |   | 2016 |   |
|                                   |   | Note   |   |   | In millions         |   |
| CURRENT ASSETS                         |   |   |   |   |                |   |   |                                                 |   |   |   |   |
| Cash and cash equivalents              |   |   |   |   |                | 926    |   |                                                 |   | 716 |   |   |   | 186 |   |
| Short-term deposits                    |   |   |   |   |                |   |   |                                                 |   | 452 |   |   |   | 118 |   |
| Trade receivables                      |   |   | 7      |   |                |   | 1,057  |                                                 |   |   | 990 |   |   |   | 257 |   |
| Income tax receivable                  |   |   |   |   |                |   | 2      |                                                 |   |   |   |   |   |   |   |   |
| Other receivables and prepaid expenses |   |   |   |   |                |   | 47     |                                                 |   |   | 57 |   |   |   | 15 |   |
| Deferred expenses – right of use |   |   | 12     |   |                |   | 33     |                                                 |   |   | 28 |   |   |   | 7 |   |
| Inventories                            |   |   | 8      |   |                |   | 120    |                                                 |   |   | 96 |   |   |   | 25 |   |
|                                   |   |   |   |   |                |   | 2,185  |                                                 |   |   | 2,339 |   |   |   | 608 |   |
|                                   |   |   |   |   |                |   |   |                                                 |   |   |   |   |   |   |   |   |
| NON CURRENT ASSETS                     |   |   |   |   |                |   |   |                                                 |   |   |   |   |   |   |   |   |
| Trade receivables                      |   |   | 7      |   |                |   | 492    |                                                 |   |   | 333 |   |   |   | 87 |   |
| Prepaid expenses and other             |   |   |   |   |                |   | 3      |                                                 |   |   | 2 |   |   |   | 1 |   |
| Deferred expenses – right of use |   |   | 12     |   |                |   | 20     |                                                 |   |   | 75 |   |   |   | 20 |   |
| Property and equipment                 |   |   | 10     |   |                |   | 1,414  |                                                 |   |   | 1,207 |   |   |   | 314 |   |
| Licenses and other intangible assets   |   |   | 11     |   |                |   | 956    |                                                 |   |   | 793 |   |   |   | 206 |   |
| Goodwill                               |   |   | 13     |   |                |   | 407    |                                                 |   |   | 407 |   |   |   | 106 |   |
| Deferred income tax asset              |   |   | 25     |   |                |   | 49     |                                                 |   |   | 41 |   |   |   | 10 |   |
|                                   |   |   |   |   |                |   | 3,341  |                                                 |   |   | 2,858 |   |   |   | 744 |   |
|                                   |   |   |   |   |                |   |   |                                                 |   |   |   |   |   |   |   |   |
| TOTAL ASSETS                           |   |   |   |   |                |   | 5,526  |                                                 |   |   | 5,197 |   |   |   | 1,352 |   |
|                    |   |                    |   |                      |
|-------------------------|--------|-------------------------|--------|---------------------------|
| Isaac Benbenishti       |   | Ziv Leitman             |   | Barry Ben-Zeev (Woolfson) |
| Chief Executive Officer |   | Chief Financial Officer |   | Director                  |
|                    |   |                    |   |                      |

----

|                                                              |   |   |   |   | New Israeli Shekels |   |   | Convenience translation into U.S. dollars (note 2b3) |   |
|-------------------------------------------------------------------|--------|--------|--------|--------|---------------------|--------|--------|------------------------------------------------------|--------|
|                                                              |   |   |   |   | December 31,        |   |
|                                                              |   |   |   |   | 2015                |   |   | 2016                                                 |   |   | 2016 |   |
|                                                              |   | Note   |   |   | In millions         |   |
| CURRENT LIABILITIES                                               |   |   |   |   |                |   |   |                                                 |   |   |   |   |
| Current maturities of notes payable and borrowings                |   |   | 6,15   |   |                |   | 554    |                                                 |   |   | 498 |   |   |   | 130 |   |
| Trade payables                                                    |   |   |   |   |                |   | 715    |                                                 |   |   | 681 |   |   |   | 177 |   |
| Payables in respect of employees                                  |   |   |   |   |                |   | 77     |                                                 |   |   | 101 |   |   |   | 26 |   |
| Other payables (mainly institutions)                              |   |   |   |   |                |   | 45     |                                                 |   |   | 28 |   |   |   | 7 |   |
| Income tax payable                                                |   |   |   |   |                |   | 52     |                                                 |   |   | 45 |   |   |   | 12 |   |
| Deferred income with respect to settlement                        |   |   |   |   |                |   |   |                                                 |   |   |   |   |   |   |   |   |
|  agreement with Orange                                       |   |   | 18     |   |                |   | 217    |                                                 |   |   | 108 |   |   |   | 28 |   |
| Deferred revenues from HOT mobile                                 |   |   | 9      |   |                |   |   |                                                 |   |   | 31 |   |   |   | 8 |   |
| Other deferred revenues                                           |   |   |   |   |                |   | 28     |                                                 |   |   | 38 |   |   |   | 10 |   |
| Provisions                                                        |   |   | 14     |   |                |   | 77     |                                                 |   |   | 77 |   |   |   | 20 |   |
|                                                              |   |   |   |   |                |   | 1,765  |                                                 |   |   | 1,607 |   |   |   | 418 |   |
|                                                              |   |   |   |   |                |   |   |                                                 |   |   |   |   |   |   |   |   |
| NON CURRENT LIABILITIES                                           |   |   |   |   |                |   |   |                                                 |   |   |   |   |   |   |   |   |
| Notes payable                                                     |   |   | 6,15   |   |                |   | 1,190  |                                                 |   |   | 646 |   |   |   | 168 |   |
| Borrowings from banks and others                                  |   |   | 6,15   |   |                |   | 1,357  |                                                 |   |   | 1,550 |   |   |   | 403 |   |
| Liability for employee rights upon retirement, net                |   |   | 16     |   |                |   | 34     |                                                 |   |   | 39 |   |   |   | 10 |   |
| Dismantling and restoring sites obligation                        |   |   | 14     |   |                |   | 36     |                                                 |   |   | 35 |   |   |   | 9 |   |
|  Deferred income with respect to settlement                  |   |   |   |   |                |   |   |                                                 |   |   |   |   |   |   |   |   |
|  agreement with Orange                                       |   |   | 18     |   |                |   | 108    |                                                 |   |   |   |   |   |   |   |   |
|  Deferred revenues from HOT mobile                           |   |   | 9      |   |                |   |   |                                                 |   |   | 195 |   |   |   | 51 |   |
|  Other non-current liabilities                               |   |   |   |   |                |   | 16     |                                                 |   |   | 14 |   |   |   | 4 |   |
|                                                              |   |   |   |   |                |   | 2,741  |                                                 |   |   | 2,479 |   |   |   | 645 |   |
|                                                              |   |   |   |   |                |   |   |                                                 |   |   |   |   |   |   |   |   |
| TOTAL LIABILITIES                                                 |   |   |   |   |                |   | 4,506  |                                                 |   |   | 4,086 |   |   |   | 1,063 |   |
|                                                              |   |   |   |   |                |   |   |                                                 |   |   |   |   |   |   |   |   |
| EQUITY                                                            |   |   | 21     |   |                |   |   |                                                 |   |   |   |   |   |   |   |   |
| Share capital – ordinary shares of NIS 0.01 par value:      |   |   |   |   |                |   |   |                                                 |   |   |   |   |   |
| authorized – December 31, 2015 and 2016 – 235,000,000 |   |   |   |   |                |   |   |                                                 |   |   |   |   |   |
| shares; issued and outstanding -                                  |   |   |   | 2      |                |   |   | 2                                                    |   |   |   | 1 |   |
| December 31, 2015 – *156,087,456 shares                     |   |   |   |   |                |   |   |                                                 |   |   |   |   |   |
| December 31, 2016 – *156,993,337 shares                     |   |   |   |   |                |   |   |                                                 |   |   |   |   |   |
| Capital surplus                                                   |   |   |   |   |                |   | 1,102  |                                                 |   |   | 1,034 |   |   |   | 269 |   |
| Accumulated retained earnings                                     |   |   |   |   |                |   | 267    |                                                 |   |   | 358 |   |   |   | 93 |   |
| Treasury shares, at cost –                                  |   |   |   |   |                |   |   |                                                 |   |   |   |   |   |   |   |   |
|    December 31, 2015 – **4,461,975 shares    |   |   |   |   |                |   |   |                                                 |   |   |   |   |   |   |   |   |
|  December 31, 2016 – **3,603,578 shares                |   |   |   | (351   | )                   |   |   | (283                                                 | )      |   |   | (74 | ) |
| TOTAL EQUITY                                                      |   |   |   |   |                |   | 1,020  |                                                 |   |   | 1,111 |   |   |   | 289 |   |
| TOTAL LIABILITIES AND EQUITY                                      |   |   |   |   |                |   | 5,526  |                                                 |   |   | 5,197 |   |   |   | 1,352 |   |

----

|                                |   |   |   |   |                                    |   |   |       |   |   |   |   |   | Convenience       |   |
|-------------------------------------|--------|--------|--------|--------|-----------------------------------------|--------|--------|------------|--------|--------|--------|--------|--------|-------------------|--------|
|                                |   |   |   |   |                                    |   |   |       |   |   |   |   |   | translation       |   |
|                                |   |   |   |   |                                    |   |   |       |   |   |   |   |   | into U.S. dollars |   |
|                                |   |   |   |   | New Israeli Shekels                     |   |   | (note 2b3) |   |
|                                |   |   |   |   | Year ended December 31                  |   |
|                                |   |   |   |   | 2014                                    |   |   | 2015       |   |   | 2016   |   |   | 2016              |   |
|                                |   | Note   |   |   | In millions (except earnings per share) |   |
| Revenues, net                       |   |   | 5      |   |                                    |   | 4,400  |       |   |   | 4,111  |   |   |              | 3,544  |   |   |   | 922 |   |
| Cost of revenues                    |   |   | 5, 22  |   |                                    |   | 3,419  |       |   |   | 3,472  |   |   |              | 2,924  |   |   |   | 760 |   |
| Gross profit                        |   |   |   |   |                                    |   | 981    |       |   |   | 639    |   |   |              | 620    |   |   |   | 162 |   |
|                                |   |   |   |   |                                    |   |   |       |   |   |   |   |   |              |   |   |   |   |   |   |
| Selling and marketing expenses      |   |   | 22     |   |                                    |   | 438    |       |   |   | 417    |   |   |              | 426    |   |   |   | 111 |   |
| General and administrative expenses |   |   | 22     |   |                                    |   | 193    |       |   |   | 223    |   |   |              | 263    |   |   |   | 68 |   |
| Income with respect to settlement   |   |   |   |   |                                    |   |   |       |   |   |   |   |   |              |   |   |   |   |   |   |
| agreement with Orange               |   |   | 18     |   |                                    |   |   |       |   |   | 61     |   |   |              | 217    |   |   |   | 56 |   |
| Other income, net                   |   |   | 23     |   |                                    |   | 50     |       |   |   | 47     |   |   |              | 45     |   |   |   | 12 |   |
| Operating profit                    |   |   |   |   |                                    |   | 400    |       |   |   | 107    |   |   |              | 193    |   |   |   | 51 |   |
| Finance income                      |   |   | 24     |   |                                    |   | 3      |       |   |   | 13     |   |   |              | 13     |   |   |   | 3 |   |
| Finance expenses                    |   |   | 24     |   |                                    |   | 162    |       |   |   | 156    |   |   |              | 118    |   |   |   | 31 |   |
| Finance costs, net                  |   |   | 24     |   |                                    |   | 159    |       |   |   | 143    |   |   |              | 105    |   |   |   | 28 |   |
| Profit (loss) before income tax     |   |   |   |   |                                    |   | 241    |       |   |   | (36    | )      |   |              | 88     |   |   |   | 23 |   |
| Income tax expenses                 |   |   | 25     |   |                                    |   | 79     |       |   |   | 4      |   |   |              | 36     |   |   |   | 9 |   |
| Profit (loss) for the year          |   |   |   |   |                                    |   | 162    |       |   |   | (40    | )      |   |              | 52     |   |   |   | 14 |   |
|                                |   |   |   |   |                                    |   |   |       |   |   |   |   |   |              |   |   |   |   |   |   |
| Earnings (loss) per share           |   |   |   |   |                                    |   |   |       |   |   |   |   |   |              |   |   |   |   |   |   |
| Basic                               |   |   | 27     |   |                                    |   | 1.04   |       |   |   | (0.26  | )      |   |              | 0.33   |   |   |   | 0.09 |   |
| Diluted                             |   |   | 27     |   |                                    |   | 1.04   |       |   |   | (0.26  | )      |   |              | 0.33   |   |   |   | 0.09 |   |

----

|                                                              |   |   |   |   | New Israeli Shekels    |   |   | Convenience translation into U.S. dollars(note 2b3) |   |
|-------------------------------------------------------------------|--------|--------|--------|--------|------------------------|--------|--------|-----------------------------------------------------|--------|
|                                                              |   |   |   |   | Year ended December 31 |   |
|                                                              |   |   |   |   | 2014                   |   |   | 2015                                                |   |   | 2016 |   |   | 2016 |   |
|                                                              |   | Note   |   |   | In millions            |   |
| Profit (loss) for the year                                        |   |   |   |   |                   | 162    |   |                                                |   | (40 | ) |   |   | 52 |   |   |   | 14 |   |
| Other comprehensive income (loss), items                          |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |
|  that will not be reclassified to profit or loss             |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |
|  Remeasurements of post-employment benefit                   |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |
|  obligations                                                 |   |   | 16     |   |                   |   | (9     | )                                                   |   |   | 5 |   |   |   | (8 | ) |   |   | (2 | ) |
| Income taxes relating to remeasurements of                        |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
|      post-employment benefit obligations |   |   | 25     |   |                   |   | 2      |                                                |   |   | (1 | ) |   |   | 2 |   |   |   | * |   |
| Other comprehensive income (loss)                                 |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
|  for the year, net of income taxes                           |   |   |   |   |                   |   | (7     | )                                                   |   |   | 4 |   |   |   | (6 | ) |   |   | (2 | ) |
|                                                              |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL COMPREHENSIVE INCOME                                        |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
|  (LOSS) FOR THE YEAR                                         |   |   |   |   |                   |   | 155    |                                                |   |   | (36 | ) |   |   | 46 |   |   |   | 12 |   |
|                                                              |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |

----

|                                                                                      |   | Share capital |        |   |                      |   |   |    |   |   |        |   |   |     |   |
|-------------------------------------------------------------------------------------------|--------|---------------|-------------|--------|---------------------------|--------|--------|---------|--------|--------|-------------|--------|--------|----------|--------|
|                                                                                      |   | Number of     |        |   |                      |   |   | Capital |   |   | Accumulated |   |   | Treasury |   |   |   |   |
|                                                                                      |   | Shares**      |        |   | Amount                    |   |   | surplus |   |   | earnings    |   |   | shares   |   |   | Total |   |
|                                                                                      |   |          |        |   | I n  m i l l i o n s |   |
| New Israeli  Shekels:                                                                |   |          |        |   |                      |   |   |    |   |   |        |   |   |     |   |   |   |   |
| BALANCE AT JANUARY 1, 2014                                                                |   |          | 155,687,002 |   |                      |   | 2      |    |   |   | 1,100       |   |   |     | 123    |   |   |   | (351 | ) |   |   | 874 |   |
|                                                                                      |   |          |        |   |                      |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |
| CHANGES DURING THE YEAR ENDED DECEMBER 31, 2014                                           |   |          |        |   |                      |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income for the year                                                   |   |          |        |   |                      |   |   |    |   |   |        |   |   |     | 155    |   |   |   |   |   |   |   | 155 |   |
| Exercise of options granted to employees                                                  |   |          | 385,943     |   |                      |   | *      |    |   |   | 2           |   |   |     |   |   |   |   |   |   |   |   | 2 |   |
| Employee share-based compensation expenses                                                |   |          |        |   |                      |   |   |    |   |   |        |   |   |     | 8      |   |   |   |   |   |   |   | 8 |   |
|  BALANCE AT DECEMBER 31, 2014                                                        |   |          | 156,072,945 |   |                      |   | 2      |    |   |   | 1,102       |   |   |     | 286    |   |   |   | (351 | ) |   |   | 1,039 |   |
|                                                                                      |   |          |        |   |                      |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |
| CHANGES DURING THE YEAR ENDED DECEMBER 31, 2015                                           |   |          |        |   |                      |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive loss for the year                                                     |   |          |        |   |                      |   |   |    |   |   |        |   |   |     | (36    | ) |   |   |   |   |   |   | (36 | ) |
| Exercise of options and vesting of restricted shares granted to employees                 |   |          | 14,511      |   |                      |   | *      |    |   |   | *           |   |   |     |   |   |   |   | * |   |   |   | * |   |
| Employee share-based compensation expenses                                                |   |          |        |   |                      |   |   |    |   |   |        |   |   |     | 17     |   |   |   |   |   |   |   | 17 |   |
|  BALANCE AT DECEMBER 31, 2015                                                        |   |          | 156,087,456 |   |                      |   | 2      |    |   |   | 1,102       |   |   |     | 267    |   |   |   | (351 | ) |   |   | 1,020 |   |
|                                                                                      |   |          |        |   |                      |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |
| CHANGES DURING THE YEAR ENDED DECEMBER 31, 2016                                           |   |          |        |   |                      |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income for the year                                                   |   |          |        |   |                      |   |   |    |   |   |        |   |   |     | 46     |   |   |   |   |   |   |   | 46 |   |
| Exercise of options and vesting of restricted shares granted to employees                 |   |          | 905,881     |   |                      |   | *      |    |   |   | (68         | )      |   |     |   |   |   |   | 68 |   |   |   | * |   |
| Employee share-based compensation expenses                                                |   |          |        |   |                      |   |   |    |   |   |        |   |   |     | 45     |   |   |   |   |   |   |   | 45 |   |
| BALANCE AT DECEMBER 31, 2016                                                              |   |          | 156,993,337 |   |                      |   | 2      |    |   |   | 1,034       |   |   |     | 358    |   |   |   | (283 | ) |   |   | 1,111 |   |
|                                                                                      |   |          |        |   |                      |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |
| Convenience translation into U.S. Dollars (note 2b3):                                     |   |          |        |   |                      |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |
| BALANCE AT JANUARY 1, 2016                                                                |   |          | 156,087,456 |   |                      |   | 1      |    |   |   | 287         |   |   |     | 69     |   |   |   | (92 | ) |   |   | 265 |   |
|        CHANGES DURING THE YEAR ENDED DECEMBER 31, 2016 |   |          |        |   |                      |   |   |    |   |   |        |   |   |     |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income for the year                                                   |   |          |        |   |                      |   |   |    |   |   |        |   |   |     | 12     |   |   |   |   |   |   |   | 12 |   |
| Exercise of options and vesting of restricted shares granted to employees                 |   |          | 905,881     |   |                      |   | *      |    |   |   | (18         | )      |   |     |   |   |   |   | 18 |   |   |   | * |   |
| Employee share-based compensation expenses                                                |   |          |        |   |                      |   |   |    |   |   |        |   |   |     | 12     |   |   |   |   |   |   |   | 12 |   |
| BALANCE AT DECEMBER 31, 2016                                                              |   |          | 156,993,337 |   |                      |   | 1      |    |   |   | 269         |   |   |     | 93     |   |   |   | (74 | ) |   |   | 289 |   |

----

|                                                          |   |   |   |   | New Israeli Shekels    |   |   | Convenience translation into U.S. dollars(note 2b3) |   |
|---------------------------------------------------------------|--------|--------|--------|--------|------------------------|--------|--------|-----------------------------------------------------|--------|
|                                                          |   |   |   |   | Year ended December 31 |   |
|                                                          |   |   |   |   | 2014                   |   |   | 2015                                                |   |   | 2016 |   |   | 2016 |   |
|                                                          |   | Note   |   |   | In millions            |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                         |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |
| Cash generated from operations (Appendix)                     |   |   |   |   |                   | 1,017  |   |                                                |   | 955 |   |   |   | 975 |   |   |   | 253 |   |
| Income tax paid                                               |   |   | 25     |   |                   |   | (66    | )                                                   |   |   | (33 | ) |   |   | (30 | ) |   |   | (8 | ) |
| Net cash provided by operating activities                     |   |   |   |   |                   |   | 951    |                                                |   |   | 922 |   |   |   | 945 |   |   |   | 245 |   |
|                                                          |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
|  CASH FLOWS FROM INVESTING ACTIVITIES:                   |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Acquisition of property and equipment                         |   |   | 10     |   |                   |   | (287   | )                                                   |   |   | (216 | ) |   |   | (127 | ) |   |   | (33 | ) |
| Acquisition of intangible assets                              |   |   | 11     |   |                   |   | (145   | )                                                   |   |   | (143 | ) |   |   | (69 | ) |   |   | (18 | ) |
| Short-term investment in deposits                             |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   | (452 | ) |   |   | (118 | ) |
| Interest received                                             |   |   | 24     |   |                   |   | 4      |                                                |   |   | 3 |   |   |   | 2 |   |   |   | 1 |   |
| Proceeds from sale of property and equipment                  |   |   | 23     |   |                   |   | 1      |                                                |   |   | 1 |   |   |   | 7 |   |   |   | 2 |   |
| Investment in PHI                                             |   |   | 9      |   |                   |   |   |                                                |   |   | (1 | ) |   |   |   |   |   |   |   |   |
|  Proceeds from (repayment of)  derivative financial |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| instruments, net                                              |   |   | 6      |   |                   |   | (4     | )                                                   |   |   | * |   |   |   | * |   |   |   | * |   |
| Net cash used in investing activities                         |   |   |   |   |                   |   | (431   | )                                                   |   |   | (356 | ) |   |   | (639 | ) |   |   | (166 | ) |
|                                                          |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
|  CASH FLOWS FROM FINANCING ACTIVITIES:                   |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Proceeds from exercise of stock options granted to            |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| employees                                                     |   |   | 21     |   |                   |   | 2      |                                                |   |   | * |   |   |   | * |   |   |   | * |   |
| Interest paid                                                 |   |   | 24     |   |                   |   | (131   | )                                                   |   |   | (137 | ) |   |   | (108 | ) |   |   | (28 | ) |
| Non-current borrowings received                               |   |   | 6,15   |   |                   |   | 200    |                                                |   |   | 675 |   |   |   | 250 |   |   |   | 65 |   |
| Repayment of non-current borrowings                           |   |   | 6,15   |   |                   |   | (100   | )                                                   |   |   | (533 | ) |   |   | (15 | ) |   |   | (4 | ) |
| Repayment of notes payable                                    |   |   | 6,15   |   |                   |   | (309   | )                                                   |   |   | (308 | ) |   |   | (643 | ) |   |   | (167 | ) |
| Net cash used in financing activities                         |   |   |   |   |                   |   | (338   | )                                                   |   |   | (303 | ) |   |   | (516 | ) |   |   | (134 | ) |
|                                                          |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
|  INCREASE (DECREASE) IN CASH AND CASH                    |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
|  EQUIVALENTS                                             |   |   |   |   |                   |   | 182    |                                                |   |   | 263 |   |   |   | (210 | ) |   |   | (55 | ) |
|                                                          |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
|  CASH AND CASH EQUIVALENTS AT BEGINNING                  |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
|  OF YEAR                                                 |   |   |   |   |                   |   | 481    |                                                |   |   | 663 |   |   |   | 926 |   |   |   | 241 |   |
|                                                          |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
|  CASH AND CASH EQUIVALENTS AT END OF                     |   |   |   |   |                   |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
|  YEAR                                                    |   |   |   |   |                   |   | 663    |                                                |   |   | 926 |   |   |   | 716 |   |   |   | 186 |   |

----

|                                                     |   |   |       |   | New Israeli Shekels     |   |   | Convenience translation into U.S. dollars(note 2b3) |   |
|----------------------------------------------------------|--------|--------|------------|--------|-------------------------|--------|--------|-----------------------------------------------------|--------|
|                                                     |   |   |       |   | Year ended December 31, |   |
|                                                     |   |   |       |   | 2014                    |   |   | 2015                                                |   |   | 2016 |   |   | 2016 |   |
|                                                     |   | Note   |       |   | In millions             |   |
|                                                     |   |   |       |   |                    |   |   |                                                |   |   |   |   |   |   |   |
| Cash generated from operations:                          |   |   |       |   |                    |   |   |                                                |   |   |   |   |   |   |   |
|      Profit (loss) for the year |   |   |       |   |                    | 162    |   |                                                |   | (40 | ) |   |   | 52 |   |   |   | 14 |   |
|                                                     |   |   |       |   |                    |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |
|     Adjustments for:                 |   |   |       |   |                    |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization (including impairment)     |   |   | 10, 11, 13 |   |                    |   | 652    |                                                |   |   | 641 |   |   |   | 565 |   |   |   | 147 |   |
| Amortization (including impairment) of deferred          |   |   |       |   |                    |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
|      expenses - Right of use    |   |   | 12, 13     |   |                    |   | 37     |                                                |   |   | 112 |   |   |   | 30 |   |   |   | 8 |   |
| Amortization of employee share based compensation        |   |   | 21         |   |                    |   | 8      |                                                |   |   | 17 |   |   |   | 45 |   |   |   | 12 |   |
| Liability for employee rights upon retirement, net       |   |   | 16         |   |                    |   | (3     | )                                                   |   |   | (12 | ) |   |   | (3 | ) |   |   | (1 | ) |
| Finance costs, net                                       |   |   | 24         |   |                    |   | 4      |                                                |   |   | (8 | ) |   |   | 1 |   |   |   | * |   |
| Change in fair value of derivative financial instruments |   |   | 6          |   |                    |   | 7      |                                                |   |   | (2 | ) |   |   | * |   |   |   | * |   |
| Interest paid                                            |   |   | 24         |   |                    |   | 131    |                                                |   |   | 137 |   |   |   | 108 |   |   |   | 28 |   |
| Interest received                                        |   |   | 24         |   |                    |   | (4     | )                                                   |   |   | (3 | ) |   |   | (2 | ) |   |   | (1 | ) |
| Deferred income taxes                                    |   |   | 25         |   |                    |   | 4      |                                                |   |   | (40 | ) |   |   | 10 |   |   |   | 3 |   |
| Income tax paid                                          |   |   | 25         |   |                    |   | 66     |                                                |   |   | 33 |   |   |   | 30 |   |   |   | 8 |   |
| Capital (gain) loss from property and equipment          |   |   |       |   |                    |   | (1     | )                                                   |   |   | * |   |   |   | * |   |   |   | * |   |
| Changes in operating assets and liabilities:             |   |   |       |   |                    |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Decrease (increase) in accounts receivable:              |   |   |       |   |                    |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade                                                    |   |   | 7          |   |                    |   | (26    | )                                                   |   |   | (183 | ) |   |   | 226 |   |   |   | 58 |   |
| Other                                                    |   |   |       |   |                    |   | 8      |                                                |   |   | (13 | ) |   |   | (9 | ) |   |   | (2 | ) |
| Increase (decrease) in accounts payable and accruals:    |   |   |       |   |                    |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Trade                                                    |   |   |       |   |                    |   | 44     |                                                |   |   | (5 | ) |   |   | (38 | ) |   |   | (10 | ) |
| Other payables                                           |   |   |       |   |                    |   | (4     | )                                                   |   |   | (12 | ) |   |   | * |   |   |   | * |   |
| Provisions                                               |   |   | 14         |   |                    |   | (9     | )                                                   |   |   | 19 |   |   |   | * |   |   |   | * |   |
| Deferred income with respect to settlement               |   |   |       |   |                    |   |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |
|    agreement with Orange                  |   |   | 18         |   |                    |   |   |                                                |   |   | 325 |   |   |   | (217 | ) |   |   | (56 | ) |
| Deferred revenues from HOT mobile                        |   |   | 9          |   |                    |   |   |                                                |   |   |   |   |   |   | 227 |   |   |   | 59 |   |
| Other deferred revenues                                  |   |   |       |   |                    |   | (2     | )                                                   |   |   | (6 | ) |   |   | 10 |   |   |   | 3 |   |
| Increase in deferred expenses - Right of use             |   |   | 12         |   |                    |   | (22    | )                                                   |   |   | (34 | ) |   |   | (80 | ) |   |   | (22 | ) |
|   Current income tax                                |   |   | 25         |   |                    |   | 10     |                                                |   |   | 11 |   |   |   | (4 | ) |   |   | (1 | ) |
|  Decrease (increase) in inventories                 |   |   | 8          |   |                    |   | (45    | )                                                   |   |   | 18 |   |   |   | 24 |   |   |   | 6 |   |
| Cash generated from operations:                          |   |   |       |   |                    |   | 1,017  |                                                |   |   | 955 |   |   |   | 975 |   |   |   | 253 |   |

----

----

|  | (1) | In February 2015 a regulation came into effect according to which each of the infrastructure owners - Bezeq and Hot are required to allow use of their broadband fixed-line infrastructure by telecommunication providers that do not have a broadband fixed-line infrastructure. This regulation allows telecommunication providers that do not have a broadband fixed-line infrastructure, including the Company and its subsidiaries, to offer internet access in one transaction (without requiring the subscriber to engage with both an internet access provider and an infrastructure provider). As a result, the Group commenced selling offers including both network infrastructure services using Bezeq’s network and internet access service. As part of the Economic Program Law for the years 2017-2018, that was published at the end of December 2016 it was determined, among others: Bezeq and HOT Telecom will be required to allow other domestic operators including Partner, access to passive infrastructures; exemption from building permits – domestic operators are now allowed to deploy fixed-line infrastructure without requiring building permits (under certain conditions). |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | Type of services | Area of service | License owner                                                   | Granted by | Valid through | Guarantees made  |
|--------|------------------|-----------------|-----------------------------------------------------------------|------------|---------------|------------------|
| (1)    | Cellular         | Israel          | Partner Communications Company Ltd.                             | MOC        | Feb, 2022     | NIS 80 million   |
| (2)    | Cellular         | West Bank       | Partner Communications Company Ltd.                             | CA         | Feb, 2022     | NIS 4 million    |
| (3)    | ISP              | Israel          | Partner Communications Company Ltd.                             | MOC        | Mar, 2018     |             |
| (4)    | ISP              | West Bank       | Partner Communications Company Ltd.                             | CA         | Mar, 2018     |             |
| (5)    | ISP              | Israel          | 012 Smile Telecom Ltd.                                          | MOC        | Jun, 2020     |             |
| (6)    | ISP              | West Bank       | 012 Smile Telecom Ltd.                                          | CA         | Jun, 2020     |             |
| (7)    | ILD (*)          | Israel          | 012 Smile Telecom Ltd.                                          | MOC        | Dec, 2029     | NIS 5 million    |
| (8)    | ILD (**)         | West Bank       | 012 Smile Telecom Ltd.                                          | CA         | Dec, 2029     | NIS 0.25 million |
| (9)    | Fixed(*)         | Israel          | 012 Telecom Ltd.                                                | MOC        | Dec, 2025     | NIS 5 million    |
| (10)   | Fixed(**)        | West Bank       | 012 Telecom Ltd.                                                | CA         | Dec, 2025     | NIS 0.25 million |
| (11)   | Fixed(*)         | Israel          | Partner Land-line Communication Solutions - Limited Partnership | MOC        | Jan, 2027     | NIS 5 million    |
| (12)   | Fixed(**)        | West Bank       | Partner Land-line Communication Solutions - Limited Partnership | CA         | Jan, 2027     | NIS 0.25 million |
| (13)   | NTP(***)         | Israel          | Partner Land-line Communication Solutions - Limited Partnership | MOC        | Feb, 2017     |             |
| (14)   | NTP              | Israel          | 012 Smile Telecom Ltd.                                          | MOC        | Dec, 2020     |             |

