----

----

| o      | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|--------|------------------------------------------------------------------------------------------------|
|   |                                                                                           |
|   | OR                                                                                             |
| x      | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934           |
|   | For the fiscal year ended December 31, 2009                                                    |
|   |                                                                                           |
|   | OR                                                                                             |
| o      | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934       |
|   | For the transition period from __________ to __________                                        |
|   |                                                                                           |
| o      | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    |
|   | Date of event requiring this shell company report ___________                                  |

| Title of each class                 |   | Name of each exchange on which registered |
|-------------------------------------|--------|-------------------------------------------|
| Ordinary Shares, NIS 0.01 Par Value |   | NASDAQ Global Market                      |

----

|                                  |   |                            |   |                                      |   |
|---------------------------------------|--------|---------------------------------|--------|-------------------------------------------|--------|
| Large accelerated filer   o |   | Accelerated filer   o |   | Non-accelerated filer    x |   |

|        |                                                                                                    |    |   |
|-------------|---------------------------------------------------------------------------------------------------------|---------|--------|
| U.S. GAAP o | International Financial Reporting Standards as issued by the International Accounting Standards Board x | Other o |   |

----

----

| PART I   |   |                                                    |   | 1  |
|----------|--------|---------------------------------------------------------|--------|----|
| ITEM 1.  |   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS   |   | 1  |
| ITEM 2.  |   | OFFER STATISTICS AND EXPECTED TIMETABLE                 |   | 1  |
| ITEM 3.  |   | KEY INFORMATION                                         |   | 1  |
|     | A.     | Selected Financial Data                                 |   | 1  |
|     | B.     | Capitalization and Indebtedness                         |   | 5  |
|     | C.     | Reasons for the Offer and Use of Proceeds               |   | 5  |
|     | D.     | Risk Factors                                            |   | 5  |
| ITEM 4.  |   | INFORMATION ON THE COMPANY                              |   | 18 |
|     | A.     | History and Development of the Company                  |   | 18 |
|     | B.     | Business Overview                                       |   | 21 |
|     | C.     | Organizational Structure                                |   | 34 |
|     | D.     | Property, Plants and Equipment                          |   | 34 |
| ITEM 4A. |   | UNRESOLVED STAFF COMMENTS                               |   | 35 |
| ITEM 5.  |   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS            |   | 35 |
|     | A.     | Operating Results                                       |   | 35 |
|     | B.     | Liquidity and Capital Resources                         |   | 45 |
|     | C.     | Research and Development, Patents and Licenses          |   | 51 |
|     | D.     | Trend Information                                       |   | 51 |
|     | E.     | Off-Balance Sheet Arrangements                          |   | 59 |
|     | F.     | Tabular Disclosure of Contractual Obligations           |   | 59 |
| ITEM 6.  |   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES              |   | 59 |
|     | A.     | Directors and Senior Management                         |   | 59 |
|     | B.     | Compensation                                            |   | 62 |
|     | C.     | Board Practices                                         |   | 62 |
|     | D.     | Employees                                               |   | 69 |
|     | E.     | Share Ownership                                         |   | 71 |
| ITEM 7.  |   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS       |   | 72 |
|     | A.     | Major Shareholders                                      |   | 72 |
|     | B.     | Related Party Transactions                              |   | 73 |
|     | C.     | Interests of Experts and Counsel                        |   | 81 |
| ITEM 8.  |   | FINANCIAL INFORMATION                                   |   | 81 |
|     | A.     | Consolidated Statements and Other Financial Information |   | 81 |
|     | B.     | Significant Changes                                     |   | 90 |

----

| ITEM 9.                                                                  |   | THE OFFER AND LISTING                                                        |   | 90         |
|--------------------------------------------------------------------------|--------|------------------------------------------------------------------------------|--------|------------|
|                                                                     | A.     | Offer and Listing Details                                                    |   | 90         |
|                                                                     | B.     | Plan of Distribution                                                         |   | 91         |
|                                                                     | C.     | Markets                                                                      |   | 91         |
|                                                                     | D.     | Selling Shareholders                                                         |   | 91         |
|                                                                     | E.     | Dilution                                                                     |   | 91         |
|                                                                     | F.     | Expense of the Issue                                                         |   | 91         |
| ITEM 10.                                                                 |   | ADDITIONAL INFORMATION                                                       |   | 91         |
|                                                                     | A.     | Share Capital                                                                |   | 91         |
|                                                                     | B.     | Memorandum and Articles of Association                                       |   | 91         |
|                                                                     | C.     | Material Contracts                                                           |   | 97         |
|                                                                     | D.     | Exchange Controls                                                            |   | 97         |
|                                                                     | E.     | Taxation                                                                     |   | 97         |
|                                                                     | F.     | Dividends and Paying Agents                                                  |   | 104        |
|                                                                     | G.     | Statement by Experts                                                         |   | 104        |
|                                                                     | H.     | Documents on Display                                                         |   | 104        |
|                                                                     | I.     | Subsidiary Information                                                       |   | 105        |
| ITEM 11.                                                                 |   | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS                   |   | 105        |
| ITEM 12.                                                                 |   | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       |   | 107        |
| PART II                                                                  |   |                                                                         |   | 107        |
| ITEM 13.                                                                 |   | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              |   | 107        |
| ITEM 14.                                                                 |   | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |   | 107        |
| ITEM 15.                                                                 |   | CONTROLS AND PROCEDURES                                                      |   | 107        |
| ITEM 16.                                                                 |   | RESERVED.                                                                    |   | 108        |
| ITEM 16A.                                                                |   | AUDIT COMMITTEE FINANCIAL EXPERT                                             |   | 108        |
| ITEM 16B.                                                                |   | CODE OF ETHICS                                                               |   | 108        |
| ITEM 16C.                                                                |   | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       |   | 109        |
| ITEM 16D.                                                                |   | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   |   | 109        |
| ITEM 16E.                                                                |   | PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS        |   | 109        |
| ITEM 16F.  CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT |   |   110                                                                   |
| ITEM 16G.  CORPORATE GOVERNANCE                                |   |   110                                                                   |
| PART III                                                                 |   |                                                                         |   |   111 |
| ITEM 17.                                                                 |   | FINANCIAL STATEMENTS                                                         |   | 111        |
| ITEM 18.                                                                 |   | FINANCIAL STATEMENTS                                                         |   | 112        |
| ITEM 19.                                                                 |   | EXHIBITS                                                                     |   | 112        |
|                                                                     |   |                                                                         |   |       |

----

----

----

PART I

ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE

ITEM 3.  KEY INFORMATION

A.  Selected Financial Data

----

|                                                                                                                                                                                                                                                                                                                                                                     |   | Year Ended December 31,                             |      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|-----------|
|                                                                                                                                                                                                                                                                                                                                                                     |   | 2008                                                |      |   | 2009 |   |   | 2009 |   |
|                                                                                                                                                                                                                                                                                                                                                                     |   | (NIS in thousands, except share and per share data) |      |   | (US$ in thousands, except share and per share data) |   |
|                                                                                                                                                                                                                                                                                                                                                                     |   |                                                |      |   |   |   |   |   |   |   |   |   |
| Revenues                                                                              |   |                                                | 1,167,327 |   |   |   | 1,243,088 |   |   |   | 329,295 |   |
| Depreciation and amortization                                                         |   |                                                | 117,503   |   |   |   | 98,642 |   |   |   | 26,130 |   |
| Salaries                                                                              |   |                                                | 183,917   |   |   |   | 171,139 |   |   |   | 45,335 |   |
| General and operating expenses                                                        |   |                                                | 741,055   |   |   |   | 810,963 |   |   |   | 214,825 |   |
| Other operating expenses                                                              |   |                                                | 7,258     |   |   |   | 2,448 |   |   |   | 648 |   |
| Other operating income                                                                |   |                                                | (12,839   | ) |   |   | – |   |   |   | – |   |
| Operating income                                                                      |   |                                                | 130,433   |   |   |   | 159,896 |   |   |   | 42,357 |   |
| Finance expense                                                                       |   |                                                | 138,700   |   |   |   | 133,908 |   |   |   | 35,471 |   |
| Finance income                                                                        |   |                                                | (27,202   | ) |   |   | (131,806 | ) |   |   | (34,915 | ) |
| Income before income tax                                                              |   |                                                | 18,935    |   |   |   | 157,794 |   |   |   | 41,800 |   |
| Income tax                                                                            |   |                                                | 22,747    |   |   |   | 57,784 |   |   |   | 15,307 |   |
| Net income (loss) for the year                                                        |   |                                                | (3,812    | ) |   |   | 100,010 |   |   |   | 26,493 |   |
| Income (loss) attributable to owners of the Company                                                                                                                                                                                                                                                                                                                      |   |                                                | (18,315   | ) |   |   | 62,239 |   |   |   | 16,487 |   |
| Income (loss) attributable to non-controlling interest                                                                                                                                                                                                                                                                                                                   |   |                                                | 14,503    |   |   |   | 37,771 |   |   |   | 10,006 |   |
| Income (loss) for the year                                                                                                                                                                                                                                                                                                                                               |   |                                                | (3,812    | ) |   |   | 100,010 |   |   |   | 26,493 |   |
| Basic earnings (loss) per share                                                                                                                                                                                                                                                                                                                                          |   |                                                | (0.85     | ) |   |   | 3.39 |   |   |   | 0.89 |   |
| Diluted earnings (loss) per share                                                                                                                                                                                                                                                                                                                                        |   |                                                | (0.89     | ) |   |   | 3.39 |   |   |   | 0.89 |   |

|                                                                                                                                                                                                                                                                                                                                                                |   | As at December 31, |      |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|
|                                                                                                                                                                                                                                                                                                                                                                |   | 2008               |      |   | 2009 |   |   | 2009 |   |
|                                                                                                                                                                                                                                                                                                                                                                |   | (NIS in thousands) |      |   | (US$ in thousands) |   |
|                                                                                                                                                                                                                                                                                                                                                                |   |               |      |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                        |   |               | 86,090    |   |   |   | 1,349,759 |   |   |   | 357,552 |   |
| Total assets                                                                     |   |               | 1,900,904 |   |   |   | 2,845,606 |   |   |   | 753,802 |   |
| Total current liabilities                                                        |   |               | 424,267   |   |   |   | 1,008,728 |   |   |   | 267,213 |   |
| Total non-current liabilities                                                                                                                                                                                                                                                                                                                                       |   |               | 885,002   |   |   |   | 1,144,080 |   |   |   | 303,067 |   |

----

|                                                                     |   | Year Ended December 31,                             |    |
|--------------------------------------------------------------------------|--------|-----------------------------------------------------|---------|
|                                                                     |   | 2006                                                |    |   | 2007 |   |
|                                                                     |   | (NIS in thousands, except share and per share data) |    |
|                                                                     |   |                                                |    |   |   |   |
| Revenues:                                                                |   |                                                |    |   |   |   |
| Communications                                                           |   |                                                | 342,506 |   |   |   | 1,103,157 |   |
| Media                                                                    |   |                                                | 65,853  |   |   |   | 72,789 |   |
| Total revenues                                                           |   |                                                | 408,359 |   |   |   | 1,175,946 |   |
| Operating expenses:                                                      |   |                                                |    |   |   |   |   |   |
| Cost of revenues                                                         |   |                                                | 252,413 |   |   |   | 802,296 |   |
| Selling and marketing                                                    |   |                                                | 75,576  |   |   |   | 176,250 |   |
| General and administrative                                               |   |                                                | 33,957  |   |   |   | 69,843 |   |
| Impairment and other expenses (income), net                              |   |                                                | 12,813  |   |   |   | 14,589 |   |
| Total operating expenses                                                 |   |                                                | 374,759 |   |   |   | 1,062,978 |   |
| Operating income                                                         |   |                                                | 33,600  |   |   |   | 112,968 |   |
| Financial expenses, net                                                  |   |                                                | 20,861  |   |   |   | 57,533 |   |
| Gain from issuance of shares in a subsidiary                             |   |                                                | – |   |   |   | 120,310 |   |
| Income before income taxes                                               |   |                                                | 12,739  |   |   |   | 175,745 |   |
| Income tax expenses                                                      |   |                                                | 1,286   |   |   |   | 50,460 |   |
| Income (loss) after income tax                                           |   |                                                | 11,453  |   |   |   | 125,285 |   |
| Minority share in income                                                 |   |                                                | (34     | ) |   |   | (1,267 | ) |
| Company’s share in net loss of investees from continued operations |   |                                                | (334    | ) |   |   | – |   |
| Net income (loss)                                                        |   |                                                | 11,085  |   |   |   | 124,018 |   |
| Earnings per ordinary share - basic                                      |   |                                                |    |   |   |   |   |   |
| Net income (loss) per share                                              |   |                                                | 0.60    |   |   |   | 5.74 |   |
| Weighted average number of shares used in the calculation                |   |                                                | 18,438  |   |   |   | 21,617 |   |
| Earnings per ordinary share - diluted                                    |   |                                                | 0.60    |   |   |   | 5.44 |   |
| Weighted average number of shares used in the calculation                |   |                                                | 18,438  |   |   |   | 24,795 |   |

----

|                                                      |   | Year Ended December 31, 2005                        |    |
|-----------------------------------------------------------|--------|-----------------------------------------------------|---------|
|                                                      |   | (NIS in thousands, except share and per share data) |    |
|                                                      |   |                                                |    |
| Revenues:                                                 |   |                                                |    |
| Communications                                            |   |                                                | 246,579 |   |
| Media                                                     |   |                                                | 42,191  |   |
| Total revenues                                            |   |                                                | 288,770 |   |
| Operating expenses:                                       |   |                                                |    |   |
| Cost of revenues                                          |   |                                                | 154,781 |   |
| Selling and marketing                                     |   |                                                | 71,935  |   |
| General and administrative                                |   |                                                | 33,156  |   |
| Total operating expenses                                  |   |                                                | 259,872 |   |
| Operating income                                          |   |                                                | 28,898  |   |
| Financial expenses, net                                   |   |                                                | (9,403  | ) |
| Other income                                              |   |                                                | 237     |   |
| Income before income taxes                                |   |                                                | 19,732  |   |
| Income tax expenses                                       |   |                                                | 1,451   |   |
| Net income                                                |   |                                                | 18,281  |   |
| Earnings per ordinary share - basic                       |   |                                                |    |   |
| Net income per share                                      |   |                                                | 0.99    |   |
| Weighted average number of shares used in the calculation |   |                                                | 18,432  |   |
| Earnings per ordinary share - diluted                     |   |                                                |    |   |
| Net income per share                                      |   |                                                | 0.99    |   |
| Weighted average number of shares used in the calculation |   |                                                | 18,432  |   |

| Period                       |   | Average |   | High   |   | Low    |   | At Period End |
|------------------------------|--------|---------|--------|--------|--------|--------|--------|---------------|
|                         |   |    |   |   |   |   |   |          |
| Year ended December 31, 2005 |   | 4.484   |   | 4.741  |   | 4.299  |   | 4.603         |
| Year ended December 31, 2006 |   | 4.453   |   | 4.725  |   | 4.176  |   | 4.225         |
| Year ended December 31, 2007 |   | 4.110   |   | 4.342  |   | 3.830  |   | 3.846         |
| Year ended December 31, 2008 |   | 3.586   |   | 4.022  |   | 3.230  |   | 3.802         |
| Year ended December 31, 2009 |   | 3.923   |   | 4.256  |   | 3.690  |   | 3.775         |

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

| Period        |   | High   |   | Low    |
|---------------|--------|--------|--------|--------|
|          |   |   |   |   |
| December 2009 |   | 3.815  |   | 3.772  |
| January 2010  |   | 3.765  |   | 3.667  |
| February 2010 |   | 3.796  |   | 3.704  |
| March 2010    |   | 3.787  |   | 3.713  |
| April 2010    |   | 3.749  |   | 3.682  |
| May 2010      |   | 3.870  |   | 3.730  |

----

B.  Capitalization and Indebtedness

C.  Reasons for the Offer and Use of Proceeds

D.  
Risk Factors 

----

----

----

----

----

----

----

----

| ·      | Cross officerships, directorships and share ownership.  The ownership interests of Eurocom Communications in our ordinary shares could create, or appear to create, conflicts of interest when directors and executive officers are faced with decisions that could have different implications for the two companies.  For example, these decisions could relate to the nature, quality and cost of services rendered to us by Eurocom Communications, disagreements over the desirability of a potential acquisition opportunity or employee retention or recruiting.  In addition, Eurocom Communications may take an opportunity for itself or preclude us from taking advantage of a corporate opportunity; and |
|---------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·      | Intercompany transactions.  From time to time, Eurocom Communications or other companies within the Eurocom group may enter into transactions with us or our subsidiaries or other affiliates.  Although the terms of any such transactions will be established based upon negotiations between employees of such companies and us and, when appropriate, subject to the approval of our independent directors or a committee of disinterested directors and in some instances a vote of shareholders, the terms of any such transactions may not be as favorable to us or our subsidiaries or affiliates as may otherwise be obtained in arm’s-length negotiations with unaffiliated third parties. |
|---------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·      | quarterly variations in our operating results, which beginning in the 2010 second quarter include the operations of Bezeq; |
|---------------------------------|----------------------------------------------------------------------------------------------------------------------------|

| ·      | global economic conditions; |
|---------------------------------|-----------------------------|

| ·      | price movements in the market price of Bezeq’s ordinary shares |
|---------------------------------|----------------------------------------------------------------------|

| ·      | operating results that vary from the expectations of securities analysts and investors; |
|---------------------------------|-----------------------------------------------------------------------------------------|

| ·      | changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; |
|---------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|

| ·      | regulatory changes that impact pricing of services and competition in Bezeq’s markets; |
|---------------------------------|----------------------------------------------------------------------------------------------|

| ·      | changes in market valuations of other communications companies; |
|---------------------------------|-----------------------------------------------------------------|

| ·      | announcements of technological innovations or new services by Bezeq or its competitors; |
|---------------------------------|-----------------------------------------------------------------------------------------|

| ·      | announcements by Bezeq or its  competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; |
|---------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·      | changes in the status of Bezeq’s intellectual property rights; |
|---------------------------------|----------------------------------------------------------------------|

| ·      | announcements by third parties of significant claims or proceedings against us or Bezeq; |
|---------------------------------|------------------------------------------------------------------------------------------|

| ·      | additions or departures of key personnel; |
|---------------------------------|-------------------------------------------|

| ·      | future sales of our ordinary shares; and |
|---------------------------------|------------------------------------------|

| ·      | stock market price and volume fluctuations. |
|---------------------------------|---------------------------------------------|

----

----

----

----

ITEM 4.  INFORMATION ON THE COMPANY

A.  History and Development of the Company

----

| ·      | Bezeq – domestic fixed-line communications.  This segment primarily includes Bezeq’s operation as a domestic operator, including fixed-line telephony services, Internet services, transmission services and data communications. |
|---------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·      | Pelephone – cellular telephone.  Cellular mobile telephone services (cellular communications), marketing of end-user equipment, installation, operation and maintenance of cellular communications equipment and systems. |
|---------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·      | Bezeq International– Internet, international communications and network end point, or NEP, services.  Internet service provider, or ISP, services, international communications services and NEP services.  Bezeq International owns 44.99% of Walla! which provides portal services and Internet media services.  Bezeq owns an additional 9,902,467 shares of Walla! that are being held in a blind trust and Bezeq has no voting rights with respect to such shares. |
|---------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·      | YES - multi-channel television.  Multi-channel digital television broadcasts to subscribers over satellite and provision of value-added services to subscribers. |
|---------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·        | At least 19% of the rights to vote at the general meeting of shareholders of SP2 and the rights to appoint directors of SP2 must be held by an Israeli Party at all times; and |
|----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·        | The right to appoint at least one-fifth of the directors in Bezeq and Bezeq’s subsidiaries and not less than one director in each such company will be held by an Israeli Party at all times, provided that the percentage of the Israeli Party’s direct or indirect shareholdings in Bezeq is not less than 3% of any of the means of control of Bezeq.  Indirect shareholdings will be calculated as the product of the Israeli Party’s lowest rate of holdings in each of the means of control in SP2, multiplied by the percentage of the holdings of the parties to the control permit in each of the means of control in Bezeq. |
|----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