----

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

|  | (1) | Basis of preparation |
|--|-----|----------------------|

----

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

|  | c. | Interests in other entities |
|--|----|-----------------------------|

----

----

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

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

----

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

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

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

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

|  | (a) | The licenses to operate cellular communication services were recognized at cost. Borrowing costs which served to finance the license fee - incurred until the commencement of utilization of the license - were capitalized to cost of the license. |
|--|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (b) | Partner Land-line Communication solutions – limited partnership's license for providing fixed-line communication services is stated at cost. |
|--|-----|----------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

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

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

|  | (4) | 012 Smile trade name: |
|--|-----|-----------------------|

----

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

|  | g. | Right Of Use (ROU) |
|--|----|--------------------|

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

----

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

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

|  | j. |  Financial instruments |
|--|----|-----------------------------|

----

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

----

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

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

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

----

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

----

|  | m. | Provisions |
|--|----|------------|

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

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

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

----

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

----

----

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

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

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

----

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

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

----

----

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

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

----

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

----

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

|                    |   |   |
|-------------------------|--------|--------|
| Terminal growth rate    | 0.5%   |   |
| After-tax discount rate | 9.8%   |   |
| Pre-tax discount rate   | 11.9%  |   |

----

|  |  (5) | Assessing allowance for doubtful accounts: The allowance is established when there is objective evidence that the Group will not be able to collect amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, or delinquency or default in debtor payments are considered indicators that a trade receivable is impaired. Individual receivables which are known to be uncollectable are written off by reducing the carrying amount directly. The other receivables are assessed collectively. For these receivables the allowance is determined based on percentage of doubtful debts in collection, considering the likelihood of recoverability based on the age of the balances, the historical write-off experience net of recoveries, changes in the credit worthiness, and collection trends. The trade receivables are periodically reviewed for impairment. |
|--|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (6) | Considering uncertain tax positions: The assessment of amounts of current and deferred taxes requires the Group's management to take into consideration uncertainties that its tax position will be accepted and of incurring any additional tax expenses. This assessment is based on estimates and assumptions based on interpretation of tax laws and regulations, and the Group's past experience. It is possible that new information will become known in future periods that will cause the final tax outcome to be different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. See also notes 2(q) and  note 25. |
|--|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                                                               |   | New Israeli Shekels          |   |
|--------------------------------------------------------------------|--------|------------------------------|--------|
|                                                               |   | Year ended December 31, 2016 |   |
|                                                               |   | In millions                  |   |
|                                                               |   | Cellular segment             |   |   | Fixed-line segment |   |   | Elimination |   |   | Consolidated |   |
| Segment revenue - Services                                         |   |                         | 2,080  |   |   |   | 672 |   |   |   |   |   |   | 2,752 |   |
| Inter-segment revenue - Services                                   |   |                         | 19     |   |   |   | 194 |   |   |   | (213 | ) |   |   |   |   |
| Segment revenue - Equipment                                        |   |                         | 729    |   |   |   | 63 |   |   |   |   |   |   |   | 792 |   |
| Total revenues                                                     |   |                         | 2,828  |   |   |   | 929 |   |   |   | (213 | ) |   |   | 3,544 |   |
|                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment cost of revenues - Services                                |   |                         | 1,659  |   |   |   | 617 |   |   |   |   |   |   |   | 2,276 |   |
| Inter-segment cost of  revenues- Services                     |   |                         | 192    |   |   |   | 21 |   |   |   | (213 | ) |   |   |   |   |
| Segment cost of revenues - Equipment                               |   |                         | 596    |   |   |   | 52 |   |   |   |   |   |   |   | 648 |   |
| Cost of revenues                                                   |   |                         | 2,447  |   |   |   | 690 |   |   |   | (213 | ) |   |   | 2,924 |   |
| Gross profit                                                       |   |                         | 381    |   |   |   | 239 |   |   |   |   |   |   |   | 620 |   |
|                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses (3)                                             |   |                         | 571    |   |   |   | 118 |   |   |   |   |   |   |   | 689 |   |
| Income with respect to settlement                                  |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| agreement with Orange                                              |   |                         | 217    |   |   |   |   |   |   |   |   |   |   |   | 217 |   |
| Other income, net                                                  |   |                         | 41     |   |   |   | 4 |   |   |   |   |   |   |   | 45 |   |
| Operating profit                                                   |   |                         | 68     |   |   |   | 125 |   |   |   |   |   |   |   | 193 |   |
| Adjustments to presentation of segment                             |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     Adjusted EBITDA                            |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      –Depreciation and amortization |   |                         | 447    |   |   |   | 148 |   |   |   |   |   |   |   |   |   |
|      –Other (1)                     |   |                         | 47     |   |   |   | (1 | ) |   |   |   |   |   |   |   |   |
| Segment Adjusted EBITDA (2)                                        |   |                         | 562    |   |   |   | 272 |   |   |   |   |   |   |   |   |   |
|                                                                       |   | New Israeli Shekels          |   |
|----------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                       |   | Year ended December 31, 2016 |   |
|                                                                       |   | In millions                  |   |
| Reconciliation of segments subtotal Adjusted EBITDA to profit for the year |   |                         |   |
| Segments subtotal Adjusted EBITDA (2)                                      |   |                         | 834    |   |
| Depreciation and amortization                                              |   |                         | (595   | ) |
| Other (1)                                                                  |   |                         | (46    | ) |
| Finance costs, net                                                         |   |                         | (105   | ) |
| Income tax expenses                                                        |   |                         | (36    | ) |
| Profit for the year                                                        |   |                         | 52     |   |

----

|                                                                         |   | New Israeli Shekels          |   |
|------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                         |   | Year ended December 31, 2015 |   |
|                                                                         |   | In millions                  |   |
|                                                                         |   | Cellular segment             |   |   | Fixed-line segment |   |   | Elimination |   |   | Consolidated |   |
| Segment revenue - Services                                                   |   |                         | 2,275  |   |   |   | 717 |   |   |   |   |   |   | 2,992 |   |
| Inter-segment revenue - Services                                             |   |                         | 22     |   |   |   | 189 |   |   |   | (211 | ) |   |   |   |   |
| Segment revenue - Equipment                                                  |   |                         | 1,051  |   |   |   | 68 |   |   |   |   |   |   |   | 1,119 |   |
| Total revenues                                                               |   |                         | 3,348  |   |   |   | 974 |   |   |   | (211 | ) |   |   | 4,111 |   |
|                                                                         |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment cost of revenues - Services                                          |   |                         | 1,856  |   |   |   | 736 | (*) |   |   |   |   |   |   | 2,592 |   |
| Inter-segment cost of  revenues- Services                               |   |                         | 187    |   |   |   | 24 |   |   |   | (211 | ) |   |   |   |   |
| Segment cost of revenues - Equipment                                         |   |                         | 832    |   |   |   | 48 |   |   |   |   |   |   |   | 880 |   |
| Cost of revenues                                                             |   |                         | 2,875  |   |   |   | 808 |   |   |   | (211 | ) |   |   | 3,472 |   |
| Gross profit                                                                 |   |                         | 473    |   |   |   | 166 |   |   |   |   |   |   |   | 639 |   |
|                                                                         |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses (3)                                                       |   |                         | 506    |   |   |   | 134 | (*) |   |   |   |   |   |   | 640 |   |
| Income with respect to settlement                                            |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      agreement with Orange                          |   |                         | 61     |   |   |   |   |   |   |   |   |   |   |   | 61 |   |
| Other income, net                                                            |   |                         | 44     |   |   |   | 3 |   |   |   |   |   |   |   | 47 |   |
| Operating profit                                                             |   |                         | 72     |   |   |   | 35 |   |   |   |   |   |   |   | 107 |   |
| Adjustments to presentation of segment                                       |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Adjusted EBITDA                                            |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      –Depreciation and amortization           |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|        (including impairment charges, see |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|         note 13)                     |   |                         | 510    |   |   |   | 243 |   |   |   |   |   |   |   |   |   |
|     –Other (1)                                     |   |                         | 15     |   |   |   | 1 |   |   |   |   |   |   |   |   |   |
| Segment Adjusted EBITDA (2)                                                  |   |                         | 597    |   |   |   | 279 |   |   |   |   |   |   |   |   |   |
|                                                                     |   | New Israeli Shekels          |   |
|--------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                     |   | Year ended December 31, 2015 |   |
|                                                                     |   | In millions                  |   |
| Reconciliation of segments subtotal Adjusted EBITDA to loss for the year |   |                         |   |
| Segments subtotal Adjusted EBITDA (2)                                    |   |                         | 876    |   |
| Depreciation and amortization (including impairment                      |   |                         |   |   |
|     charges, see note 13)                            |   |                         | (753   | ) |
| Other (1)                                                                |   |                         | (16    | ) |
| Finance costs, net                                                       |   |                         | (143   | ) |
| Income tax expenses                                                      |   |                         | (4     | ) |
| Loss for the year                                                        |   |                         | (40    | ) |

----

|                                                               |   | New Israeli Shekels          |   |
|--------------------------------------------------------------------|--------|------------------------------|--------|
|                                                               |   | Year ended December 31, 2014 |   |
|                                                               |   | In millions                  |   |
|                                                               |   | Cellular segment             |   |   | Fixed-line segment |   |   | Elimination |   |   | Consolidated |   |
| Segment revenue - Services                                         |   |                         | 2,592  |   |   |   | 816 |   |   |   |   |   |   | 3,408 |   |
| Inter-segment revenue - Services                                   |   |                         | 26     |   |   |   | 188 |   |   |   | (214 | ) |   |   |   |   |
| Segment revenue - Equipment                                        |   |                         | 938    |   |   |   | 54 |   |   |   |   |   |   |   | 992 |   |
| Total revenues                                                     |   |                         | 3,556  |   |   |   | 1,058 |   |   |   | (214 | ) |   |   | 4,400 |   |
|                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Segment cost of revenues - Services                                |   |                         | 1,963  |   |   |   | 692 |   |   |   |   |   |   |   | 2,655 |   |
| Inter-segment cost of  revenues- Services                     |   |                         | 185    |   |   |   | 29 |   |   |   | (214 | ) |   |   |   |   |
| Segment cost of revenues - Equipment                               |   |                         | 727    |   |   |   | 37 |   |   |   |   |   |   |   | 764 |   |
| Cost of revenues                                                   |   |                         | 2,875  |   |   |   | 758 |   |   |   | (214 | ) |   |   | 3,419 |   |
| Gross profit                                                       |   |                         | 681    |   |   |   | 300 |   |   |   |   |   |   |   | 981 |   |
|                                                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating expenses (3)                                             |   |                         | 509    |   |   |   | 122 |   |   |   |   |   |   |   | 631 |   |
| Other income, net                                                  |   |                         | 49     |   |   |   | 1 |   |   |   |   |   |   |   | 50 |   |
| Operating profit                                                   |   |                         | 221    |   |   |   | 179 |   |   |   |   |   |   |   | 400 |   |
| Adjustments to presentation of segment                             |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     Adjusted EBITDA                            |   |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      –Depreciation and amortization |   |                         | 534    |   |   |   | 155 |   |   |   |   |   |   |   |   |   |
|      –Other (1)                     |   |                         | 7      |   |   |   | * |   |   |   |   |   |   |   |   |   |
| Segment Adjusted EBITDA (2)                                        |   |                         | 762    |   |   |   | 334 |   |   |   |   |   |   |   |   |   |
|                                                                       |   | New Israeli Shekels         |   |
|----------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                       |   | Year ended December 31,2014 |   |
|                                                                       |   | In millions                 |   |
| Reconciliation of segments subtotal Adjusted EBITDA to profit for the year |   |                        |   |
| Segments subtotal Adjusted EBITDA (2)                                      |   |                        | 1,096  |   |
| Depreciation and amortization                                              |   |                        | (689   | ) |
| Other (1)                                                                  |   |                        | (7     | ) |
| Finance costs, net                                                         |   |                        | (159   | ) |
| Income tax expenses                                                        |   |                        | (79    | ) |
| Profit for the year                                                        |   |                        | 162    |   |

| (1) | Mainly amortization of employee share based compensation. |
|-----|-----------------------------------------------------------|

| (2) | Adjusted EBITDA as reviewed by the CODM represents Earnings Before Interest (finance costs, net), Taxes, Depreciation and Amortization (including amortization of intangible assets, deferred expenses-right of use and impairment charges) and Other expenses (mainly amortization of share based compensation). Adjusted EBITDA is not a financial measure under IFRS and may not be comparable to other similarly titled measures for other companies. Adjusted EBITDA may not be indicative of the Group's historic operating results nor is it meant to be predictive of potential future results. The usage of the term "Adjusted EBITDA" is to highlight the fact that the Amortization includes amortization of deferred expenses – right of use and amortization of employee share based compensation and impairment charges; it is fully comparable to EBITDA information which has been previously provided for prior periods. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Operating expenses include selling and marketing expenses and general and administrative expenses. |
|-----|----------------------------------------------------------------------------------------------------|

----

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

----

|                                 |   | Exchange    |   |   | Exchange    |   |   |          |   |
|--------------------------------------|--------|-------------|--------|--------|-------------|--------|--------|---------------|--------|
|                                 |   | rate of one |   |   | rate of one |   |   | Israeli       |   |
|                                 |   | Dollar      |   |   | Euro        |   |   | CPI*          |   |
| At December 31:                      |   |        |   |   |        |   |   |          |   |
|      2016   |   | NIS 3.845   |   |   | NIS 4.044   |   |   | 220.68 points |   |
|      2015   |   | NIS 3.902   |   |   | NIS 4.247   |   |   | 221.13 points |   |
|      2014   |   | NIS 3.889   |   |   | NIS 4.725   |   |   | 223.36 points |   |
| Increase (decrease) during the year: |   |        |   |   |        |   |   |          |   |
|      2016   |   |        | (1.5   | )%     |        |   | (4.8   | )%            |   |   | (0.2 | )% |
|      2015   |   |        | 0.3    | %      |        |   | (10.1  | )%            |   |   | (1.0 | )% |
|      2014   |   |        | 12.0   | %      |        |   | (1.2   | )%            |   |   | (0.2 | )% |

----

|                                                      |   | December 31, 2016               |   |
|-----------------------------------------------------------|--------|---------------------------------|--------|
|                                                      |   | In or linked to USD             |   |   | In or linked to other foreign currencies (mainly EURO) |   |   | NIS linked to CPI |   |   | NIS unlinked |   |   | Total |   |
|                                                      |   | New Israeli Shekels in millions |   |
| Current assets                                            |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Cash and cash equivalents               |   |                            | 2      |   |   |   | 1 |   |   |   |   |   |   | 713 |   |   |   | 716 |   |
|    Short term deposits                     |   |                            |   |   |   |   |   |   |   |   |   |   |   | 452 |   |   |   | 452 |   |
|    Trade receivables*                      |   |                            | 58     |   |   |   | 35 |   |   |   |   |   |   | 897 |   |   |   | 990 |   |
|    Other receivables                       |   |                            |   |   |   |   |   |   |   |   |   |   |   | 39 |   |   |   | 39 |   |
|                                                      |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non- current assets                                       |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Trade receivables                       |   |                            |   |   |   |   |   |   |   |   |   |   |   | 333 |   |   |   | 333 |   |
| Total assets                                              |   |                            | 60     |   |   |   | 36 |   |   |   |   |   |   | 2,434 |   |   |   | 2,530 |   |
|                                                      |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                                       |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Current maturities of notes payable and |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       borrowings            |   |                            |   |   |   |   |   |   |   |   | 212 |   |   |   | 287 |   |   |   | 499 |   |
|    Trade payables*                         |   |                            | 132    |   |   |   | 19 |   |   |   |   |   |   |   | 530 |   |   |   | 681 |   |
|    Payables in respect of employees        |   |                            |   |   |   |   |   |   |   |   |   |   |   |   | 90 |   |   |   | 90 |   |
|    Other payables                          |   |                            |   |   |   |   |   |   |   |   |   |   |   |   | 10 |   |   |   | 10 |   |
|                                                      |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non- current liabilities                                  |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Notes payable                           |   |                            |   |   |   |   |   |   |   |   | 212 |   |   |   | 437 |   |   |   | 649 |   |
|    Borrowings from banks and others        |   |                            |   |   |   |   |   |   |   |   | 197 |   |   |   | 1,353 |   |   |   | 1,550 |   |
| Total liabilities                                         |   |                            | 132    |   |   |   | 19 |   |   |   | 621 |   |   |   | 2,707 |   |   |   | 3,479 |   |
|                                                                    |   | In or linked to foreign currencies |   |
|-------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                    |   | New Israeli Shekels in millions    |   |
| *Accounts that were set-off under enforceable netting arrangements |   |                               |   |
| Trade receivables gross amounts                                         |   |                               | 267    |   |
| Set-off                                                                 |   |                               | (174   | ) |
| Trade receivables, net                                                  |   |                               | 93     |   |
|                                                                    |   |                               |   |   |
| Trade payables gross amounts                                            |   |                               | 325    |   |
| Set-off                                                                 |   |                               | (174   | ) |
| Trade payables, net                                                     |   |                               | 151    |   |