B.  Business Overview

----

|   | ● | Changes in the fixed-line sector. The Minister of Communications decided that the Ministry of Communications will prepare the regulatory and pricing infrastructure for the establishment of a wholesale market for fixed-line communications (including resale and the provision of access to infrastructure), including arrangements for local loop unbundling, or LLU.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | ● | Tariff flexibility for Bezeq – alternative service packages.  To improve the efficiency of the approval process for alternative payment packages, the Minister of Communications decided to change the system for their approval so that Bezeq would be able to offer packages 45 days after submitting a detailed application to the Ministry of Communications, unless the Minister of Communications or the Minister of Finance gives notice of his objection to the application.  The Minister adopted the recommendations of the Gronau Committee that so long as Bezeq’s market share is more than 60%, the control of Bezeq’s tariffs should continue in the format of fixed prices and with respect to alternative payment packages, the smaller Bezeq’s share in landline telephony in Israel, the higher the maximum discount permitted (a 15% discount so long as the market share is higher than 85%; 25% discount when the market share is between 75% and 85%; and 40% discount when the market share is between 60% and 75%).  The alternative payment package will be approved only if it is worthwhile for at least 30% of the subscribers who consume the services offered in the package. |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | ● | Mobile virtual network operators.  In January 2009, the Israeli Government’s decided to take actions to promote the entry of mobile virtual network operators, or MVNOs, into Israel’s cellular market and on January 20, 2010, the Minister of Communications signed regulations allowing the grant of MVNO licenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | ● | Multi-channel television – basic channel package.  Under a proposed amendment to the Communications Law, as of August 1, 2012, DBS and HOT will be obligated (i) to allow any subscriber to connect to a package which includes Israel’s five non-cable television channels, referred to as the Basic Package, the payment for which will be calculated based on subscriber connection costs plus reasonable profit for DBS and HOT; (ii) to allow any subscriber to separately purchase any other channel offered by them and not to make the purchase of one channel conditional upon the purchase of another channel; (iii) to set a price for the Basic Package based on usage cost plus reasonable profit.  In addition, under the proposed amendment, DBS and HOT will be authorized to broadcast commercials commencing January 1, 2012.  The Broadcast Council will determine rules regarding the maximum time during which commercials may be broadcast and on which channels which will be in effect for a period of three years.                                                                                                                                                                         |

----

|   | ● | Structural separation. Under its current general license, Bezeq is required to maintain full structural separation between itself and those subsidiaries and affiliates specified in the license.  Bezeq is also required to maintain separate operations from those of Pelephone due to the determination of the Antitrust Commissioner.  The HOT group’s licenses also required them to maintain structural separations.  The Gronau Committee’s recommendation, as adopted by the Ministry of Communications, determines to leave in place Bezeq’s structural separation so long as only two companies own fixed-line infrastructure that is deployed nationwide.  Furthermore, should the Minister find, within two years following the establishment of the wholesale market for fixed communications (including resale and the provision of access), that the manner in which Bezeq established the wholesale market prevents greater competition in the domestic communications market, then he will act to apply structural separation between Bezeq’s infrastructure operations and service operations. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | ● | Service Packages. The Gronau Committee recommended that Bezeq and its subsidiaries be allowed to offer service packages consisting of telephony and Internet protocol, or IP, television services once the wholesale market arrangements, as described above, have been implemented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

----

----

| ·      | an obligation to maintain complete structural separation among Bezeq and its subsidiaries pertaining to corporate structure and management systems, including finance, marketing, manpower, assets and data; |
|---------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·      | supervision and regulation of part of Bezeq’s tariffs; and |
|---------------------------------|------------------------------------------------------------------|

| ·      | an obligation to provide “access” infrastructure services to other licensees on an equal, non-discriminatory basis and a prohibition on granting Bezeq’s subsidiaries advantageous terms when providing such services. |
|---------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·      | separating infrastructure and service providers; |
|---------------------------------|--------------------------------------------------|

| ·      | granting new licenses and encouraging new and innovative technologies such as VoB; and |
|---------------------------------|----------------------------------------------------------------------------------------|

| ·      | mandating number portability. |
|---------------------------------|-------------------------------|

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----

----

----

----

----

| Online Advertising Properties  |
|-------------------------------------|

----

----

----

C.  Organizational Structure

| ·      | B Communications, which is the controlling shareholder of Bezeq, Israel’s largest telecommunications provider.  B Communications interest in Bezeq is directly held by SP2, which is a wholly-owned subsidiary directly held by our wholly-owned subsidiary, or SP1. |
|---------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·      | GoldMind, an Internet media company in Israel, which operates websites in Israel. |
|---------------------------------|-----------------------------------------------------------------------------------|

D.  Property, Plants and Equipment

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ITEM4A. UNRESOLVED STAFF COMMENTS

ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.  Operating Results

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | December 31,2009 |      |   | Conveniencetranslation intoU.S. dollars |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|-----------|--------|-----------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | NIS              |      |   | US$                                     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |             |      |   |                                    |   |   |   |
| Cash and cash equivalents                                                                           |   |             | 934       |   |                                    |   | 247 |   |
| Trade and other receivables                                                                         |   |             | 225,118   |   |                                    |   | 59,634 |   |
| Long-term trade receivables                                                                         |   |             | 6,260     |   |                                    |   | 1,658 |   |
| Property and equipment                                                                              |   |             | 158,916   |   |                                    |   | 42,097 |   |
| Intangible assets                                                                                   |   |             | 629,018   |   |                                    |   | 166,627 |   |
| Employee benefits assets                                                                            |   |             | 13,078    |   |                                    |   | 3,464 |   |
| Deferred expenses                                                                                   |   |             | 326,950   |   |                                    |   | 86,610 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |             | 1,360,274 |   |                                    |   | 360,337 |   |

|                                        |   | December 31,2009 |    |   | Conveniencetranslation intoU.S. dollars |   |
|---------------------------------------------|--------|------------------|---------|--------|-----------------------------------------|--------|
|                                        |   | NIS              |    |   | US$                                     |   |
|                                        |   |             |    |   |                                    |   |   |   |
| Trade and other payables                    |   |             | 233,593 |   |                                    |   | 61,879 |   |
| Deferred income                             |   |             | 4,094   |   |                                    |   | 1,085 |   |
| Related parties payables                    |   |             | 2,422   |   |                                    |   | 641 |   |
| Current maturities of long-term liabilities |   |             | 149     |   |                                    |   | 40 |   |
| Deferred tax liabilities                    |   |             | 30,136  |   |                                    |   | 7,983 |   |
|                                        |   |             | 270,394 |   |                                    |   | 71,628 |   |

----

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| Network equipment and computers | 15%-33%                                                                         |
|---------------------------------|---------------------------------------------------------------------------------|
| Furniture and office equipment  | 6%-15%                                                                          |
| Motor vehicles                  | 15%                                                                             |
| Leasehold improvements          | shorter of the lease term or the useful lives of the asset (generally 10 years) |

| Licenses                      | 20 years   |
|-------------------------------|------------|
| Subscribers acquisition costs | 1-3 years  |
| Customers relationship        | 8-10 years |
| Capitalized software costs    | 5 years    |

----

----

----

|                                                   |   | Year ended December 31, |      |
|--------------------------------------------------------|--------|------------------------------|-----------|
|                                                   |   | 2008                         |      |   | 2009 |   |
|                                                   |   | NIS                          |      |   | % |   |   | NIS |   |   | % |   |
|                                                   |   |                         |      |   |   |   |   |   |   |   |   |   |
| Revenues:                                              |   |                         |      |   |   |   |   |   |   |   |   |   |
| Broadband                                              |   |                         | 546,986   |   |   |   | 46.9 |   |   |   | 608,503 |   |   |   | 49.0 |   |
| Traditional voice                                      |   |                         | 557,224   |   |   |   | 47.7 |   |   |   | 563,767 |   |   |   | 45.3 |   |
| Media                                                  |   |                         | 63,117    |   |   |   | 5.4 |   |   |   | 70,818 |   |   |   | 5.7 |   |
| Total revenues                                         |   |                         | 1,167,327 |   |   |   | 100.0 |   |   |   | 1,243,088 |   |   |   | 100.0 |   |
| Cost and expenses:                                     |   |                         |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                          |   |                         | 117,503   |   |   |   | 10.1 |   |   |   | 98,642 |   |   |   | 7.9 |   |
| Salaries                                               |   |                         | 183,917   |   |   |   | 15.7 |   |   |   | 171,139 |   |   |   | 13.8 |   |
| General and operating expenses                         |   |                         | 741,055   |   |   |   | 63.5 |   |   |   | 810,963 |   |   |   | 65.2 |   |
| Other operating expenses                               |   |                         | 7,258     |   |   |   | 0.6 |   |   |   | 2,448 |   |   |   | 0.2 |   |
| Other operating income                                 |   |                         | (12,839   | ) |   |   | (1.1 | )  |   |   | – |   |   |   | – |   |
| Total cost and expenses                                |   |                         | 1,036,894 |   |   |   | 88.8 |   |   |   | 1,083,192 |   |   |   | 87.1 |   |
| Operating income                                       |   |                         | 130,433   |   |   |   | 11.2 |   |   |   | 159,896 |   |   |   | 12.9 |   |
| Finance expense                                        |   |                         | 138,700   |   |   |   | 11.9 |   |   |   | 133,908 |   |   |   | 10.8 |   |
| Finance income                                         |   |                         | (27,202   | )  |   |   | (2.3 | )  |   |   | (131,806 | )  |   |   | (10.6 | )  |
| Income before income tax                               |   |                         | 18,935    |   |   |   | 1.6 |   |   |   | 157,794 |   |   |   | 12.7 |   |
| Income tax                                             |   |                         | 22,747    |   |   |   | 1.9 |   |   |   | 57,784 |   |   |   | 4.7 |   |
| Net income (loss) for the year                         |   |                         | (3,812    | )  |   |   | (0.3 | )  |   |   | 100,010 |   |   |   | 8.0 |   |
| Income (loss) attributable to owners of the Company    |   |                         | (18,315   | )  |   |   | (1.5 | )  |   |   | 62,239 |   |   |   | 5.0 |   |
| Income (loss) attributable to non-controlling interest |   |                         | 14,503    |   |   |   | 1.2 |   |   |   | 37,771 |   |   |   | 3.0 |   |