----

|                                                      |   | December 31, 2015               |   |
|-----------------------------------------------------------|--------|---------------------------------|--------|
|                                                      |   | In or linked to USD             |   |   | In or linked to other foreign currencies (mainly EURO) |   |   | NIS linked to CPI |   |   | NIS unlinked |   |   | Total |   |
|                                                      |   | New Israeli Shekels in millions |   |
| Current assets                                            |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Cash and cash equivalents               |   |                            |   |   |   | 1 |   |   |   |   |   |   | 925 |   |   |   | 926 |   |
|    Trade receivables*                      |   |                            | 50     |   |   |   | 50 |   |   |   |   |   |   | 957 |   |   |   | 1,057 |   |
|    Other receivables                       |   |                            |   |   |   |   |   |   |   |   |   |   |   | 31 |   |   |   | 31 |   |
|                                                      |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non- current assets                                       |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Trade receivables                       |   |                            |   |   |   |   |   |   |   |   |   |   |   | 492 |   |   |   | 492 |   |
| Total assets                                              |   |                            | 50     |   |   |   | 51 |   |   |   |   |   |   | 2,405 |   |   |   | 2,506 |   |
|                                                      |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current liabilities                                       |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Current maturities of notes payable and |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|        borrowings      |   |                            |   |   |   |   |   |   |   |   | 353 |   |   |   | 201 |   |   |   | 554 |   |
|    Trade payables*                         |   |                            | 117    |   |   |   | 46 |   |   |   |   |   |   |   | 552 |   |   |   | 715 |   |
|    Payables in respect of employees        |   |                            |   |   |   |   |   |   |   |   |   |   |   |   | 68 |   |   |   | 68 |   |
|    Other payables                          |   |                            |   |   |   |   |   |   |   |   |   |   |   |   | 10 |   |   |   | 10 |   |
|                                                      |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non- current liabilities                                  |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|    Notes payable                           |   |                            |   |   |   |   |   |   |   |   | 463 |   |   |   | 727 |   |   |   | 1,190 |   |
|    Borrowings from banks and others        |   |                            |   |   |   |   |   |   |   |   | 198 |   |   |   | 1,159 |   |   |   | 1,357 |   |
| Total liabilities                                         |   |                            | 117    |   |   |   | 46 |   |   |   | 1,014 |   |   |   | 2,717 |   |   |   | 3,894 |   |
|                                                                     |   | In or linked to foreign currencies |   |
|--------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                     |   | New Israeli Shekels in millions    |   |
| * Accounts that were set-off under enforceable netting arrangements |   |                               |   |
| Trade receivables gross amounts                                          |   |                               | 248    |   |
| Set-off                                                                  |   |                               | (148   | ) |
| Trade receivables, net                                                   |   |                               | 100    |   |
|                                                                     |   |                               |   |   |
| Trade payables gross amounts                                             |   |                               | 311    |   |
| Set-off                                                                  |   |                               | (148   | ) |
| Trade payables, net                                                      |   |                               | 163    |   |

----

|                                      |   | New Israeli Shekels |   |
|-------------------------------------------|--------|---------------------|--------|
|                                      |   | December 31         |   |
|                                      |   | 2015                |   |   | 2016 |   |
|                                      |   | In millions         |   |
| Embedded derivatives pay USD, receive NIS |   |                | 35     |   |   |   | 11 |   |

----

----

|                                             |   | 2017                            |   |   | 2018   |   |   | 2019   |   |   | 2020to2021 |   |   | 2022to2023 |   |   | Total undisco-unted |   |   | Less offering expenses and discounts |   |   | Total discounted |   |
|--------------------------------------------------|--------|---------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|------------|--------|--------|------------|--------|--------|---------------------|--------|--------|--------------------------------------|--------|--------|------------------|--------|
|                                             |   | New Israeli Shekels in millions |   |
| Principal payments of long term indebtedness:    |   |                            |   |   |   |   |   |   |   |   |       |   |   |       |   |   |                |   |   |                                 |   |   |             |   |
| Notes payable series C (*)                       |   |                            | 212    |   |   |   | 212    |   |   |   |       |   |   |       |   |   |                |   |   | 424                                  |   |   |             | (1     | ) |   |   | 423 |   |
| Notes payable series D                           |   |                            | 109    |   |   |   | 109    |   |   |   | 109        |   |   |       | 219    |   |                |   |   |                                 |   | 546    |             |   |   | (3 | ) |   |   | 543 |   |
| Notes payable series E                           |   |                            | 121    |   |   |   |   |   |   |   |       |   |   |       |   |   |                |   |   |                                 |   | 121    |             |   |   | ** |  |   |   | 121 |   |
| Borrowing C                                      |   |                            |   |   |   |   | 25     |   |   |   | 25         |   |   |       | 25     |   |                |   |   |                                 |   | 75     |             |   |   |   |   |   |   | 75 |   |
| Borrowing D                                      |   |                            |   |   |   |   | 25     |   |   |   | 25         |   |   |       | 25     |   |                |   |   |                                 |   | 75     |             |   |   |   |   |   |   | 75 |   |
| Borrowing E                                      |   |                            |   |   |   |   |   |   |   |   | 152        |   |   |       |   |   |                |   |   |                                 |   | 152    |             |   |   |   |   |   |   | 152 |   |
| Borrowing F (*)                                  |   |                            |   |   |   |   |   |   |   |   | 197        |   |   |       |   |   |                |   |   |                                 |   | 197    |             |   |   |   |   |   |   | 197 |   |
| Borrowing G                                      |   |                            |   |   |   |   | 20     |   |   |   | 20         |   |   |       | 40     |   |                |   | 20     |                                 |   |   | 100              |   |   |   |   |   |   |   | 100 |   |
| Borrowing H                                      |   |                            |   |   |   |   | 20     |   |   |   | 20         |   |   |       | 40     |   |                |   | 20     |                                 |   |   | 100              |   |   |   |   |   |   |   | 100 |   |
| Borrowing I                                      |   |                            |   |   |   |   | 30     |   |   |   | 40         |   |   |       | 50     |   |                |   |   |                                 |   |   | 120              |   |   |   |   |   |   |   | 120 |   |
| Borrowing J                                      |   |                            | 15     |   |   |   | 15     |   |   |   | 15         |   |   |       | 17     |   |                |   |   |                                 |   |   | 62               |   |   |   |   |   |   |   | 62 |   |
| Borrowing K                                      |   |                            |   |   |   |   | 23     |   |   |   | 30         |   |   |       | 23     |   |                |   |   |                                 |   |   | 76               |   |   |   |   |   |   |   | 76 |   |
| Borrowing L                                      |   |                            |   |   |   |   | 33     |   |   |   | 33         |   |   |       | 67     |   |                |   | 67     |                                 |   |   | 200              |   |   |   |   |   |   |   | 200 |   |
| Borrowing M                                      |   |                            | 17     |   |   |   | 33     |   |   |   | 33         |   |   |       | 67     |   |                |   | 50     |                                 |   |   | 200              |   |   |   |   |   |   |   | 200 |   |
| Borrowing N                                      |   |                            | 25     |   |   |   | 25     |   |   |   | 67         |   |   |       | 133    |   |                |   |   |                                 |   |   | 250              |   |   |   |   |   |   |   | 250 |   |
| Expected interest payments of                    |   |                            |   |   |   |   |   |   |   |   |       |   |   |       |   |   |                |   |   |                                 |   |   |             |   |   |   |   |   |   |   |   |   |
|    long term borrowings and notes |   |                            |   |   |   |   |   |   |   |   |       |   |   |       |   |   |                |   |   |                                 |   |   |             |   |   |   |   |   |   |   |   |   |
|    payables (*)                   |   |                            | 88     |   |   |   | 69     |   |   |   | 48         |   |   |       | 38     |   |                |   | 5      |                                 |   |   | 248              |   |   |   |   |   |   |   |   |   |
| Trade and other payables                         |   |                            | 681    |   |   |   |   |   |   |   |       |   |   |       |   |   |                |   |   |                                 |   |   | 681              |   |   |   |   |   |   |   |   |   |
|                                             |   |                            | 1,268  |   |   |   | 639    |   |   |   | 814        |   |   |       | 744    |   |                |   | 162    |                                 |   |   | 3,627            |   |   |   |   |   |   |   |   |   |

----

|                                   |    |     |   |   | December 31, 2015               |   |   | December 31, 2016 |   |
|----------------------------------------|---------|----------|--------|--------|---------------------------------|--------|--------|-------------------|--------|
|                                   |    | Category |   |   | Carrying amount                 |   |   | Fair value        |   |   | Interest rate used (**) |   |   | Carrying amount |   |   | Fair value |   |   | Interest rate used (**) |   |
|                                   |    |     |   |   | New Israeli Shekels in millions |   |
| Assets                                 |    |     |   |   |                            |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents              |    | L&R  |   |   |                            | 926    |   |              |   | 926 |   |   |   |   |   |   | 716 |   |   |   | 716 |   |   |   |   |
| Short term deposits                    |    | L&R  |        |   |                            |   |   |              |   |   |   |   |   |   |   |   | 452 |   |   |   | 452 |   |   |   |   |
| Trade receivables                      |    | L&R  |        |   |                            | 1,549  |   |              |   | 1,552 |   |   |   | 3.73 | % |   |   | 1,323 |   |   |   | 1,318 |   |   |   | 4.72 | % |
| Other receivables (*)                  |    | L&R  |        |   |                            | 6      |   |              |   | 6 |   |   |   |   |   |   |   | 9 |   |   |   | 9 |   |   |   |   |   |
| Liabilities                            |    |     |   |   |                            |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes payable series B                 |    | AC       |   |   |                            | 121    |   |              |   | 123 |   |   | Market quote |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Notes payable series C                 |    | AC       |   |   |                            | 695    |   |              |   | 724 |   |   | Market quote |   |   |   | 423 |   |   |   | 440 |   |   | Market quote |   |
| Notes payable series D                 |    | AC       |   |   |                            | 543    |   |              |   | 548 |   |   | Market quote |   |   |   | 543 |   |   |   | 548 |   |   | Market quote |   |
| Notes payable series E                 |    | AC       |   |   |                            | 371    |   |              |   | 399 |   |   | Market quote |   |   |   | 121 |   |   |   | 127 |   |   | Market quote |   |
| Trade and other payables (*)           |    | AC       |   |   |                            | 793    |   |              |   | 793 |   |   |   |   |   |   |   | 780 |   |   |   | 780 |   |   |   |   |   |
| Borrowing C                            |    | AC       |   |   |                            | 75     |   |              |   | 85 |   |   |   | 2.66 | % |   |   | 75 |   |   |   | 81 |   |   |   | 3.43 | % |
| Borrowing D                            |    | AC       |   |   |                            | 75     |   |              |   | 85 |   |   |   | 2.66 | % |   |   | 75 |   |   |   | 81 |   |   |   | 3.43 | % |
| Borrowing E (*)                        |    | AC       |   |   |                            | 152    |   |              |   | 152 |   |   |   |   |   |   |   | 152 |   |   |   | 152 |   |   |   |   |   |
| Borrowing F                            |    | AC       |   |   |                            | 198    |   |              |   | 210 |   |   |   | 1.79 | % |   |   | 197 |   |   |   | 199 |   |   |   | 3.17 | % |
| Borrowing G                            |    | AC       |   |   |                            | 100    |   |              |   | 100 |   |   |   | 3.08 | % |   |   | 100 |   |   |   | 98 |   |   |   | 3.85 | % |
| Borrowing H                            |    | AC       |   |   |                            | 100    |   |              |   | 100 |   |   |   | 2.93 | % |   |   | 100 |   |   |   | 97 |   |   |   | 3.85 | % |
| Borrowing I                            |    | AC       |   |   |                            | 120    |   |              |   | 121 |   |   |   | 3.17 | % |   |   | 120 |   |   |   | 120 |   |   |   | 3.43 | % |
| Borrowing J                            |    | AC       |   |   |                            | 76     |   |              |   | 77 |   |   |   | 2.75 | % |   |   | 62 |   |   |   | 62 |   |   |   | 3.23 | % |
| Borrowing K                            |    | AC       |   |   |                            | 75     |   |              |   | 75 |   |   |   | 3.71 | % |   |   | 76 |   |   |   | 76 |   |   |   | 3.43 | % |
| Borrowing L                            |    | AC       |   |   |                            | 200    |   |              |   | 203 |   |   |   | 4.25 | % |   |   | 200 |   |   |   | 204 |   |   |   | 3.98 | % |
| Borrowing M                            |    | AC       |   |   |                            | 200    |   |              |   | 200 |   |   |   | 3.884 | % |   |   | 200 |   |   |   | 201 |   |   |   | 3.85 | % |
| Borrowing N                            |    | AC       |   |   |                            |   |   |              |   |   |   |   |   |   |   |   |   | 250 |   |   |   | 260 |   |   |   | 3.67 | % |
| Derivative financial instruments  |    | FVTPL    |   |   |                            |   |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                   | Level 2 |     |   |   | *                               |   |   |              | *      |   |   |   |   |   |   |   | * |   |   |   | * |   |   |   |   |   |

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

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

----

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

|                                    |   | New Israeli Shekels |   |
|-----------------------------------------|--------|---------------------|--------|
|                                    |   | December 31         |   |
|                                    |   | 2015                |   |   | 2016 |   |
|                                    |   | In millions         |   |
| Trade (current and non-current)         |   |                | 1,763  |   |   |   | 1,545 |   |
| Deferred interest income (note 2(n)(3)) |   |                | (45    | ) |   |   | (32 | ) |
| Allowance for doubtful accounts         |   |                | (169   | ) |   |   | (190 | ) |
|                                    |   |                | 1,549  |   |   |   | 1,323 |   |
| Current                                 |   |                | 1,057  |   |   |   | 990 |   |
| Non – current                     |   |                | 492    |   |   |   | 333 |   |

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

|                                       |   | New Israeli Shekels |   |
|--------------------------------------------|--------|---------------------|--------|
|                                       |   | Year ended          |   |
|                                       |   | 2014                |   |   | 2015 |   |   | 2016 |   |
|                                       |   | In millions         |   |
| Balance at beginning of year               |   |                | 202    |   |   |   | 166 |   |   |   | 169 |   |
| Receivables written-off during the year as |   |                |   |   |   |   |   |   |   |   |   |   |
|     uncollectible      |   |                | (74    | ) |   |   | (61 | ) |   |   | (61 | ) |
| Charge or expense during the year          |   |                | 38     |   |   |   | 64 |   |   |   | 82 |   |
| Balance at end of year                     |   |                | 166    |   |   |   | 169 |   |   |   | 190 |   |

----

|  | (b) | Allowance for doubtful accounts (continued) The aging of gross trade receivables and their respective allowance for doubtful accounts as of December 31, 2015 and 2016 is as follows: |
|--|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|               |   | New Israeli Shekels |   |
|--------------------|--------|---------------------|--------|
|               |   | December 31         |   |
|               |   | 2015                |   |   | 2016 |   |
|               |   | In millions         |   |
|               |   | Gross               |   |   | Allowance |   |   | Gross |   |   | Allowance |   |
| Less than one year |   |                | 1,679  |   |   |   | 108 |   |   |   | 1,420 |   |   |   | 101 |   |
| More than one year |   |                | 84     |   |   |   | 61 |   |   |   | 125 |   |   |   | 89 |   |
|               |   |                | 1,763  |   |   |   | 169 |   |   |   | 1,545 |   |   |   | 190 |   |
|                                                                                         |   | New Israeli Shekels |   |
|----------------------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                                         |   | December 31         |   |
|                                                                                         |   | 2015                |   |   | 2016 |   |
|                                                                                         |   | In millions         |   |
| Handsets and devices                                                                         |   |                | 82     |   |   |   | 60 |   |
| Accessories and other                                                                        |   |                | 16     |   |   |   | 9 |   |
| Spare parts                                                                                  |   |                | 20     |   |   |   | 22 |   |
| ISP modems, routers, servers and related equipment                                           |   |                | 2      |   |   |   | 5 |   |
|                                                                                         |   |                | 120    |   |   |   | 96 |   |
|                                                                                         |   |                |   |   |   |   |   |   |
| Write-offs recorded                                                                          |   |                | 5      |   |   |   | 6 |   |
| Cost of inventory recognized as expenses and included in cost of revenues for the year ended |   |                | 898    |   |   |   | 673 |   |

----

----

|                                                       |   | As at December 31 |   |
|------------------------------------------------------------|--------|-------------------|--------|
|                                                       |   | 2015              |   |   | 2016 |   |
|                                                       |   | NIS in millions   |   |   | NIS in millions |   |
| Current assets                                             |   |              | 26     |   |   |   | 122 |   |
| Non-current assets                                         |   |              | 8      |   |   |   | 115 |   |
| Current liabilities                                        |   |              | 24     |   |   |   | 110 |   |
| Non-current liabilities                                    |   |              | 8      |   |   |   | 125 |   |
|                                                       |   |              |   |   |   |   |   |   |
| Supplemental information relating to associates:           |   |              |   |   |   |   |   |   |
|   Commitments for operating leases and operating |   |              |   |   |   |   |   |   |
|       expenses               |   |              | 7      |   |   |   | 364 |   |
|   Commitments to purchase fixed assets           |   |              | 4      |   |   |   | 3 |   |
|                                                   |   | Year ended December 31 |   |
|--------------------------------------------------------|--------|------------------------|--------|
|                                                   |   | 2015                   |   |   | 2016 |   |
|                                                   |   | NIS in millions        |   |   | NIS in millions |   |
|                                                   |   |                   |   |   |   |   |
| Summarized statement of income                         |   |                   |   |   |   |   |
|    Revenue                              |   |                   | 94     |   |   |   | 432 |   |
|    Pre-tax Profit                       |   |                   | *      |   |   |   | * |   |
|    After-tax profit                     |   |                   | *      |   |   |   | * |   |
|    Total comprehensive income           |   |                   | *      |   |   |   | * |   |
|                                                   |   |                   |   |   |   |   |   |   |
| Reconciliation to carrying amount:                     |   |                   |   |   |   |   |   |   |
|    Opening net assets of PHI            |   |                   | -      |   |   |   | 2 |   |
|    Profit for the period                |   |                   | *      |   |   |   | * |   |
|    Partners contributions               |   |                   | 2      |   |   |   |   |   |
|    Closing net assets of PHI            |   |                   | 2      |   |   |   | 2 |   |
|    Carrying amount: Group's share (50%) |   |                   | 1      |   |   |   | 1 |   |

----

|                         |   | Communication network           |   |   | Computers and information systems |   |   | Optic fibers and related assets |   |   | Property, leasehold improvements, furniture and equipment |   |   | Total  |   |
|------------------------------|--------|---------------------------------|--------|--------|-----------------------------------|--------|--------|---------------------------------|--------|--------|-----------------------------------------------------------|--------|--------|--------|--------|
|                         |   | New Israeli Shekels in millions |   |
| Cost                         |   |                            |   |   |                              |   |   |                            |   |   |                                                      |   |   |   |   |
| Balance at January 1, 2014   |   |                            | 2,504  |   |                              |   | 332    |                            |   |   | 450                                                       |   |   |   | 244    |   |   |   | 3,530 |   |
| Additions in 2014            |   |                            | 237    |   |                              |   | 23     |                            |   |   | 19                                                        |   |   |   | 15     |   |   |   | 294 |   |
| Disposals in 2014            |   |                            | 237    |   |                              |   | 52     |                            |   |   |                                                      |   |   |   | 30     |   |   |   | 319 |   |
| Balance at December 31, 2014 |   |                            | 2,504  |   |                              |   | 303    |                            |   |   | 469                                                       |   |   |   | 229    |   |   |   | 3,505 |   |
|                         |   |                            |   |   |                              |   |   |                            |   |   |                                                      |   |   |   |   |   |   |   |   |   |
| Additions in 2015            |   |                            | 118    |   |                              |   | *      |                            |   |   | 19                                                        |   |   |   | 4      |   |   |   | 141 |   |
| Disposals in 2015            |   |                            | 423    |   |                              |   | 39     |                            |   |   | 2                                                         |   |   |   | 30     |   |   |   | 494 |   |
| Balance at December 31, 2015 |   |                            | 2,199  |   |                              |   | 264    |                            |   |   | 486                                                       |   |   |   | 203    |   |   |   | 3,152 |   |
|                         |   |                            |   |   |                              |   |   |                            |   |   |                                                      |   |   |   |   |   |   |   |   |   |
| Additions in 2016            |   |                            | 66     |   |                              |   | 17     |                            |   |   | 22                                                        |   |   |   | 11     |   |   |   | 116 |   |
| Disposals in 2016            |   |                            | 235    |   |                              |   | 74     |                            |   |   |                                                      |   |   |   | 78     |   |   |   | 387 |   |
| Balance at December 31, 2016 |   |                            | 2,030  |   |                              |   | 207    |                            |   |   | 508                                                       |   |   |   | 136    |   |   |   | 2,881 |   |
|                         |   |                            |   |   |                              |   |   |                            |   |   |                                                      |   |   |   |   |   |   |   |   |   |
| Accumulated depreciation     |   |                            |   |   |                              |   |   |                            |   |   |                                                      |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2014   |   |                            | 1,310  |   |                              |   | 179    |                            |   |   | 120                                                       |   |   |   | 130    |   |   |   | 1,739 |   |
| Depreciation in 2014         |   |                            | 305    |   |                              |   | 51     |                            |   |   | 31                                                        |   |   |   | 37     |   |   |   | 424 |   |
| Disposals in 2014            |   |                            | 236    |   |                              |   | 52     |                            |   |   |                                                      |   |   |   | 31     |   |   |   | 319 |   |
| Balance at December 31, 2014 |   |                            | 1,379  |   |                              |   | 178    |                            |   |   | 151                                                       |   |   |   | 136    |   |   |   | 1,844 |   |
|                         |   |                            |   |   |                              |   |   |                            |   |   |                                                      |   |   |   |   |   |   |   |   |   |
| Depreciation in 2015         |   |                            | 271    |   |                              |   | 45     |                            |   |   | 34                                                        |   |   |   | 26     |   |   |   | 376 |   |
| Impairment charges (**)      |   |                            | 5      |   |                              |   | 7      |                            |   |   |                                                      |   |   |   |   |   |   |   | 12 |   |
| Disposals in 2015            |   |                            | 423    |   |                              |   | 39     |                            |   |   | 2                                                         |   |   |   | 30     |   |   |   | 494 |   |
| Balance at December 31, 2015 |   |                            | 1,232  |   |                              |   | 191    |                            |   |   | 183                                                       |   |   |   | 132    |   |   |   | 1,738 |   |
|                         |   |                            |   |   |                              |   |   |                            |   |   |                                                      |   |   |   |   |   |   |   |   |   |
| Depreciation in 2016         |   |                            | 229    |   |                              |   | 29     |                            |   |   | 35                                                        |   |   |   | 23     |   |   |   | 316 |   |
| Disposals in 2016            |   |                            | 230    |   |                              |   | 74     |                            |   |   |                                                      |   |   |   | 76     |   |   |   | 380 |   |
| Balance at December 31, 2016 |   |                            | 1,231  |   |                              |   | 146    |                            |   |   | 218                                                       |   |   |   | 79     |   |   |   | 1,674 |   |
|                         |   |                            |   |   |                              |   |   |                            |   |   |                                                      |   |   |   |   |   |   |   |   |   |
| Carrying amounts, net        |   |                            |   |   |                              |   |   |                            |   |   |                                                      |   |   |   |   |   |   |   |   |   |
|                         |   |                            |   |   |                              |   |   |                            |   |   |                                                      |   |   |   |   |   |   |   |   |   |
| At December 31, 2014         |   |                            | 1,125  |   |                              |   | 125    |                            |   |   | 318                                                       |   |   |   | 93     |   |   |   | 1,661 |   |
| At December 31, 2015         |   |                            | 967    |   |                              |   | 73     |                            |   |   | 303                                                       |   |   |   | 71     |   |   |   | 1,414 |   |
| At December 31, 2016         |   |                            | 799    |   |                              |   | 61     |                            |   |   | 290                                                       |   |   |   | 57     |   |   |   | 1,207 |   |
|                                                                                                |   | New Israeli Shekels    |   |
|-----------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                                |   | Year ended December 31 |   |
|                                                                                                |   | 2014                   |   |   | 2015 |   |   | 2016 |   |
|                                                                                                |   | In millions            |   |
| Depreciation expenses and impairment charged to the income statement:                               |   |                   |   |   |   |   |   |   |   |
| Cost of revenues                                                                                    |   |                   | 396    |   |   |   | 363 |   |   |   | 291 |   |
| Selling and marketing expenses                                                                      |   |                   | 17     |   |   |   | 16 |   |   |   | 16 |   |
| General and administrative expenses                                                                 |   |                   | 11     |   |   |   | 9 |   |   |   | 9 |   |
|                                                                                                |   |                   | 424    |   |   |   | 388 |   |   |   | 316 |   |
| Communication network cost additions include capitalization of salary and employee related expenses |   |                   | 41     |   |   |   | 30 |   |   |   | 29 |   |

----

|                         |   | Licenses                        |   |   | Trade name |   |   | Customer relationships |   |   | Subscriber acquisition and retention costs |   |   | Computer software(*) |   |   | Total  |   |
|------------------------------|--------|---------------------------------|--------|--------|------------|--------|--------|------------------------|--------|--------|--------------------------------------------|--------|--------|----------------------|--------|--------|--------|--------|
|                         |   | New Israeli Shekels in millions |   |
| Cost                         |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |
| Balance at January 1, 2014   |   |                            | 2,088  |   |       |   | 73     |                   |   |   | 276                                        |   |   |                 | 12     |   |   |   | 573 |   |   |   | 3,022 |   |
| Additions in 2014            |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 5      |   |   |   | 135 |   |   |   | 140 |   |
| Disposals in 2014            |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 4      |   |   |   | 62 |   |   |   | 66 |   |
| Balance at December 31, 2014 |   |                            | 2,088  |   |       |   | 73     |                   |   |   | 276                                        |   |   |                 | 13     |   |   |   | 646 |   |   |   | 3,096 |   |
| Additions in 2015            |   |                            | 35     |   |       |   |   |                   |   |   |                                       |   |   |                 | 6      |   |   |   | 89 |   |   |   | 130 |   |
| Disposals in 2015            |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 6      |   |   |   | 73 |   |   |   | 79 |   |
| Balance at December 31, 2015 |   |                            | 2,123  |   |       |   | 73     |                   |   |   | 276                                        |   |   |                 | 13     |   |   |   | 662 |   |   |   | 3,147 |   |
| Additions in 2016            |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 4      |   |   |   | 82 |   |   |   | 86 |   |
| Disposals in 2016            |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 4      |   |   |   | 110 |   |   |   | 114 |   |
| Balance at December 31, 2016 |   |                            | 2,123  |   |       |   | 73     |                   |   |   | 276                                        |   |   |                 | 13     |   |   |   | 634 |   |   |   | 3,119 |   |
|                         |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Accumulated amortization     |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Balance at January 1, 2014   |   |                            | 1,418  |   |       |   | 28     |                   |   |   | 164                                        |   |   |                 | 9      |   |   |   | 236 |   |   |   | 1,855 |   |
| Amortization in 2014         |   |                            | 84     |   |       |   | 5      |                   |   |   | 24                                         |   |   |                 | 4      |   |   |   | 111 |   |   |   | 228 |   |
| Disposals in 2014            |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 4      |   |   |   | 62 |   |   |   | 66 |   |
| Balance at December 31, 2014 |   |                            | 1,502  |   |       |   | 33     |                   |   |   | 188                                        |   |   |                 | 9      |   |   |   | 285 |   |   |   | 2,017 |   |
| Amortization in 2015(**)     |   |                            | 86     |   |       |   | 6      |                   |   |   | 23                                         |   |   |                 | 7      |   |   |   | 121 |   |   |   | 243 |   |
| Impairment charges (***)     |   |                            |   |   |       |   | 2      |                   |   |   | 8                                          |   |   |                 |   |   |   |   |   |   |   |   | 10 |   |
| Disposals in 2015            |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 6      |   |   |   | 73 |   |   |   | 79 |   |
| Balance at December 31, 2015 |   |                            | 1,588  |   |       |   | 41     |                   |   |   | 219                                        |   |   |                 | 10     |   |   |   | 333 |   |   |   | 2,191 |   |
| Amortization in 2016         |   |                            | 88     |   |       |   | 21     |                   |   |   | 18                                         |   |   |                 | 5      |   |   |   | 117 |   |   |   | 249 |   |
| Disposals in 2016            |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 | 4      |   |   |   | 110 |   |   |   | 114 |   |
| Balance at December 31, 2016 |   |                            | 1,676  |   |       |   | 62     |                   |   |   | 237                                        |   |   |                 | 11     |   |   |   | 340 |   |   |   | 2,326 |   |
|                         |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| Carrying amounts, net        |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
| At December 31, 2014         |   |                            | 586    |   |       |   | 40     |                   |   |   | 88                                         |   |   |                 | 4      |   |   |   | 361 |   |   |   | 1,079 |   |
| At December 31, 2015         |   |                            | 535    |   |       |   | 32     |                   |   |   | 57                                         |   |   |                 | 3      |   |   |   | 329 |   |   |   | 956 |   |
| At December 31, 2016         |   |                            | 447    |   |       |   | 11     |                   |   |   | 39                                         |   |   |                 | 2      |   |   |   | 294 |   |   |   | 793 |   |
|                         |   |                            |   |   |       |   |   |                   |   |   |                                       |   |   |                 |   |   |   |   |   |   |   |   |   |   |
|                                                                              |   | New Israeli Shekels    |   |
|-----------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                              |   | Year ended December 31 |   |
|                                                                              |   | 2014                   |   |   | 2015 |   |   | 2016 |   |
|                                                                              |   | In millions            |   |
| Amortization expenses and impairments charged to the income statement:            |   |                   |   |   |   |   |   |   |   |
| Cost of revenues                                                                  |   |                   | 200    |   |   |   | 214 |   |   |   | 210 |   |
| Selling and marketing expenses                                                    |   |                   | 28     |   |   |   | 39 |   |   |   | 39 |   |
|                                                                              |   |                   | 228    |   |   |   | 253 |   |   |   | 249 |   |
|                                                                              |   |                   |   |   |   |   |   |   |   |   |   |   |
| (*) Cost additions include capitalization of salary and employee related expenses |   |                   | 44     |   |   |   | 35 |   |   |   | 36 |   |