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| Year ended December 31, |   | Israeli inflationrate % |   | NIS depreciation (appreciation)rate % |   | Israeli inflation adjusted for depreciation (appreciation) % |
|-------------------------|--------|-------------------------|--------|---------------------------------------|--------|--------------------------------------------------------------|
|                    |   |                    |   |                                  |   |                                                         |   |   |   |
| 2005                    |   | 2.4                     |   |                                  | 6.8    |                                                         |   | (4.3 | ) |
| 2006                    |   | (0.1                    | )      |                                  | (8.2   | )                                                            |   | 8.1 |   |
| 2007                    |   | 3.4                     |   |                                  | (9.0   | )                                                            |   | 12.4 |   |
| 2008                    |   | 3.8                     |   |                                  | (1.1   | )                                                            |   | 4.9 |   |
| 2009                    |   | 3.9                     |   |                                  | (11.2  | )                                                            |   | 15.1 |   |

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----

|   | ● | Amendment to IAS, 39, Financial Instruments: Recognition and Measurement.  This amendment clarifies that the exemption for business combinations in IAS 39 is restricted to forward contracts between an acquirer and a seller with respect to the sale or acquisition of a controlled entity, in a business combination at a future acquisition date.  In addition, the term of the forward contract should not be longer than the period normally necessary for obtaining the approvals required for the transaction.  The amendment is to be applied prospectively to all unexpired contracts for annual periods beginning on or after January 1, 2010.  We are examining the effect that the amendment may have on our financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | ● | IFRS 9, Financial Instruments.  This standard is the first part of a comprehensive project to replace IAS 39 Financial Instruments: Recognition and Measurement and it replaces the requirements included in IAS 39 regarding the classification and measurement of financial assets.  In accordance with IFRS 9, there are two principal categories for measuring financial assets: amortized cost and fair value, with the basis of classification for debt instruments being the entity’s business model for managing financial assets and the contractual cash flow characteristics of the financial asset. In accordance with IFRS 9, an investment in a debt instrument will be measured at amortized cost if the objective of the entity’s business model is to hold assets in order to collect contractual cash flows and the contractual terms give rise, on specific dates, to cash flows that are solely payments of principal and interest.  All other financial assets are measured at fair value through profit or loss.  Furthermore, embedded derivatives are no longer separated from hybrid contracts that have a financial asset host.  Instead, the entire hybrid contract is assessed for classification using the principles above.  In addition, investments in equity instruments are measured at fair value with changes in fair value being recognized in profit or loss.  Nevertheless, IFRS 9 allows an entity on the initial recognition of an equity instrument not held for trading to elect irrevocably to present fair value changes in the equity instrument in other comprehensive income where no amount so recognized is ever classified to profit or loss at a later date.  Dividends on equity instruments measured through other comprehensive income are recognized in profit or loss unless they clearly constitute a return on an initial investment.  IFRS 9 removes financial liabilities from its scope. IFRS 9 is effective for annual periods beginning on or after January 1, 2013 but may be applied earlier, subject to providing disclosure and at the same time adopting other IFRS amendments as specified in the Standard.  IFRS 9 is to be applied retrospectively other than in a number of exceptions as indicated in the transitional provisions included in the Standard.  In particular, if an entity adopts the Standard for reporting periods beginning before January 1, 2012 it is not required to restate prior periods. IFRS 9 is expected to impact the classification and measurement of our financial assets, however we have not yet determined the extent of the impact. |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | ● | Amendment to IAS 36, Impairment of Assets.  In accordance with the amendment, for purposes of goodwill impairment testing the largest cash-generating unit to which goodwill should be allocated is the operating segment level as defined in IFRS 8 before applying the aggregation criteria in Paragraph 12 of IFRS 8.  The amendment is to be applied prospectively for annual periods beginning on or after January 1, 2010.  We are considering the implications of the standard and its impact, if any, on our company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

B.  Liquidity and Capital Resources

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|                                  |   | At December 31,    |   |
|---------------------------------------|--------|--------------------|--------|
|                                  |   | 2008               |   |   | 2009 |   |
|                                  |   | (NIS in thousands) |   |
|                                  |   |               |   |   |   |   |
| Short-term:                           |   |               |   |   |   |   |
| Credit                                |   |               | 34,852 |   |   |   | 1,540 |   |
| Short-term bank loans                 |   |               | 7,886  |   |   |   | 461,295 |   |
| Current maturities of long-term loans |   |               | 8,441  |   |   |   | – |   |
| Total short-term debt                 |   |               | 51,179 |   |   |   | 462,835 |   |
| Long-term:                            |   |               |   |   |   |   |   |   |
| Long-term loans maturities            |   |               | 617    |   |   |   | – |   |
| Total long-term debt                  |   |               | 617    |   |   |   | – |   |
| Total bank debt                       |   |               | 51,796 |   |   |   | 462,835 |   |