----

|                                                        |   | New Israeli Shekels in millions |   |
|-------------------------------------------------------------|--------|---------------------------------|--------|
| Cost                                                        |   |                            |   |
| Balance at January 1, 2014                                  |   |                            | 380    |   |
| Additional payments in 2014                                 |   |                            | 22     |   |
| Balance at December 31, 2014                                |   |                            | 402    |   |
| Additional payments in 2015                                 |   |                            | 34     |   |
| Balance at December 31, 2015                                |   |                            | 436    |   |
| Additional payments in 2016                                 |   |                            | 80     |   |
| Balance at December 31, 2016                                |   |                            | 516    |   |
|                                                        |   |                            |   |   |
| Accumulated amortization and impairment                     |   |                            |   |   |
| Balance at January 1, 2014                                  |   |                            | 234    |   |
| Amortization in 2014                                        |   |                            | 37     |   |
| Balance at December 31, 2014                                |   |                            | 271    |   |
| Amortization in 2015                                        |   |                            | 36     |   |
| Impairment recorded in 2015                                 |   |                            | 76     |   |
| Balance at December 31, 2015                                |   |                            | 383    |   |
| Amortization in 2016                                        |   |                            | 30     |   |
| Balance at December 31, 2016                                |   |                            | 413    |   |
|                                                        |   |                            |   |   |
| Carrying amount, net at December 31, 2014              |   |                            | 131    |   |
|                                                        |   |                            |   |   |
| Carrying amount, net at December 31, 2015              |   |                            | 53     |   |
|         Current     |   |                            | 33     |   |
|         Non-current |   |                            | 20     |   |
|                                                        |   |                            |   |   |
| Carrying amount, net at December 31, 2016              |   |                            | 103    |   |
|        Current           |   |                            | 28     |   |
|        Non-current       |   |                            | 75     |   |

----

|  | (1) | Goodwill impairment tests |
|--|-----|---------------------------|

|                    | As of December 31, |
|-------------------------|--------------------|
|                    | 2014               |   | 2015 |   | 2016 |
| Terminal growth rate    | (negative 0.2%)    |   | (negative 0.09%) |   | 0.5% |
| After-tax discount rate | 10.5%              |   | 10.3% |   | 9.8% |
| Pre-tax discount rate   | 14.3%              |   | 13.4% |   | 11.9% |

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

|  | (i) | The Group reviewed the recoverability of the VOB/ISP CGU assets. As a result, an impairment charge in a total amount of NIS 98 million was recognized in 2015. The impairment charge was allocated to the assets of the CGU pro rata, on the basis of the carrying amount of each asset, provided that the impairment did not reduce the carrying amount of an asset below the highest of its fair value less costs to sell and its value-in-use, and zero. Accordingly, the following impairment charges were recorded in 2015 in the assets of the above CGU: |
|--|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (a) | Right of use by NIS 76 million, recorded in cost of revenues (see note 12). |
|--|-----|-----------------------------------------------------------------------------|

|  | (b) | Customer relationships by NIS 8 million, recorded in selling and marketing expenses. |
|--|-----|--------------------------------------------------------------------------------------|

|  | (c) | Computers and information systems by NIS 7 million, recorded in cost of revenues. |
|--|-----|-----------------------------------------------------------------------------------|

|  | (d) | Communication network by NIS 5 million, recorded in cost of revenues. |
|--|-----|-----------------------------------------------------------------------|

----

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

|  | (e) | Trade name by NIS 2 million, recorded in selling and marketing expenses. |
|--|-----|--------------------------------------------------------------------------|

|                            |   | Dismantling and restoring sites obligation |   |   | Legal claims** |   |   | Equipment warranty |   |
|---------------------------------|--------|--------------------------------------------|--------|--------|----------------|--------|--------|--------------------|--------|
|                            |   | New Israeli Shekels in millions            |   |
| Balance as at January 1, 2016   |   |                                       | 36     |   |           |   | 75     |               |   |   | 2 |   |
| Additions during the year       |   |                                       | *      |   |           |   | 19     |               |   |   | 4 |   |
| Reductions during the year      |   |                                       | (2     | )      |           |   | (18    | )                  |   |   | (5 | ) |
| Unwind of discount              |   |                                       | 1      |   |           |   |   |               |   |   |   |   |
| Balance as at December 31, 2016 |   |                                       | 35     |   |           |   | 76     |               |   |   | 1 |   |
| Non-current                     |   |                                       | 35     |   |           |   |   |               |   |   |   |   |
| Current                         |   |                                       |   |   |           |   | 76     |               |   |   | 1 |   |
|                            |   |                                       |   |   |           |   |   |               |   |   |   |   |
| Balance as at December 31, 2015 |   |                                       | 36     |   |           |   | 75     |               |   |   | 2 |   |
| Non-current                     |   |                                       | 36     |   |           |   |   |               |   |   |   |   |
| Current                         |   |                                       |   |   |           |   | 75     |               |   |   | 2 |   |

----

|  | (1) | Borrowings and Notes Payable |
|--|-----|------------------------------|

|                           | Linkage terms (principal and interest) |   |  Annual interest rate  |
|--------------------------------|----------------------------------------|--------|-----------------------------|
| Notes payable series C         | CPI                                    |   | 3.35% CPI adj.              |
| Notes payable series D         |                                   |   | 'Makam'(*) plus 1.2%   |
| Notes payable series E         |                                   |   | 5.5% fixed                  |
| Borrowing C                    |                                   |   | 5.7% fixed                  |
| Borrowing D                    |                                   |   | 5.7% fixed                  |
| Borrowing E                    |                                   |   | Prime(**) minus 0.025% |
| Borrowing F                    | CPI                                    |   | 3.42% CPI adj.              |
| Borrowing G (received in 2014) |                                   |   | 3.08% fixed                 |
| Borrowing H (received in 2014) |                                   |   | 2.93% fixed                 |
| Borrowing I (received in 2015) |                                   |   | 3.17% fixed                 |
| Borrowing J (received in 2015) |                                   |   | 2.75% fixed                 |
| Borrowing K (received in 2015) |                                   |   | 3.71% fixed                 |
| Borrowing L (received in 2015) |                                   |   | 4.25% fixed                 |
| Borrowing M (received in 2015) |                                   |   | 3.884% fixed                |
| Borrowing N (see note 15(3))   |                                   |   | 4.95% fixed                 |

|  | (*) | 'Makam' is a variable interest that is based on the yield of 12 month government bonds issued by the government of Israel. The interest is updated on a quarterly basis.The interest rates paid (in annual terms, and including the additional interest of 1.2%) for the period from October 1, 2016 to December 30, 2016 was 1.287%. |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (**) | The Israeli Prime interest rate is determined by the Bank of Israel and updated on a monthly basis. The Israeli Prime interest rate as of December 31, 2015 and 2016 was 1.60% per year. |
|--|------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | (2) | Notes payable buy back |
|--|-----|------------------------|

|  | (3) | New borrowings received |
|--|-----|-------------------------|

|  | (4) | Loan Commitments |
|--|-----|------------------|

----

| (4) | Loan Commitments (continued) |
|-----|------------------------------|

|  | (5) | Financial covenants |
|--|-----|---------------------|

|  | (1) | The ratio of (a) the amount of all financial obligations of the Company including bank guarantees that the Company has undertaken ("Total Debt") to (b) EBITDA less Capital Expenditures shall not exceed 6.5 (the ratio as of December 31, 2015 and 2016 was 5.5 and 4.5, respectively); and |
|--|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (2) | The ratio of (a) Total Debt to (b) the EBITDA of the Company shall not exceed 4 (the ratio as of December 31, 2015 and 2016 was 3.8 and 3.4, respectively). |
|--|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (6) | Negative pledge |
|--|-----|-----------------|

----

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

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

|                                             |   | New Israeli Shekels in millions |   |
|--------------------------------------------------|--------|---------------------------------|--------|
|                                             |   | Present value of obligation     |   |   | Fair value of plan assets |   |   | Total |   |
| At January 1, 2015                               |   |                            | 204    |   |   |   | (153 | ) |   |   | 51 |   |
| Current service cost                        |   |                            | 17     |   |   |   |   |   |   |   | 17 |   |
| Interest expense (income)                   |   |                            | 4      |   |   |   | (4 | ) |   |   | * |   |
| Employer contributions                           |   |                            |   |   |   |   | (15 | ) |   |   | (15 | ) |
| Benefits paid                                    |   |                            | (86    | ) |   |   | 72 |   |   |   | (14 | ) |
| Remeasurements:                                  |   |                            |   |   |   |   |   |   |   |   |   |   |
| Experience loss (gain)                           |   |                            | (4     | ) |   |   | 1 |   |   |   | (3 | ) |
| Loss from change in financial assumptions        |   |                            | (2     | ) |   |   | * |   |   |   | (2 | ) |
| Return on plan assets                            |   |                            |   |   |   |   | * |   |   |   | * |   |
| At December 31, 2015                             |   |                            | 133    |   |   |   | (99 | ) |   |   | 34 |   |
| Current service cost                        |   |                            | 17     |   |   |   |   |   |   |   | 17 |   |
| Interest expense (income)                   |   |                            | 5      |   |   |   | (3 | ) |   |   | 2 |   |
| Employer contributions                           |   |                            |   |   |   |   | (12 | ) |   |   | (12 | ) |
| Benefits paid                                    |   |                            | (19    | ) |   |   | 9 |   |   |   | (10 | ) |
| Remeasurements:                                  |   |                            |   |   |   |   |   |   |   |   |   |   |
| Experience loss (gain)                           |   |                            | 9      |   |   |   |   |   |   |   | 9 |   |
| Loss from change in demographic assumptions      |   |                            | (4     | ) |   |   |   |   |   |   | (4 | ) |
| Loss (gain) from change in financial assumptions |   |                            | 1      |   |   |   |   |   |   |   | 1 |   |
| Return on plan assets                            |   |                            |   |   |   |   | 2 |   |   |   | 2 |   |
| At December 31, 2016                        |   |                            | 142    |   |   |   | (103 | ) |   |   | 39 |   |

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

----

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

|                            |   | December 31 |     |
|---------------------------------|--------|-------------|----------|
|                            |   | 2015        |     |   | 2016 |   |
| Interest rate weighted average  |   |        | 3.47     | % |   |   | 2.95 | % |
| Inflation rate weighted average |   |        | 1.20     | % |   |   | 1.04 | % |
| Expected turnover rate          |   |        | 10% - 49 | % |   |   | 9%-56 | % |
| Future salary increases         |   |        | 1% - 26  | % |   |   | 1%-6 | % |
|                    |   | December 31, 2016                 |   |
|-------------------------|--------|-----------------------------------|--------|
|                    |   | NIS in millions                   |   |
|                    |   | Increase of 10% of the assumption |   |   | Decrease of 10% of the assumption |   |
| Interest rate           |   |                              | (0.7   | ) |   |   | 0.7 |   |
| Expected turnover rate  |   |                              | 0.3    |   |   |   | (0.3 | ) |
| Future salary increases |   |                              | 0.4    |   |   |   | (0.4 | ) |
|                      |   | NIS in millions |   |
|---------------------------|--------|-----------------|--------|
|  2017                |   |            | 27     |   |
|  2018                |   |            | 15     |   |
|  2019                |   |            | 13     |   |
|  2020 and 2021       |   |            | 21     |   |
|  2022 and thereafter |   |            | 91     |   |
|                      |   |            | 167    |   |

----

|  | (1) | Under the Telegraph Regulations the Company is committed to pay an annual fixed fee for each frequency used. For the years 2014, 2015 and 2016 the Company recorded expenses in a total amount of approximately NIS 60 million, NIS 65 million and NIS 64 million, respectively. Under the above Regulations should the Company choose to return a frequency, such payment is no longer due. Commencing August 2016, the total amount of frequency fees of both the Company and Hot Mobile under the regulations is split between the Company and Hot Mobile, through PHI ,according to the OPEX-CAPEX mechanism (see also note 9). |
|--|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (2) | At December 31, 2016, the Group is committed to acquire property and equipment and software elements for approximately NIS 20  million. |
|--|-----|----------------------------------------------------------------------------------------------------------------------------------------------|

|  | (3) | At December 31, 2016, the Group is committed to acquire inventory in an amount of approximately NIS 1,128 million. |
|--|-----|-------------------------------------------------------------------------------------------------------------------------|

|  | (4) | Right of Use (ROU) |
|--|-----|--------------------|

|                |   | New Israeli Shekels in millions |   |
|---------------------|--------|---------------------------------|--------|
| 2017                |   |                            | 46     |   |
| 2018                |   |                            | 46     |   |
| 2019                |   |                            | 46     |   |
| 2020                |   |                            | 45     |   |
| 2021 and thereafter |   |                            | 90     |   |
|                |   |                            | 273    |   |

----

|  | (5) | In April 2012 - the Company entered into a five-year agreement with Bezeq - The Israel Telecommunication Corp., Ltd. ("Bezeq"), effective from January 1, 2012 to December 31, 2016, for the supply of transmission services for use in Partner's mobile network. Commencing April 2015, Hot Mobile undertakes its share in these expenses through PHI according to the OPEX-CAPEX mechanism, see note 9. |
|--|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|  | (7) | Covenants and negative pledge – see note 15(5), (6). |
|--|-----|------------------------------------------------------------|

|  | (8) | See note 15(4) with respect of loan commitments. |
|--|-----|--------------------------------------------------|

|  | (9) | Operating leases – see note 19. |
|--|-----|---------------------------------------|

|  | (10) | See note 9 with respect to network sharing and PHI's commitments. |
|--|------|-------------------------------------------------------------------|

----

|  | (1) | The Group leases it's headquarter facilities in Rosh Ha-ayin, Israel, with a total of approximately 51,177 gross square meters (including parking lots). The lease term is until the end of 2024. The rental payments are linked to the Israeli CPI. |
|--|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (2) | The Group also leases call centers and retail stores. The leases for each site have different lengths and specific terms. Lease agreements for service centers and retail stores for a period of two to ten years. The Group has options to extend some lease contract periods for up to twenty years (including the original lease periods). Some of the rental payments are linked to the dollar or to the Israeli CPI. Some of the extension options include an increase of the lease payment in a range of 2%-15%. |
|--|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (3) | Lease agreements in respect of cell sites and switching stations throughout Israel are for periods of two to ten years. The Company has an option to extend some of the lease contract periods for up to ten years (including the original lease periods). Some of the rental payments fees are linked to the dollar or linked to the Israeli CPI. Some of the extension options include an increase of the lease payment mostly in a range of 2%-10%. |
|--|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (4) | As of December 31, 2016 operating lease agreements in respect of vehicles are for periods of up to three years. The rental payments are linked to the Israeli CPI. |
|--|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (5) | Non-cancelable minimum operating lease rentals in respect of all the above leases are payable including option periods which are reasonably certain are as follows: |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                |   | New Israeli Shekels |   |
|---------------------|--------|---------------------|--------|
|                |   | December 31, 2016   |   |
|                |   | In millions         |   |
| 2017                |   |                | 137    |   |
| 2018                |   |                | 107    |   |
| 2019                |   |                | 86     |   |
| 2020                |   |                | 71     |   |
| 2021-2022           |   |                | 116    |   |
| 2023-2024           |   |                | 83     |   |
| 2025-2026           |   |                | 14     |   |
| 2027 and thereafter |   |                | 16     |   |
|                |   |                | 630    |   |

|  | (6) | The rental expenses for the years ended December 31, 2014, 2015 and 2016 were approximately NIS 259 million, NIS 260 million, and NIS 213 million, respectively. |
|--|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

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

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

| Claim amount                    |   | Number of claims |   |   | Total claims amount (NIS million) |   |
|---------------------------------|--------|------------------|--------|--------|-----------------------------------|--------|
| Up to NIS 100 million           |   |             | 7      |   |                              |   | 227 |   |
| NIS 100-400 million             |   |             | 6      |   |                              |   | 1,364 |   |
| NIS 400 million - NIS 1 billion |   |             | 1      |   |                              |   | 405 |   |
| Over NIS 1 billion              |   |             | -      |   |                              |   | - |   |
| Unquantified claims             |   |             | 4      |   |                              |   | - |   |
| Total                           |   |             | 18     |   |                              |   | 1,996 |   |

|  | 1. | On April 13, 2011, a claim and a motion to certify the claim as a class action were filed against Partner. The claim alleges that Partner sent a message to its customers that their internet package was fully utilized before it was fully utilized. The amount claimed in the lawsuit was estimated by the plaintiffs to be approximately NIS 4.6 million. In June 2013, the Court approved the motion and recognized the lawsuit as a class action. In August 2013, Partner filed a request to appeal to the Supreme Court. In February 2014, the Supreme Court dismissed Partner's request, and a hearing has been set. In January 2015, the parties filed a request to approve a settlement agreement. In July 2015, the parties filed an amended request to approve the settlement agreement. In June 2016 the Court approved the request and Partner is currently implementing the approved settlement agreement. The damages that Partner is required to pay are immaterial. |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | 2. | On May 12, 2011, a claim and a motion to certify the claim as a class action were filed against Partner. The claim alleges that Partner misled certain subscribers with respect to terms and conditions of a content back up service for cellular handsets. The total amount claimed from Partner is estimated by the plaintiffs to be approximately NIS 35 million. In August 2013, the Court approved the motion and recognized the lawsuit as a class action. In June 2016, the parties filed a request to approve a settlement agreement. In December 2016 the Court approved the request and Partner is currently implementing the approved settlement agreement. The damages that Partner is required to pay are immaterial. |
|--|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 3. | On September 9, 2010, a claim and a motion to certify the claim as a class action were filed against Partner. The claim alleges that Partner unlawfully charged its customers for services of various content providers which are sent through text messages (SMS). The total amount claimed from Partner is estimated by the plaintiffs to be approximately NIS 405 million. The claim was certified as a class action in December 2016. In February 2017, the plaintiffs filed an appeal to the Supreme Court, regarding the definition of the group of customers. Partner estimates that even if the claim will be decided in favor of the relevant customers, the damages that Partner will be required to pay for, will be immaterial. |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 1) | During 2008, several claims and motions to certify the claims as class actions were filed against several international telephony companies including 012 Smile. The plaintiffs allege that with respect to prepaid calling card services, the defendants misled the consumers regarding certain issues, charged consumers in excess, and formed a cartel that arranged and raised the prices of calling cards. The total amount of damages claimed by the plaintiffs against 012 Smile is approximately NIS 128 million. In November 2010, the court granted the plaintiffs' request and certified the lawsuit as a class action against all of the defendants. In May 2012, the parties signed a settlement agreement regarding the amended request and regarding an additional lawsuit in an amount of NIS 2.7 billion, dealing with similar issues. The parties submitted a revised settlement agreement in December 2014 that was approved by the Court in January 2015. In January 2016, the Court declared that in accordance with the documents filed with the court, the execution of the settlement agreement was completed. The damages that Partner was required to pay were immaterial. |
|--|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | 2) | On November 4, 2013, a claim and a motion to certify the claim as a class action were filed against Partner. The claim alleges that Partner unlawfully reduced the account balance of Pre-Paid subscribers. The amount claimed in the lawsuit was estimated by the plaintiffs to be approximately NIS 35 million. In October 2015, the parties filed a joint request to approve the claim as a class action. In May, 2016, the Court approved the request and in October 2016 Partner completed its obligations in accordance with the claim. The damages that Partner was required to pay were immaterial. |
|--|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| Claim amount              |   | Number of claims |   |   | Total claims amount (NIS million) |   |
|---------------------------|--------|------------------|--------|--------|-----------------------------------|--------|
| Up to NIS 100 million     |   |             | 13     |   |                              |   | 329 |   |
| NIS 100-400 million       |   |             | 2      |   |                              |   | 416 |   |
| Unquantified  claims |   |             | 7      |   |                              |   | - |   |
| Total                     |   |             | 22     |   |                              |   | 745 |   |

----

|  | 1) | On September 26, 2011, a claim and a motion to certify the claim as a class action were filed against Partner. The claim alleges that Partner unlawfully charged payments from customers who requested to port-in their phone number from another cellular operator for services which were given to them prior to the completion of the port-in. The amount claimed in the lawsuit was estimated by the plaintiffs to be approximately NIS 25 million. In March 2013, the Tel-Aviv District Court approved the motion and recognized the lawsuit as a class action. In February 2016, the parties filed a request to approve a settlement agreement. In May 2016, the Court approved the request and in December 2016 Partner completed its obligations in accordance with the settlement agreement. The damages that Partner was required to pay were immaterial. |
|--|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2) | On May 6, 2010, a claim and a motion to certify the claim as a class action were filed against Partner. The claim alleges that Partner unlawfully charged its customers for opening handsets that were locked for use on other cellular networks (SIM lock). The amount claimed in the lawsuit was estimated by the plaintiffs to be approximately NIS 20 million. In August 2013, the Court approved the motion and recognized the lawsuit as a class action.  In October 2013, Partner filed a request to appeal to the Supreme Court. In June 2014, the Supreme Court determined a credit mechanism for the relevant group of customers which the parties are implementing. In November 2016, the plaintiffs filed a request to the Court to approve that the verdict regarding the refund to the customers was fully executed. In January 2017 Partner completed its obligations in accordance with the claim. The damages that Partner was required to pay were immaterial. |
|--|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | 2. | Employees and suppliers claims |
|--|----|--------------------------------|

|  | 3. | Other claims |
|--|----|--------------|

----

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

|  | (1) | Under the Telegraph Regulations the Company is committed to pay an annual fixed fee for each frequency used. Under the above Regulations should the Company choose to return a frequency, such payment is no longer due. |
|--|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

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

|  | b. | Share based compensation to employees |
|--|----|---------------------------------------|

|  | (1) | Description of the Equity Incentive Plan |
|--|-----|------------------------------------------|

----

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

|   |  (1) | Description of the Equity Incentive Plan (continued) |
|--------|-----------|------------------------------------------------------|

|  | - | Exercise price adjustment: The exercise price of options shall be reduced in the following events: (1) dividend distribution other than in the ordinary course: by the gross dividend amount so distributed per share, and (2)  dividend distribution in the ordinary course: the exercise price shall be reduced by the amount of a dividend in excess of 40% of the Company’s net income for the relevant period per share, or by the gross dividend amount so distributed per share ("Full Dividend Mechanism"), depending on the date of granting of the options. |
|--|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | - | Cashless exercise:  Most of the options may be exercised only through a cashless exercise procedure, while holders of other options may choose between cashless exercise and the regular option exercise procedure. In accordance with such cashless exercise, the option holder would receive from the Company, without payment of the exercise price, only the number of shares whose aggregate market value equals the economic gain which the option holder would have realized by selling all the shares purchased at their market price, net of the option exercise price. |
|--|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (2) | Information in respect of options and restricted shares granted under the Plan: |
|--|-----|---------------------------------------------------------------------------------|

|                                     |   | Through December 31, 2016 |        |
|------------------------------------------|--------|---------------------------|-------------|
|                                     |   | Number of options         |        |   | Number of RSAs |   |
| Granted                                  |   |                      | 30,102,849  |   |   |   | 3,791,622 |   |
| Shares issued upon exercises and vesting |   |                      | (6,111,330  | ) |   |   | (864,412 | ) |
| Cancelled upon net exercises, expiration |   |                      |        |   |   |   |   |   |
|     and forfeitures  |   |                      | (12,705,618 | ) |   |   | (971,796 | ) |
| Outstanding                              |   |                      | 11,285,901  |   |   |   | 1,955,414 |   |
| Of which:                                |   |                      |        |   |   |   |   |   |
| Exercisable                              |   |                      | 5,912,904   |   |   |   |   |   |
| Vest in 2017                             |   |                      | 2,535,575   |   |   |   | 916,070 |   |
| Vest in 2018                             |   |                      | 2,481,751   |   |   |   | 890,588 |   |
| Vest in 2019                             |   |                      | 355,671     |   |   |   | 148,756 |   |

----

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

|  | (3) | Options and RSAs status summary as of December 31, 2014, 2015 and 2016 and the changes therein during the years ended on those dates: |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------|

|                                        |   | Year ended December 31 |      |
|---------------------------------------------|--------|------------------------|-----------|
|                                        |   | 2014                   |      |   | 2015 |   |   | 2016 |   |
|                                        |   | Number                 |      |   | Weighted average exercise price |   |   | Number |   |   | Weighted average exercise price |   |   | Number |   |   | Weighted average exercise price |   |
| Share Options:                              |   |                   |      |   | NIS |   |   |   |   |   | NIS |   |   |   |   |   | NIS |   |
| Outstanding at the beginning of the year    |   |                   | 6,928,382 |   |   |   | 43.46 |   |   |   | 8,962,116 |   |   |   | 32.08 |   |   |   | 12,686,317 |   |   |   | 29.52 |   |
| Granted during the year                     |   |                   | 3,897,270 |   |   |   | 26.25 |   |   |   | 5,519,031 |   |   |   | 17.41 |   |   |   | 998,433 |   |   |   | 18.14 |   |
| Exercised during the year                   |   |                   | (828,950  | ) |   |   | 16.30 |   |   |   | (32,880 | ) |   |   | 13.12 |   |   |   | (284,251 | ) |   |   | 15.74 |   |
| Forfeited during the year                   |   |                   | (334,570  | ) |   |   | 32.83 |   |   |   | (1,459,215 | ) |   |   | 28.7 |   |   |   | (1,219,648 | ) |   |   | 20.58 |   |
| Expired during the year                     |   |                   | (700,016  | ) |   |   | 57.72 |   |   |   | (302,735 | ) |   |   | 58.61 |   |   |   | (894,950 | ) |   |   | 38.16 |   |
| Outstanding at the end of the year          |   |                   | 8,962,116 |   |   |   | 32.08 |   |   |   | 12,686,317 |   |   |   | 29.52 |   |   |   | 11,285,901 |   |   |   | 29.14 |   |
| Exercisable at the end of the year          |   |                   | 4,902,943 |   |   |   | 47.25 |   |   |   | 4,615,076 |   |   |   | 45.97 |   |   |   | 5,912,904 |   |   |   | 37.77 |   |
| Shares issued during the year due exercises |   |                   | 385,943   |   |   |   |   |   |   |   | 14,511 |   |   |   |   |   |   |   | 47,484 |   |   |   |   |   |
|                                        |   |                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RSAs:                                       |   |                   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Outstanding at the beginning of the year    |   |                   |      |   |   |   |   |   |   |   | 1,589,990 |   |   |   |   |   |   |   | 2,900,626 |   |   |   |   |   |
| Granted during the year                     |   |                   | 1,594,850 |   |   |   |   |   |   |   | 1,779,596 |   |   |   |   |   |   |   | 417,176 |   |   |   |   |   |
| Vested during the year                      |   |                   |      |   |   |   |   |   |   |   | (6,015 | ) |   |   |   |   |   |   | (858,397 | ) |   |   |   |   |
| Forfeited during the year                   |   |                   | (4,860    | ) |   |   |   |   |   |   | (462,945 | ) |   |   |   |   |   |   | (503,991 | ) |   |   |   |   |
| Outstanding at the end of the year          |   |                   | 1,589,990 |   |   |   |   |   |   |   | 2,900,626 |   |   |   |   |   |   |   | 1,955,414 |   |   |   |   |   |

|                                                                                                     |   | Options granted in 2014 |   |   | Options granted in 2015 |   |   | Options granted in 2016 |   |
|----------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|--------|-------------------------|--------|--------|-------------------------|--------|
| Weighted average fair value of options granted using the                                                 |   |                    |   |   |                    |   |   |                    |   |
|     Black & Scholes option-pricing model – per option (NIS)                |   |                    | 6.92   |   |                    |   | 5.37   |                    |   |   | 5.02 |   |
| The above fair value is estimated on the grant date based on the following weighted average assumptions: |   |                    |   |   |                    |   |   |                    |   |   |   |   |
| Expected volatility                                                                                      |   |                    | 31.66  | %      |                    |   | 39.28  | %                       |   |   | 39.5 | % |
| Risk-free interest rate                                                                                  |   |                    | 1.00   | %      |                    |   | 0.54   | %                       |   |   | 0.54 | % |
| Expected life (years)                                                                                    |   |                    | 4      |   |                    |   | 3      |                    |   |   | 3 |   |
| Dividend yield                                                                                           |   |                    | *      |   |                    |   | *      |                    |   |   | * |   |

----

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

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

| Expire in |   | Number of options |       |   | Weighted average exercise price in NIS |   |
|-----------|--------|-------------------|------------|--------|----------------------------------------|--------|
| 2017      |   |              | 748,729    |   |                                   |   | 42.07 |   |
| 2018      |   |              | 50,000     |   |                                   |   | 23.61 |   |
| 2019      |   |              | 1,218,271  |   |                                   |   | 49.82 |   |
| 2020      |   |              | 2,915,328  |   |                                   |   | 37.14 |   |
| 2021      |   |              | 5,175,460  |   |                                   |   | 19.99 |   |
| 2022      |   |              | 1,178,113  |   |                                   |   | 20.14 |   |
|      |   |              | 11,285,901 |   |                                   |   | 29.14 |   |

----

| (a)  Cost of revenues                            |   | New Israeli Shekels     |   |
|-------------------------------------------------------|--------|-------------------------|--------|
|                                                  |   | Year ended December 31, |   |
|                                                  |   | 2014                    |   |   | 2015 |   |   | 2016 |   |
|                                                  |   | In millions             |   |
| Transmission, communication and content providers     |   |                    | 981    |   |   |   | 888 |   |   |   | 814 |   |
| Cost of equipment and accessories                     |   |                    | 738    |   |   |   | 852 |   |   |   | 625 |   |
| Wages, employee benefits expenses and car maintenance |   |                    | 366    |   |   |   | 320 |   |   |   | 270 |   |
| Depreciation and amortization (including impairment)  |   |                    | 596    |   |   |   | 577 |   |   |   | 501 |   |
| Costs of handling, replacing or repairing equipment   |   |                    | 88     |   |   |   | 88 |   |   |   | 93 |   |
| Operating lease, rent and overhead expenses           |   |                    | 332    |   |   |   | 315 |   |   |   | 258 |   |
| Network and cable maintenance                         |   |                    | 120    |   |   |   | 145 |   |   |   | 150 |   |
| Internet infrastructure and service providers         |   |                    | 29     |   |   |   | 49 |   |   |   | 68 |   |
| Car kit installation, IT support, and other operating |   |                    |   |   |   |   |   |   |   |   |   |   |
|      expenses                |   |                    | 86     |   |   |   | 72 |   |   |   | 62 |   |
| Amortization of rights of use (including impairment)  |   |                    | 37     |   |   |   | 112 |   |   |   | 30 |   |
| Other                                                 |   |                    | 46     |   |   |   | 54 |   |   |   | 53 |   |
| Total cost of revenues                                |   |                    | 3,419  |   |   |   | 3,472 |   |   |   | 2,924 |   |

| (b)  Selling and marketing expenses              |   | New Israeli Shekels     |   |
|-------------------------------------------------------|--------|-------------------------|--------|
|                                                  |   | Year ended December 31, |   |
|                                                  |   | 2014                    |   |   | 2015 |   |   | 2016 |   |
|                                                  |   | In millions             |   |
| Wages, employee benefits expenses and car maintenance |   |                    | 205    |   |   |   | 206 |   |   |   | 177 |   |
| Advertising and marketing                             |   |                    | 49     |   |   |   | 30 |   |   |   | 68 |   |
| Selling commissions, net                              |   |                    | 83     |   |   |   | 77 |   |   |   | 82 |   |
| Depreciation and amortization (including impairment)  |   |                    | 45     |   |   |   | 55 |   |   |   | 55 |   |
| Operating lease, rent and overhead expenses           |   |                    | 25     |   |   |   | 27 |   |   |   | 29 |   |
| Other                                                 |   |                    | 31     |   |   |   | 22 |   |   |   | 15 |   |
| Total selling and marketing expenses                  |   |                    | 438    |   |   |   | 417 |   |   |   | 426 |   |

| (c)  General and administrative expenses         |   | New Israeli Shekels     |   |
|-------------------------------------------------------|--------|-------------------------|--------|
|                                                  |   | Year ended December 31, |   |
|                                                  |   | 2014                    |   |   | 2015 |   |   | 2016 |   |
|                                                  |   | In millions             |   |
| Wages, employee benefits expenses and car maintenance |   |                    | 71     |   |   |   | 84 |   |   |   | 101 |   |
| Bad debts and allowance for doubtful accounts         |   |                    | 39     |   |   |   | 63 |   |   |   | 82 |   |
| Professional fees                                     |   |                    | 27     |   |   |   | 31 |   |   |   | 32 |   |
| Credit card and other commissions                     |   |                    | 18     |   |   |   | 16 |   |   |   | 14 |   |
| Depreciation                                          |   |                    | 11     |   |   |   | 9 |   |   |   | 9 |   |
| Other                                                 |   |                    | 27     |   |   |   | 20 |   |   |   | 25 |   |
| Total general and administrative expenses             |   |                    | 193    |   |   |   | 223 |   |   |   | 263 |   |