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| ·        | On the closing date of the acquisition by B Communications of the Bezeq interest, B Communications’ indirect fully owned-subsidiary SP2, which holds the Bezeq interest, received a bank loan from certain banking and financial institutions led by Bank Hapoalim Ltd., or Bank Hapoalim, in a total principal amount of NIS 4.6 billion (approximately $1.24 billion).  The loan is divided into four tranches, as follows: |
|--------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (i)   | Credit A - a “bullet” floating rate loan, in the amount of NIS 700 million (approximately $185.4 million); with principal and interest that was payable on November 30, 2010.  Credit A is indexed to Bank Hapoalim’s prime interest rate, plus a margin of 2%.  Bank Hapoalim Prime on the date of the closing was equal to 1.62%.  B Communications repaid this loan in full following its receipt of the dividend from Bezeq on May 3, 2010. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (ii)   | Credit B –This tranche is divided into two parts.  The first part, in the amount of NIS 1.1 billion (approximately $0.3 billion), is a floating loan indexed to the Bank Hapoalim prime interest rate; and the second part, in the amount of NIS 900 million (approximately $238.4 million), is a fixed rate loan, linked to the Israeli consumer price index.  Both parts of Credit B are payable in 13 equal semi-annual installments of both principal and interest, with the first payments due on November 30, 2010.  The interest rate on the first part of Credit B is 4.58% and the interest rate on the second part of Credit B is 4.35%. |
|------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iii)   | Credit C – a “bullet” loan, in the principal amount of NIS 700 million (approximately $185.4 million), is a floating rate loan, indexed to the Bank Hapoalim prime interest rate, at an interest rate of 4.73% .  The principal of Credit C will be paid in one payment on November 30, 2016; and the interest will be paid in 13 semi-annual installments, the first of which is due on November 30, 2010. |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iv)   | Credit D - two “bullet” loans, the principal of which will be paid in one payment on May 30, 2017 and the interest will be paid in 13 semi-annual installments, the first of which is due on November 30, 2010.  The first loan of Credit D is in the principal amount of NIS 800 million (approximately $212 million) and is a floating rate loan, indexed to the Bank Hapoalim prime interest rate, at a rate of 4.75%.  The second loan is in the principal amount of NIS 400 million (approximately $106 million) and is a fixed rate loan, linked to the Israeli consumer price index, at a rate of 5.4%. |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|         | In addition, SP2 will pay the lenders certain fees, expenses and cost increases.  SP2 also issued phantom stock options to the banks, under which they received option units, which reflect, in the aggregate, 2% of Bezeq’s share equity (subject to adjustments in certain cases).  The “base price” of each unit is NIS 8.62.  However, the total amount that SP2 will pay the banks in the aggregate is limited to NIS 125 million (NIS 2.3367 per option unit).  The option units are exercisable by the lenders until May 30, 2017, but are due for payment in certain installments.  The payments under the option agreements will be made from dividends that SP2 will receive from Bezeq, which in accordance with the loan agreement SP2 may not withdraw such amounts from its account.  If no amounts are available for this purpose, the payments will be delayed until equitable sums are available, but not later then May 30, 2017. |
|--------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|         | SP2’s undertakings and limitations under the loan agreement include, among other things: (a) the obligation to provide the lenders with certain financial information; (b) limitations as to the use of amounts which will be received from Bezeq and the ability to withdraw and distribute them to SP2’s shareholders; and (c) an undertaking to object to certain changes in Bezeq’s incorporation documents if the lenders find such changes would prejudice their rights.  In certain situations, payments from Bezeq must be used for early repayment of the loan or may not be withdrawn by SP2 to its parent company. Upon the occurrence of certain events of default, but subject to certain conditions, the lenders are entitled to call the loans for immediate repayment, subject to certain procedures and remedy periods set forth in agreement, including upon the following events: |
|--------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o    | The failure of: (i) Bezeq to maintain minimum shareholders equity and minimum ratio of shareholder equity; (ii) Bezeq to exceed certain thresholds relating to the ratio of financial debt to EBITDA; and (iii) B Communications’ wholly-owned subsidiary that directly holds the Bezeq interest to maintain a minimum ratio of debt to EBITDA and a debt service coverage ratio. |
|---------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o    | Material breach of an undertaking or representation; certain restructuring, insolvency or debt restructuring events of SP2 or Bezeq; any material change in the nature of Bezeq’s activities; certain changes in control of SP2 or dilution of SP2’s holdings in Bezeq or if SP2 ceases to control Bezeq; if Bezeq’s general license is adversely modified; if any of the permits or approvals issued in connection with B Communications’ acquisition of controlling interest in Bezeq ceases to be in force or was amended; and if Bezeq or certain subsidiaries of Bezeq fail to make certain payments when due. |
|---------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|         | The Bezeq shares that were purchased by SP2 on the closing date, and all of SP2’s other rights and assets (except additional shares of Bezeq that it may acquire in the future) have been pledged to the lenders as security of SP2’s obligations under the loan agreement.  In addition, B Communications’ wholly-owned subsidiary SP1, the direct parent company of SP2, has pledged to the lenders the entire equity it holds in SP2 and the debt owed to it by SP2 (other than the amounts that SP2 will pay SP1 according to the terms and the conditions of the loan agreement). |
|--------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·        | On February 19, 2010, B Communications’ wholly-owned subsidiary SP1 entered into a loan agreement with certain entities from the Migdal Insurance and Financial Holdings Ltd. or Migdal, group.  According to the Migdal loan agreement, on the closing date of B Communications’ acquisition of our Bezeq interest, SP1 was provided a loan of NIS 500 million.  The loan will bear annual interest at a rate of 6.81%, linked to the Israeli consumer price index.  In addition, a special interest payment is payable on the date of the final repayment of the loan in order to ensure a certain internal rate of return, or IRR, of the loan principal (without linkage to the Israeli consumer price index), which will be calculated according to a formula that takes into account amounts that SP1 may pay due to early repayment at Migdal’s demand and amounts with respect to which Migdal may waive its right to demand early repayment.  However, in any event the abovementioned IRR will not exceed the IRR which derives from a fixed interest of 6.95%. |
|--------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|         | The interest is payable semi-annually, and the principal is payable in one payment, on the earlier of: (i) March 31, 2017; (ii) 60 days prior to the agreed repayment date of the entire amount of Credit D under the SP2 loan described above. |
|--------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|         | The Migdal loan is secured by a first ranking pledge on SP1’s rights in the bank account into which all payments from SP2 are made, except for certain defined expenses, referred to as the Pledged Bank Account.  SP1 undertook to maintain in the Pledged Bank Account minimum funds of NIS 22.5 million (linked to the Israeli consumer price index).  The Migdal facility agreement includes limitations on distributions and payments from the Pledged Bank Account (including conditions as to total debt to EBITDA ratios that relate to SP1). The Migdal loan agreement contains certain undertakings and covenants, including, among others, (i) certain undertakings for SP1 and its direct and indirect controlling shareholders to maintain (indirect) control in Bezeq, (ii) limitations on amendments to the SP2 loan described above; and (iii) an undertaking to comply with the terms of the regulatory approvals granted with respect to purchase of control in Bezeq. |
|--------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                           |   | Year Ended December 31, |     |
|----------------------------------------------------------------|--------|-------------------------|----------|
|                                                           |   | 2008                    |     |   | 2009 |   |
|                                                           |   | (NIS in thousands)      |     |
|                                                           |   |                    |     |   |   |   |   |   |
| Net income                                                     |   |                    | (3,812   | ) |   |   | 100,010 |   |
| Other adjustments for non-cash items                           |   |                    | 253,716  |   |   |   | 151,857 |   |
| Net changes in assets and liabilities                          |   |                    | (42,068  | ) |   |   | (14,584 | ) |
| Net cash provided by operating activities                      |   |                    | 207,836  |   |   |   | 237,283 |   |
| Net cash (used in) provided by investing activities            |   |                    | (482,076 | ) |   |   | 407,666 |   |
| Net cash (used in) provided by  financing activities |   |                    | (221,561 | ) |   |   | 613,866 |   |
| Effect of exchange rate changes                                |   |                    | (20,035  | ) |   |   | 5,789 |   |
| Net increase (decrease) in cash and cash equivalents           |   |                    | (515,836 | ) |   |   | 1,264,604 |   |

----

C.  Research and Development, Patents and Licenses

D.  Trend Information

----

|                                                                          |   | Domesticfixed-line communications |   | Cellular |    | International communications, internet services and NEP |   | Multi-channeltelevision |   | Other  |   | Adjustments to consolidated * |   | Consolidated |
|-------------------------------------------------------------------------------|--------|-----------------------------------|--------|----------|---------|---------------------------------------------------------|--------|-------------------------|--------|--------|--------|-------------------------------|--------|--------------|
|                                                                          |   | (NIS in millions)                 |
|                                                                          |   |                              |   |     |    |                                                    |   |                    |   |   |   |                          |   |         |   |   |   |   |   |   |   |
| Total revenue:                                                                |   |                              |   |     |    |                                                    |   |                    |   |   |   |                          |   |         |   |   |   |   |   |   |   |
| From externals                                                                |   | 5,039                             |   |     | 5,130   |                                                    |   | 1,273                   |   |   | 1,529  |                          |   | 54           |   |   | (1,529 | ) |   | 11,496 |   |
| From other areas of operations in the Bezeq group                             |   | 264                               |   |     | 246     |                                                    |   | 45                      |   |   | 1      |                          |   | 20           |   |   | (553 | ) |   | 23 |   |
| Total                                                                         |   | 5,303                             |   |     | 5,376   |                                                    |   | 1,318                   |   |   | 1,530  |                          |   | 74           |   |   | (2,082 | ) |   | 11,519 |   |
| Total attributed costs                                                        |   |                              |   |     |    |                                                    |   |                    |   |   |   |                          |   |         |   |   |   |   |   |   |   |
| Variable costs attributed to the area of operation                            |   | 1,774                             |   |     | 2,153   |                                                    |   | 635                     |   |   | 498    |                          |   | 47           |   |   |   |   |   |   |   |
| Fixed costs attributed to the area of operation*                              |   | 2,006                             |   |     | 2,033   |                                                    |   | 422                     |   |   | 784    |                          |   | 23           |   |   |   |   |   |   |   |
| Total costs                                                                   |   | 3,780                             |   |     | 4,186   |                                                    |   | 1,057                   |   |   | 1,282  |                          |   | 70           |   |   | (1,828 | ) |   | 8,547 |   |
| Costs not constituting revenue from another area of operation                 |   | 3,543                             |   |     | 4,003   |                                                    |   | 934                     |   |   | 1,259  |                          |   | 66           |   |   | (1,259 | ) |   | 8,546 |   |
| Costs constituting revenue from other areas of operation                      |   | 237                               |   |     | 183     |                                                    |   | 123                     |   |   | 23     |                          |   | 4            |   |   | (569 | ) |   | 1 |   |
| Total costs                                                                   |   | 3,780                             |   |     | 4,186   |                                                    |   | 1,057                   |   |   | 1,282  |                          |   | 70           |   |   | (1,828 | ) |   | 8,547 |   |
| Profit from regular operation attributed to the Company’s owners        |   | 1,523                             |   |     | 1,190   |                                                    |   | 261                     |   |   | 123    |                          |   | 5            |   |   | (130 | ) |   | 2,972 |   |
| Profit from regular operation attributed to non-controlling rights            |   | –                           |   |     | – |                                                    |   | –                 |   |   | 125    |                          |   | (1           | ) |   | (125 | ) |   | (1 | ) |
| Total assets attributed to the area of operations as at December 31, 2009     |   | 6,368                             |   |     | 4,990   |                                                    |   | 1,106                   |   |   | 1,206  |                          |   | 85           |   |   | 186 |   |   | 13,941 |   |
| Total liabilities attributed to the area of operation as at December 31, 2009 |   | 6,390                             |   |     | 2,440   |                                                    |   | 404                     |   |   | 4,315  |                          |   | 22           |   |   | (6,168 | ) |   | 7,403 |   |

| * | The companies in the Bezeq group that are service providing companies, (as distinct from manufacturing companies) do not manage a dedicating costing system distinguishing between fixed and variable costs. The above distribution was made for the purposes of this report only. Variable costs are costs which the company’s  management and control over them are flexible in the short term and their effect on the output is direct, unlike fixed costs that are not flexible in the short term and do not directly affect output. |
|---|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                                                                          |   | Domestic fixed-line communications |   | Cellular |    | International communications, internet services and NEP |   | Multi-channel television |   | Other  |   | Adjustments to consolidated * |   | Consolidated |
|-------------------------------------------------------------------------------|--------|------------------------------------|--------|----------|---------|---------------------------------------------------------|--------|--------------------------|--------|--------|--------|-------------------------------|--------|--------------|
|                                                                          |   | (NIS in millions)                  |
|                                                                          |   |                               |   |     |    |                                                    |   |                     |   |   |   |                          |   |         |   |   |   |   |   |   |   |
| Total revenue:                                                                |   |                               |   |     |    |                                                    |   |                     |   |   |   |                          |   |         |   |   |   |   |   |   |   |
| From externals                                                                |   | 5,179                              |   |     | 4,448   |                                                    |   | 1,243                    |   |   | 1,506  |                          |   | 31           |   |   | (1,506 | ) |   | 10,901 |   |
| From other areas of operations in the Bezeq group                             |   | 319                                |   |     | 265     |                                                    |   | 63                       |   |   | 7      |                          |   | 44           |   |   | (584 | ) |   | 114 |   |
| Total                                                                         |   | 5,498                              |   |     | 4,713   |                                                    |   | 1,306                    |   |   | 1,513  |                          |   | 75           |   |   | (2,090 | ) |   | 11,015 |   |
| Total attributed costs                                                        |   |                               |   |     |    |                                                    |   |                     |   |   |   |                          |   |         |   |   |   |   |   |   |   |
| Variable costs attributed to the area of operation                            |   | 1,785                              |   |     | 1,849   |                                                    |   | 622                      |   |   | 555    |                          |   | 53           |   |   |   |   |   |   |   |
| Fixed costs attributed to the area of operation*                              |   | 2,238                              |   |     | 1,931   |                                                    |   | 442                      |   |   | 781    |                          |   | 22           |   |   |   |   |   |   |   |
| Total costs                                                                   |   | 4,023                              |   |     | 3,780   |                                                    |   | 1,064                    |   |   | 1,336  |                          |   | 75           |   |   | (1,903 | ) |   | 8,375 |   |
| Costs not constituting revenue from another area of operation                 |   | 3,743                              |   |     | 3,614   |                                                    |   | 928                      |   |   | 1,222  |                          |   | 73           |   |   | (1,212 | ) |   | 8,368 |   |
| Costs constituting revenue from other areas of operation                      |   | 280                                |   |     | 166     |                                                    |   | 136                      |   |   | 114    |                          |   | 2            |   |   | (691 | ) |   | 7 |   |
| Total                                                                         |   | 4,023                              |   |     | 3,780   |                                                    |   | 1,064                    |   |   | 1,336  |                          |   | 75           |   |   | (1,903 | ) |   | 8,375 |   |
| Profit from regular operation attributed to the Company’s owners        |   | 1,475                              |   |     | 933     |                                                    |   | 242                      |   |   | 88     |                          |   | (1           | ) |   | (97 | ) |   | 2,640 |   |
| Profit from regular operation attributed to non-controlling rights            |   | –                            |   |     | – |                                                    |   | –                  |   |   | 89     |                          |   | 1            |   |   | (89 | ) |   | 1 |   |
| Total assets attributed to the area of operation as at December 31, 2008      |   | 6,281                              |   |     | 4,644   |                                                    |   | 994                      |   |   | 1,132  |                          |   | 100          |   |   | 1,163 |   |   | 14,314 |   |
| Total liabilities attributed to the area of operation as at December 31, 2008 |   | 6,037                              |   |     | 2,552   |                                                    |   | 284                      |   |   | 4,024  |                          |   | 29           |   |   | (2,856 | ) |   | 10,070 |   |

| *      | The companies in the Bezeq group that are service providing companies, (as distinct from manufacturing companies) do not manage a dedicating costing system distinguishing between fixed and variable costs. The above distribution was made for the purposes of this report only. Variable costs are costs which the company’s management and control over them are flexible in the short term and their effect on the output is direct, unlike fixed costs that are not flexible in the short term and do not directly affect output. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **     | Details of the nature of the adjustments to the consolidated – transactions between areas of activity                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ***    | Reclassified                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

----

|                                                                   |   | Domestic fixed-line communications |   | Cellular |    | International communications, internet services and NEP |   | Multi-channel television |   | Other  |   | Adjustments to consolidated * |   | Consolidated |
|------------------------------------------------------------------------|--------|------------------------------------|--------|----------|---------|---------------------------------------------------------|--------|--------------------------|--------|--------|--------|-------------------------------|--------|--------------|
|                                                                   |   | (NIS in millions)                  |
|                                                                   |   |                               |   |     |    |                                                    |   |                     |   |   |   |                          |   |         |   |   |   |   |   |   |   |
| Total revenue:                                                         |   |                               |   |     |    |                                                    |   |                     |   |   |   |                          |   |         |   |   |   |   |   |   |   |
| From externals                                                         |   | 5,373                              |   |     | 4,380   |                                                    |   | 1,226                    |   |   | 1,403  |                          |   | 18           |   |   | (1,403 | ) |   | 10,997 |   |
| From other areas of operations in the Bezeq group                      |   | 340                                |   |     | 304     |                                                    |   | 78                       |   |   | 12     |                          |   | 46           |   |   | (641 | ) |   | 139 |   |
| Total                                                                  |   | 5,713                              |   |     | 4,684   |                                                    |   | 1,304                    |   |   | 1,415  |                          |   | 64           |   |   | (2,044 | ) |   | 11,136 |   |
| Total attributed costs                                                 |   |                               |   |     |    |                                                    |   |                     |   |   |   |                          |   |         |   |   |   |   |   |   |   |
| Variable costs attributed to the area of operation                     |   | 2,352                              |   |     | 2,038   |                                                    |   | 679                      |   |   | 530    |                          |   | 47           |   |   |   |   |   |   |   |
| Fixed costs attributed to the area of operation*                       |   | 2,042                              |   |     | 1,841   |                                                    |   | 421                      |   |   | 829    |                          |   | 17           |   |   |   |   |   |   |   |
| Total costs                                                            |   | 4,394                              |   |     | 3,879   |                                                    |   | 1,100                    |   |   | 1,359  |                          |   | 64           |   |   | (1,981 | ) |   | 8,815 |   |
| Costs not constituting revenue from another area of operation          |   | 4,062                              |   |     | 3,711   |                                                    |   | 960                      |   |   | 1,220  |                          |   | 63           |   |   | (1,220 | ) |   | 8,796 |   |
| Costs constituting revenue from other areas of operation               |   | 332                                |   |     | 168     |                                                    |   | 140                      |   |   | 139    |                          |   | 1            |   |   | (761 | ) |   | 19 |   |
| Total                                                                  |   | 4,394                              |   |     | 3,879   |                                                    |   | 1,100                    |   |   | 1,359  |                          |   | 64           |   |   | (1,981 | ) |   | 8,815 |   |
| Profit from regular operation attributed to the Company’s owners |   | 1,319                              |   |     | 805     |                                                    |   | 204                      |   |   | 27     |                          |   | 1            |   |   | (35 | ) |   | 2,321 |   |
| Profit from regular operation attributed to non-controlling rights     |   | –                            |   |     | – |                                                    |   | –                  |   |   | 29     |                          |   | (1           | ) |   | (29 | ) |   | (1 | ) |

| *      | The companies in the Bezeq group that are service providing companies, (as distinct from manufacturing companies) do not manage a dedicating costing system distinguishing between fixed and variable costs. The above distribution was made for the purposes of this report only. Variable costs are costs which the company’s  management and control over them are flexible in the short term and their effect on the output is direct, unlike fixed costs that are not flexible in the short term and do not directly affect output. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **     | Details of the nature of the adjustments to the consolidated – transactions between areas of activity                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ***    | Reclassified                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

----

|                                                                |   | 2009              |   | 2008   |   | Q4 2009 |   | Q3 2009 |   | Q2 2009 |   | Q1 2009 |   | Q4 2008 |   | Q3 2008 |   | Q2 2008 |   | Q1 2008 |
|---------------------------------------------------------------------|--------|-------------------|--------|--------|--------|---------|--------|---------|--------|---------|--------|---------|--------|---------|--------|---------|--------|---------|--------|---------|
|                                                                |   | (NIS in millions) |
|                                                                |   |              |   |   |   |    |   |    |   |    |   |    |   |    |   |    |   |    |   |    |   |   |   |   |   |   |   |   |   |   |
| Revenue                                                             |   | 5,303             |   |   | 5,498  |    |   | 1,316   |   |    | 1,343  |    |   | 1,318   |   |    | 1,326  |    |   | 1,348   |   |   | 1,388 |   |   | 1,354 |   |   | 1,408 |   |
| Operating profit                                                    |   | 1,523             |   |   | 1,475  |    |   | 161     |   |    | 491    |    |   | 434     |   |    | 437    |    |   | 232     | ** |   | 428 | ** |   | 442 | ** |   | 373 | ** |
| Depreciation and amortization                                       |   | 794               |   |   | 852    |    |   | 194     |   |    | 184    |    |   | 205     |   |    | 211    |    |   | 209     |   |   | 214 |   |   | 211 |   |   | 218 |   |
| EBITDA                                                              |   | 2,317             |   |   | 2,327  |    |   | 355     |   |    | 675    |    |   | 639     |   |    | 648    |    |   | 441     | ** |   | 642 | ** |   | 653 | ** |   | 591 | ** |
| Investment in property, plant & equipment and intangible assets |   | 853               |   |   | 616    |    |   | 220     |   |    | 204    |    |   | 191     |   |    | 238    |    |   | 170     |   |   | 156 |   |   | 132 |   |   | 158 |   |
| Proceeds from sale of property, plant & equipment               |   | 86                |   |   | 144    |    |   | 9       |   |    | 19     |    |   | 8       |   |    | 50     |    |   | 47      |   |   | 12 |   |   | 25 |   |   | 60 |   |
| Number of active subscriber lines at end of period (in thousands)   |   | 2,489             |   |   | 2,615  |    |   | 2,489   |   |    | 2,518  |    |   | 2,547   |   |    | 2,579  |    |   | 2,615   |   |   | 2,645 |   |   | 2,681 |   |   | 2,711 |   |
| Average monthly revenue per line (NIS)*                             |   | 82                |   |   | 83     |    |   | 82      |   |    | 83     |    |   | 81      |   |    | 81     |    |   | 82      |   |   | 85 |   |   | 82 |   |   | 84 |   |
| No. of outgoing minutes (in millions)                               |   | 12,196            |   |   | 13,439 |    |   | 2,964   |   |    | 3,096  |    |   | 3,014   |   |    | 3,123  |    |   | 3,154   |   |   | 3,428 |   |   | 3,346 |   |   | 3,511 |   |
| No. of incoming minutes (in millions)                               |   | 6,718             |   |   | 6,691  |    |   | 1,674   |   |    | 1,737  |    |   | 1,664   |   |    | 1,654  |    |   | 1,648   |   |   | 1,719 |   |   | 1,651 |   |   | 1,673 |   |
| No. of ADSL subscribers at end of period (in thousands)             |   | 1,035             |   |   | 1,005  |    |   | 1,035   |   |    | 1,026  |    |   | 1,016   |   |    | 1,011  |    |   | 1,005   |   |   | 994 |   |   | 982 |   |   | 970 |   |
| Average monthly revenue per ADSL user (NIS)                         |   | 70                |   |   | 67     |    |   | 72      |   |    | 72     |    |   | 69      |   |    | 68     |    |   | 67      |   |   | 68 |   |   | 66 |   |   | 68 |   |

| *      | Not including revenue from data transmission and communication services, internet services, services to communication operators, contract work and other revenue.                                                                                                               |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                            |
| **     | Reclassification of the sum of approximately NIS 26 million, spread over the four quarters of 2008, for financing costs for provisions for termination of labor relations under early retirement, presented in the past under the item of operating expenses (income) net. |