----

| (d)  Employee benefit expense                                              |   | New Israeli Shekels     |   |
|---------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                            |   | Year ended December 31, |   |
|                                                                            |   | 2014                    |   |   | 2015 |   |   | 2016 |   |
|                                                                            |   | In millions             |   |
| Wages and salaries including social benefits, social                            |   |                    |   |   |   |   |   |   |   |
|      security costs, pension costs and car maintenance |   |                    |   |   |   |   |   |   |   |
|      before capitalization                             |   |                    | 683    |   |   |   | 622 |   |   |   | 537 |   |
| Less: expenses capitalized (notes 10, 11)                                       |   |                    | (85    | ) |   |   | (65 | ) |   |   | (65 | ) |
| Service costs: defined benefit plan (note 16)                                   |   |                    | 19     |   |   |   | 21 |   |   |   | 17 |   |
| Service costs: defined contribution plan (note 16)                              |   |                    | 17     |   |   |   | 15 |   |   |   | 14 |   |
| Amortization of share based compensation  (note 21(b))                     |   |                    | 8      |   |   |   | 17 |   |   |   | 45 |   |
|                                                                            |   |                    | 642    |   |   |   | 610 |   |   |   | 548 |   |

|                                     |   | New Israeli ShekelsYear ended December 31, |   |
|------------------------------------------|--------|--------------------------------------------|--------|
|                                     |   | 2014                                       |   |   | 2015 |   |   | 2016 |   |
|                                     |   | In millions                                |   |
| Unwinding of trade receivables           |   |                                       | 47     |   |   |   | 46 |   |   |   | 41 |   |
| Other income, net                        |   |                                       | 2      |   |   |   | * |   |   |   | 4 |   |
| Capital gain from property and equipment |   |                                       | 1      |   |   |   | 1 |   |   |   | * |   |
|                                     |   |                                       | 50     |   |   |   | 47 |   |   |   | 45 |   |

----

|                                                       |   | New Israeli Shekels     |   |
|------------------------------------------------------------|--------|-------------------------|--------|
|                                                       |   | Year ended December 31, |   |
|                                                       |   | 2014                    |   |   | 2015 |   |   | 2016 |   |
|                                                       |   | In millions             |   |
| Net foreign exchange rate gains                            |   |                    |   |   |   |   |   |   | 7 |   |
| Fair value gain from derivative financial instruments, net |   |                    |   |   |   | 2 |   |   |   | * |   |
| CPI linkage income                                         |   |                    |   |   |   | 9 |   |   |   | 2 |   |
| Interest income from cash equivalents                      |   |                    | 3      |   |   |   | 1 |   |   |   | 1 |   |
| Other                                                      |   |                    | *      |   |   |   | 1 |   |   |   | 3 |   |
| Finance income                                             |   |                    | 3      |   |   |   | 13 |   |   |   | 13 |   |
|                                                       |   |                    |   |   |   |   |   |   |   |   |   |   |
| Interest expenses                                          |   |                    | 123    |   |   |   | 136 |   |   |   | 105 |   |
| CPI linkage expenses                                       |   |                    | 3      |   |   |   |   |   |   |   |   |   |
| Fair value loss from derivative financial instruments, net |   |                    | 7      |   |   |   |   |   |   |   |   |   |
| Net foreign exchange rate losses                           |   |                    | 18     |   |   |   | 9 |   |   |   |   |   |
| Other finance costs                                        |   |                    | 11     |   |   |   | 11 |   |   |   | 13 |   |
| Finance expenses                                           |   |                    | 162    |   |   |   | 156 |   |   |   | 118 |   |
|                                                       |   |                    | 159    |   |   |   | 143 |   |   |   | 105 |   |

----

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

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

----

|  | c. | Deferred income taxes |
|--|----|-----------------------|

| Balance of deferred tax asset (liability) in respect of |   | As at January 1, 2014 |   |   | Charged to the income statement |   |   | Charged to other comprehen-sive income |   |   | As at December 31, 2014 |   |   | Charged to the income statement |   |   | Charged to other comprehen-sive income |   |   | As at December 31, 2015 |   |   | Charged to the income statement |   |   | Charged to other comprehensive income |   |   | Effect of change in corporate tax rate |   |   | As at December 31, 2016 |   |
|---------------------------------------------------------|--------|-----------------------|--------|--------|---------------------------------|--------|--------|----------------------------------------|--------|--------|-------------------------|--------|--------|---------------------------------|--------|--------|----------------------------------------|--------|--------|-------------------------|--------|--------|---------------------------------|--------|--------|---------------------------------------|--------|--------|----------------------------------------|--------|--------|-------------------------|--------|
| Allowance for doubtful accounts                         |   |                  | 54     |   |                            |   | (10    | )                                      |   |   |                    |   |   | 44                              |   |   |                                   | 1      |   |                    |   |   |                            |   | 45     |                                  |   |   | 6                                      |   |   |                    |   |   |   | (6 | ) |   |   | 45 |   |
| Provisions for employee rights                          |   |                  | 18     |   |                            |   | (1     | )                                      |   |   | 2                       |   |   |                            | 19     |   |                                   |   | (4     | )                       |   |   | (1                              | )      |   |                                  | 14     |   |                                   |   | *      |                    |   |   | 2 |   |   |   | (2 | ) |   |   | 14 |   |
| Depreciable fixed assets and software                   |   |                  | (92    | )      |                            |   | 22     |                                   |   |   |                    |   |   |                            | (70    | )      |                                   |   | 17     |                    |   |   |                            |   |   |                                  | (53    | )      |                                   |   | 13     |                    |   |   |   |   |   |   | 5 |   |   |   | (35 | ) |
| Intangibles, deferred expenses and carry forward losses |   |                  | 23     |   |                            |   | (16    | )                                      |   |   |                    |   |   |                            | 7      |   |                                   |   | 15     |                    |   |   |                            |   |   |                                  | 22     |   |                                   |   | (8     | )                       |   |   |   |   |   |   | (5 | ) |   |   | 9 |   |
| Options granted to employees                            |   |                  | 1      |   |                            |   | *      |                                   |   |   |                    |   |   |                            | 1      |   |                                   |   | 2      |                    |   |   |                            |   |   |                                  | 3      |   |                                   |   | 4      |                    |   |   |   |   |   |   | (1 | ) |   |   | 6 |   |
| Other                                                   |   |                  | 8      |   |                            |   | 1      |                                   |   |   |                    |   |   |                            | 9      |   |                                   |   | 9      |                    |   |   |                            |   |   |                                  | 18     |   |                                   |   | (18    | )                       |   |   |   |   |   |   | 2 |   |   |   | 2 |   |
| Total                                                   |   |                  | 12     |   |                            |   | (4     | )                                      |   |   | 2                       |   |   |                            | 10     |   |                                   |   | 40     |                    |   |   | (1                              | )      |   |                                  | 49     |   |                                   |   | (3     | )                       |   |   | 2 |   |   |   | (7 | ) |   |   | 41 |   |

----

|  | c. | Deferred income taxes (continued) |
|--|----|-----------------------------------|

|                                                               |   | New Israeli Shekels |   |
|--------------------------------------------------------------------|--------|---------------------|--------|
|                                                               |   | December 31,        |   |
|                                                               |   | 2015                |   |   | 2016 |   |
|                                                               |   | In millions         |   |
| Deferred tax assets                                                |   |                |   |   |   |   |
| Deferred tax assets to be recovered after more than 12 months      |   |                | 92     |   |   |   | 87 |   |
| Deferred tax assets to be recovered within 12 months               |   |                | 50     |   |   |   | 37 |   |
|                                                               |   |                | 142    |   |   |   | 124 |   |
| Deferred tax liabilities                                           |   |                |   |   |   |   |   |   |
| Deferred tax liabilities to be recovered after more than 12 months |   |                | 85     |   |   |   | 72 |   |
| Deferred tax liabilities to be recovered within 12 months          |   |                | 8      |   |   |   | 11 |   |
|                                                               |   |                | 93     |   |   |   | 83 |   |
| Deferred tax assets, net                                           |   |                | 49     |   |   |   | 41 |   |

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

|                                                   |   | New Israeli Shekels    |   |
|--------------------------------------------------------|--------|------------------------|--------|
|                                                   |   | Year ended December 31 |   |
|                                                   |   | 2014                   |   |   | 2015 |   |   | 2016 |   |
|                                                   |   | In millions            |   |
| Profit (loss) before taxes on income,                  |   |                   |   |   |   |   |   |   |   |
| as reported in the income statements                   |   |                   | 241    |   |   |   | (36 | ) |   |   | 88 |   |
| Theoretical tax expense                                |   |                   | 64     |   |   |   | (9 | ) |   |   | 22 |   |
| Increase in tax resulting from disallowable deductions |   |                   | 15     |   |   |   | 7 |   |   |   | 11 |   |
| Taxes on income in respect of previous years           |   |                   |   |   |   |   | 7 |   |   |   | (4 | ) |
| Change in corporate tax rate, see (b) above            |   |                   |   |   |   |   |   |   |   |   | 7 |   |
| Other                                                  |   |                   | *      |   |   |   | (1 | ) |   |   | * |   |
| Income tax expenses                                    |   |                   | 79     |   |   |   | 4 |   |   |   | 36 |   |

----

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

|                                      |   | New Israeli Shekels    |   |
|-------------------------------------------|--------|------------------------|--------|
|                                      |   | Year ended December 31 |   |
|                                      |   | 2014                   |   |   | 2015 |   |   | 2016 |   |
|                                      |   | In millions            |   |
| For the reported year:                    |   |                   |   |   |   |   |   |   |   |
| Current                                   |   |                   | 72     |   |   |   | 37 |   |   |   | 31 |   |
| Deferred, see (c) above                   |   |                   | 4      |   |   |   | (40 | ) |   |   | 2 |   |
| Effect of change in corporate tax rate on |   |                   |   |   |   |   |   |   |   |   |   |   |
|    deferred taxes          |   |                   |   |   |   |   |   |   |   |   | 7 |   |
| In respect of previous year:              |   |                   |   |   |   |   |   |   |   |   |   |   |
| Current                                   |   |                   | 3      |   |   |   | 7 |   |   |   | (4 | ) |
|                                      |   |                   | 79     |   |   |   | 4 |   |   |   | 36 |   |

|  | f. | Tax assessments: |
|--|----|------------------|

|  | 1) | The Company has received final corporate tax assessments through the year ended December 31, 2013. |
|--|----|----------------------------------------------------------------------------------------------------|

|  | 2) | A subsidiary has received final corporate tax assessments through the year ended December 31, 2013. |
|--|----|-----------------------------------------------------------------------------------------------------|

|  | 3) | As general rule, tax self-assessments filed by another two subsidiaries through the year ended December 31, 2012 are, by law, now regarded as final. |
|--|----|------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | a. | Key management compensation |
|--|----|-----------------------------|

|                                           |   | New Israeli Shekels    |   |
|------------------------------------------------|--------|------------------------|--------|
|                                           |   | Year ended December 31 |   |
|                                           |   | 2014                   |   |   | 2015 |   |   | 2016 |   |
| Key management compensation expenses comprised |   | In millions            |   |
| Salaries and short-term employee benefits      |   |                   | 20     |   |   |   | 23 |   |   |   | 22 |   |
| Long term employment benefits                  |   |                   | 3      |   |   |   | 4 |   |   |   | 3 |   |
| Employee share-based compensation              |   |                   |   |   |   |   |   |   |   |   |   |   |
|      expenses         |   |                   | 2      |   |   |   | 4 |   |   |   | 17 |   |
|                                           |   |                   | 25     |   |   |   | 31 |   |   |   | 42 |   |

|                                                        |   | New Israeli Shekels |   |
|-------------------------------------------------------------|--------|---------------------|--------|
|                                                        |   | December 31,        |   |
|                                                        |   | 2015                |   |   | 2016 |   |
| Statement of financial position items - key management |   | In millions         |   |
| Current liabilities:                                        |   |                | 7      |   |   |   | 10 |   |
| Non-current liabilities:                                    |   |                | 14     |   |   |   | 12 |   |

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

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

----

|  | d. | Associates – investment in PHI |
|--|----|--------------------------------------|

|             |   | New Israeli Shekels    |   |
|------------------|--------|------------------------|--------|
|             |   | Year ended December 31 |   |
|             |   | 2015                   |   |   | 2016 |   |
|             |   | In millions            |   |
| Cost of revenues |   |                   | (7     | ) |   |   | (2 | ) |

|                             |   | New Israeli Shekels |   |
|----------------------------------|--------|---------------------|--------|
|                             |   | December 31,        |   |
|                             |   | 2015                |   |   | 2016 |   |
|                             |   | In millions         |   |
| Deferred expenses - Right of use |   |                | 4      |   |   |   | 41 |   |
| Current assets (liabilities)     |   |                | 25     |   |   |   | (5 | ) |

|                                                                                       |   | Year ended December 31 |    |
|--------------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                       |   | 2014                   |    |   | 2015 |   |   | 2016 |   |
| Profit (loss)  used for the computation of                                       |   |                   |    |   |   |   |   |   |   |
| basic and diluted EPS (NIS in millions)                                                    |   |                   | 162     |   |   |   | (40 | ) |   |   | 52 |   |
|                                                                                       |   |                   |    |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares used                                                |   |                   |    |   |   |   |   |   |   |   |   |   |
| in computation of basic EPS (in thousands)                                            |   |                   | 155,802 |   |   |   | 156,081 |   |   |   | 156,268 |   |
|                                                                                       |   |                   |    |   |   |   |   |   |   |   |   |   |
| Add - net additional shares from assumed                                              |   |                   |    |   |   |   |   |   |   |   |   |   |
|       exercise of employee stock options and restricted |   |                   |    |   |   |   |   |   |   |   |   |   |
|       shared (in thousands)                                  |   |                   | 598     |   |   |   | 0 |   |   |   | 1,828 |   |
|                                                                                       |   |                   |    |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares used in                                             |   |                   |    |   |   |   |   |   |   |   |   |   |
| computation of diluted EPS (in thousands)                                                  |   |                   | 156,400 |   |   |   | 156,081 |   |   |   | 158,096 |   |
|                                                                                       |   |                   |    |   |   |   |   |   |   |   |   |   |
| Number of options and restricted shares not taken into                                     |   |                   |    |   |   |   |   |   |   |   |   |   |
|      account in computation of diluted earnings per share,   |   |                   |    |   |   |   |   |   |   |   |   |   |
|      because of their anti-dilutive effect (in thousands)         |   |                   | 8,101   |   |   |   | 15,587 |   |   |   | 8,906 |   |

----

----