----

|                                                                                  |   | 2009                                         |   | 2008   |   | Q4 2009 |   | Q3 2009 |   | Q2 2009 |    | Q1 2009 |   | Q4 2008 |   | Q3 2008 |    | Q2 2008 |   | Q1 2008 |
|---------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|--------|--------|---------|--------|---------|--------|---------|---------|---------|--------|---------|--------|---------|---------|---------|--------|---------|
|                                                                                  |   | (NIS millions except where stated otherwise) |
|                                                                                  |   |                                         |   |   |   |    |   |    |   |    |    |    |   |    |   |    |    |    |   |    |   |   |   |   |   |   |   |   |   |   |
| Revenue                                                                               |   | 5,376                                        |   |   | 4,713  |    |   | 1,393   |   |    | 1,372   |    |   | 1,346   |   |    | 1,265   |    |   | 1,138   |   |   | 1,214 |   |   | 1,188 |   |   | 1,173 |   |
| Operating profit                                                                      |   | 1,190                                        |   |   | 933    |    |   | 251     |   |    | 316     |    |   | 321     |   |    | 302     |    |   | 159     |   |   | 293 |   |   | 266 |   |   | 215 |   |
| Depreciation and amortization                                                         |   | 603                                          |   |   | 523    |    |   | 158     |   |    | 155     |    |   | 151     |   |    | 139     |    |   | 135     |   |   | 129 |   |   | 130 |   |   | 129 |   |
| EBITDA                                                                                |   | 1,794                                        |   |   | 1,456  |    |   | 410     |   |    | 471     |    |   | 472     |   |    | 441     |    |   | 294     |   |   | 422 |   |   | 396 |   |   | 344 |   |
| Net profit                                                                            |   | 875                                          |   |   | 682    |    |   | 181     |   |    | 231     |    |   | 233     |   |    | 230     |    |   | 128     |   |   | 211 |   |   | 180 |   |   | 163 |   |
| Cash flow from current operations                                                     |   | 1,115                                        |   |   | 1,277  |    |   | 55      |   |    | 395     |    |   | 290     |   |    | 375     |    |   | 298     |   |   | 379 |   |   | 344 |   |   | 256 |   |
| Investment in property, plant & equipment and intangible assets                   |   | 559                                          |   |   | 798    |    |   | 101     |   |    | 146     |    |   | 163     |   |    | 149     |    |   | 163     |   |   | 350 |   |   | 182 |   |   | 103 |   |
| Proceeds from sale of property, plant & equipment                                 |   | 4                                            |   |   | 3      |    |   | – |   |    | – |    |   | 4       |   |    | – |    |   | 1       |   |   | – |   |   | 1 |   |   | 1 |   |
| No. of subscribers at end of period (in thousands)                                    |   | 2,766                                        |   |   | 2,649  |    |   | 2,766   |   |    | 2,721   |    |   | 2,694   |   |    | 2,669   |    |   | 2,649   |   |   | 2,698 |   |   | 2,636 |   |   | 2,595 |   |
| Average monthly minutes of use (MOU) per subscriber*                                  |   | 333                                          |   |   | 352    |    |   | 339     |   |    | 339     |    |   | 329     |   |    | 323     |    |   | 335     |   |   | 359 |   |   | 358 |   |   | 355 |   |
| Average monthly revenue per ADSL subscriber (NIS)*                                    |   | 132                                          |   |   | 126    |    |   | 132     |   |    | 136     |    |   | 131     |   |    | 128     |    |   | 122     |   |   | 129 |   |   | 128 |   |   | 126 |   |
| No. of subscribers at end of period (in thousands)                                    |   | 1,531                                        |   |   | 1,151  |    |   | 1,531   |   |    | 1,407   |    |   | 1,307   |   |    | 1,217   |    |   | 1,151   |   |   | 1,068 |   |   | 977 |   |   | 867 |   |
| Revenue from value added services and content, of revenues from cellular services (%) |   | 19.6                                         | %      |   | 16.3   | %       |   | 20.8    | %      |    | 20.0    | %       |   | 19.1    | %      |    | 18.5    | %       |   | 18.4    | % |   | 16.2 | % |   | 15.5 | % |   | 15.0 | % |

| * | On December 31, 2008, Pelephone Ltd adopted a more stringent subscriber counting policy whereby customers who only receive SMS messages would not be counted as subscribers. The policy change led to the deletion of approximately 92,000 subscribers. The drop in MOU in 2009 stems from the transition to billing by segments of one second, as of January 1, 2009, which led to a drop in the number of minutes billed. |
|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                 |   | 2009                                         |   | 2008   |   | Q4 2009 |   | Q3 2009 |   | Q2 2009 |    | Q1 2009 |   | Q4 2008 |   | Q3 2008 |    | Q2 2008 |   | Q1 2008 |
|----------------------------------------------------------------------|--------|----------------------------------------------|--------|--------|--------|---------|--------|---------|--------|---------|---------|---------|--------|---------|--------|---------|---------|---------|--------|---------|
|                                                                 |   | (NIS millions except where stated otherwise) |
|                                                                 |   |                                         |   |   |   |    |   |    |   |    |    |    |   |    |   |    |    |    |   |    |   |   |   |   |   |   |   |   |   |   |
| Revenue                                                              |   | 1,318                                        |   |   | 1,306  |    |   | 334     |   |    | 332     |    |   | 327     |   |    | 324     |    |   | 337     |   |   | 329 |   |   | 326 |   |   | 314 |   |
| Operating profit                                                     |   | 261                                          |   |   | 242    |    |   | 67      |   |    | 66      |    |   | 68      |   |    | 60      |    |   | 65      |   |   | 59 |   |   | 63 |   |   | 55 |   |
| Depreciation and amortization                                        |   | 84                                           |   |   | 80     |    |   | 23      |   |    | 21      |    |   | 21      |   |    | 20      |    |   | 20      |   |   | 20 |   |   | 20 |   |   | 20 |   |
| EBITDA                                                               |   | 345                                          |   |   | 322    |    |   | 89      |   |    | 88      |    |   | 88      |   |    | 80      |    |   | 85      |   |   | 79 |   |   | 83 |   |   | 75 |   |
| Net profit                                                           |   | 200                                          |   |   | 178    |    |   | 49      |   |    | 51      |    |   | 56      |   |    | 44      |    |   | 46      |   |   | 44 |   |   | 47 |   |   | 42 |   |
| Cash flow from operating activities                                  |   | 320                                          |   |   | 163    |    |   | 72      |   |    | 82      |    |   | 83      |   |    | 84      |    |   | 73      |   |   | 32 |   |   | 51 |   |   | 8 |   |
| Investment in property, plant & equipment and intangible assets* |   | 120                                          |   |   | 119    |    |   | 39      |   |    | 33      |    |   | 26      |   |    | 21      |    |   | 27      |   |   | 33 |   |   | 31 |   |   | 28 |   |
| Proceeds from sale of property, plant & equipment                |   | –                                      |   |   | 1      |    |   | – |   |    | – |    |   | – |   |    | – |    |   | 1       |   |   | – |   |   | – |   |   | – |   |

| * | This item also includes long-term investments in assets. |
|---|----------------------------------------------------------|

----

|                                                                  |   | 2009                                         |   | 2008   |    | Q4 2009 |   | Q3 2009 |   | Q2 2009 |    |   | Q1 2009 |    | Q4 2008 |   | Q3 2008 |    | Q2 2008 |   | Q1 2008 |
|-----------------------------------------------------------------------|--------|----------------------------------------------|--------|--------|---------|---------|--------|---------|--------|---------|---------|--------|---------|---------|---------|--------|---------|---------|---------|--------|---------|
|                                                                  |   | (NIS millions except where stated otherwise) |
|                                                                  |   |                                         |   |   |    |    |   |    |   |    |    |   |    |    |    |   |    |    |    |   |    |   |   |   |   |   |   |   |   |   |   |
| Revenue                                                               |   | 1,530                                        |   |   | 1,513   |    |   | 390     |   |    | 380     |   |    | 376     |    |   |    | 384     |    |   | 376     |   |   | 375 |   |   | 380 |   |   | 381 |   |
| Operating profit                                                      |   | 248                                          |   |   | 177     |    |   | 63      |   |    | 61      |   |    | 59      |    |   |    | 66      |    |   | 55      |   |   | 52 |   |   | 43 |   |   | 27 |   |
| Depreciation and amortization                                         |   | 234                                          |   |   | 250     |    |   | 63      |   |    | 59      |   |    | 56      |    |   |    | 57      |    |   | 66      |   |   | 59 |   |   | 61 |   |   | 65 |   |
| EBITDA                                                                |   | 482                                          |   |   | 427     |    |   | 126     |   |    | 120     |   |    | 115     |    |   |    | 122     |    |   | 121     |   |   | 111 |   |   | 103 |   |   | 92 |   |
| Net profit (loss)                                                     |   | (222                                         | )      |   | (265    | )       |   | (38     | )      |    | (88     | )      |    | (95     | )       |   |    | (1      | )       |   | (17     | ) |   | (82 | ) |   | (99 | ) |   | (66 | ) |
| Cash flow from operating activities                                   |   | 410                                          |   |   | 347     |    |   | 91      |   |    | 135     |   |    | 93      |    |   |    | 91      |    |   | 134     |   |   | 97 |   |   | 32 |   |   | 84 |   |
| Investment in property, plant & equipment and intangible assets * |   | 262                                          |   |   | 238     |    |   | 53      |   |    | 87      |   |    | 60      |    |   |    | 61      |    |   | 63      |   |   | 56 |   |   | 40 |   |   | 79 |   |
| Proceeds from sale of property, plant & equipment                 |   | 1                                            |   |   | – |    |   | 1       |   |    | – |   |    | – |    |   |    | – |    |   | – |   |   | – |   |   | – |   |   | – |   |
| No. of ADSL subscribers at end of period (in thousands)               |   | 571                                          |   |   | 560     |    |   | 571     |   |    | 567     |   |    | 562     |    |   |    | 560     |    |   | 560     |   |   | 556 |   |   | 551 |   |   | 549 |   |
| Average monthly revenue per subscriber (NIS)                          |   | 226                                          |   |   | 228     |    |   | 229     |   |    | 224     |   |    | 224     |    |   |    | 228     |    |   | 225     |   |   | 226 |   |   | 230 |   |   | 231 |   |

| * | This item also includes investments in the cost of acquiring subscribers. |
|---|---------------------------------------------------------------------------|

----

E.  Off-Balance Sheet Arrangements

F.  Tabular Disclosure of Contractual Obligations

|                                          |   | Payments due by Period |      |
|-----------------------------------------------|--------|------------------------|-----------|
| Contractual Obligations                       |   | Total                  |      |   | less than 1 year |   |   | 1-3 Years |   |   | 3-5 Years |   |   | more than 5 years |   |
|                                          |   | (NIS in thousands)     |      |
| Long-term debt obligations including interest |   |                   | 1,577,768 |   |   |   | 279,000 |   |   |   | 526,796 |   |   |   | 485,190 |   |   |   | 286,781 |   |
| Operating lease obligations                   |   |                   | 1,872     |   |   |   | 1,025 |   |   |   | 847 |   |   |   |   |   |   |   |   |   |
| Total                                         |   |                   | 1,579,640 |   |   |   | 280,025 |   |   |   | 527,644 |   |   |   | 485,190 |   |   |   | 286,781 |   |

ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.  Directors and Senior Management

| NAME                     |   | AGE    |   | POSITION                                                                                                                                                                        |
|--------------------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                     |   |   |   |                                                                                                                                                                            |
| Shaul Elovitch (1)       |   | 62     |   | Chairman of the Board of Directors                                                                                                                                              |
| Eli Holtzman             |   | 62     |   | Director, Chief Executive Officer, Chief Executive Officer of B Communications and Chief Executive Officer of GoldMind                                                          |
| Doron Turgeman(3)(4)     |   | 42     |   | Deputy Chief Executive Officer, Chief Financial Officer, Chief Financial Officer of B Communications and Deputy Chief Executive Officer and Chief Financial Officer of GoldMind |
| Felix Cohen              |   | 56     |   | Director                                                                                                                                                                        |
| Yossef Elovitch          |   | 59     |   | Director                                                                                                                                                                        |
| Ronit Gotliv (2)(3)(4)   |   | 57     |   | Outside Director                                                                                                                                                                |
| Orly Guy (2)(3)(4)       |   | 50     |   | Outside Director                                                                                                                                                                |
| Amikam Shorer            |   | 43     |   | Director                                                                                                                                                                        |
| Anat Winner (1)(2)(3)(4) |   | 51     |   | Director                                                                                                                                                                        |

----

----

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| Name           |   | Age      |   | Position                                    |
|----------------|--------|----------|--------|---------------------------------------------|
|           |   |     |   |                                        |
| Shlomo Rodav   |   |  61 |   | Chairman of the Board of Directors of Bezeq |
| Abraham Gabbay |   |  43 |   | Chief Executive Officer of Bezeq            |

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B.  Compensation

C.  Board Practices

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|   | ● | a breach of the office holders duty of care to the company or another person;                                                                                                                                             |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                      |
|   | ● | a breach of the office holders duty of loyalty to the company, provided that the office holder acted in good faith and had reasonable cause to assume that the act would not prejudice the company’s interests; and |
|   |    |                                                                                                                                                                                                                      |
|   | ● | a financial liability imposed upon the office holder in favor of another person.                                                                                                                                          |

|   | ● | a financial liability imposed on the office holder in favor of another person by any judgment, including a settlement or an arbitration award approved by a court;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | ● | reasonable litigation expenses, including attorney’s fees, actually incurred by the office holder as a result of an investigation or proceeding instituted against him or her by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against the office holder or the imposition of any financial liability in lieu of criminal proceedings, or concluded without the filing of an indictment against the office holder and a financial liability was imposed on the officer holder in lieu of criminal proceedings with respect to a criminal offense that does not require proof of criminal intent; and |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   | ● | reasonable litigation expenses, including attorneys’ fees, incurred by such office holder or which were imposed on him or her by a court, in proceedings the company instituted against the office holder or that were instituted on the company’s behalf or by another person, or in a criminal charge from which the office holder was acquitted, or in a criminal proceeding in which the office holder was convicted of a criminal offense that does not require proof of criminal intent.                                                                                                                                                                       |

|   | ● | undertake in advance to indemnify an office holder, except that with respect to a financial liability imposed on the office holder by any judgment, settlement or court-approved arbitration award, the undertaking must be limited to types of occurrences, which, in the opinion of the company’s board of directors, are, at the time of the undertaking, foreseeable due to the company’s activities and to an amount or standard that the board of directors has determined is reasonable under the circumstances; and |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | ● | retroactively indemnify an office holder of the company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

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|   | ● | a breach by the office holder of his duty of loyalty, except with respect to insurance coverage or indemnification if the office holder acted in good faith and had reasonable grounds to assume that the act would not prejudice the company; |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                           |
|   | ● | a breach by the office holder of his duty of care if such breach was committed intentionally or recklessly, unless the breach was committed only negligently;                                                                                  |
|   |    |                                                                                                                                                                                                                                           |
|   | ● | any act or omission committed with intent to derive an unlawful personal gain; and                                                                                                                                                             |
|   |    |                                                                                                                                                                                                                                           |
|   | ● | any fine or forfeiture imposed on the office holder.                                                                                                                                                                                           |

D.  Employees

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E.  Share Ownership

| Name                                                                                                                                                                                                                                                                                                                            |   | Number of Ordinary SharesBeneficially Owned(1) |   | Percentage of Ownership (2) |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|-----------------------------|
|                                                                                                                                                                                                                                                                                                                            |   |                                           |   |                        |   |   |
| Shaul Elovitch (4)                                                    |   | 13,568,874                                     |   |                        | 70.81 | % |
| Eli Holtzman                                                          |   | 172,118                                        |   |                        | * |   |
| Doron Turgeman                                                        |   | –                                        |   |                        | – |   |
| Felix Cohen                                                           |   | –                                        |   |                        | – |   |
| Yossef Elovitch (4)                                                   |   | –                                        |   |                        | – |   |
| Ronit Gotliv                                                          |   | –                                        |   |                        | – |   |
| Orly Guy                                                              |   | –                                        |   |                        | – |   |
| Amikam Shorer                                                         |   | –                                        |   |                        | – |   |
| Anat Winner                                                           |   | –                                        |   |                        | – |   |
| All directors and executive officers as a group (9 persons)                                                                                                                                                                                                                                                                     |   | 13,740,992                                     |   |                        | 71.71 | % |

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| *      | Less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (1)    | Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.  Ordinary shares relating to options and warrants currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.  Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (2)    | The percentages shown are based on 19,161,333 ordinary shares issued and outstanding (which exclude 5,862,615 ordinary shares held as treasury shares) as of June 30, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

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| (3) | Eurocom Communications, our controlling shareholder, holds 13,564,746, or approximately 70.79%, of our ordinary shares as of June 30, 2010.  Mr. Shaul Elovitch, our chairman and the chairman of the board of directors of Eurocom Holdings, holds 80% of Eurocom Holdings’ shares and 75% of Eurocom Holdings’ management shares, and Mr. Yossef Elovitch, his brother and our director, holds 20% of Eurocom Holdings’ shares and 25% of Eurocom Holdings’ management shares.  Eurocom Communications is 50.33% owned by Eurocom Holdings and 49.0% of its shares are held by four holding companies, which are 80% owned by Mr. Shaul Elovitch and 20% owned by Mr. Yossef Elovitch, respectively.  The remaining 0.67% interest in Eurocom Communications is directly owned by Mr. Shaul Elovitch.  Accordingly, Mr. Shaul Elovitch may be deemed to have the sole voting and dispositive power over our ordinary shares held of record by Eurocom Communications.  In addition, Mr. Shaul Elovitch may be deemed to be the beneficial holder of 4,128 ordinary shares held of record by Mrs. Elovitch. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.  Major Shareholders

| Name                                         |   | Number ofOrdinary SharesBeneficially Owned (1) |       | Percentage ofOwnership (2) |
|----------------------------------------------|--------|------------------------------------------------|------------|----------------------------|
|                                         |   |                                           |       |                       |   |   |   |   |
| Shaul Elovitch (3)                      |   |                                           | 13,568,874 |                       |   |   | 70.81 | % |
| Clal Insurance Enterprises Holdings Ltd. (4) |   |                                           | 1,009,153  |                       |   |   | 5.26 | % |

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| (1)    | Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities.  Ordinary shares relating to options currently exercisable or exercisable within 60 days of the date of this table, are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.  Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| (2)    | The percentages shown are based on 19,161,333 ordinary shares issued and outstanding (which exclude 5,862,615 ordinary shares held as treasury shares) as of June 30, 2010.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

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| (3)    | Eurocom Communications, our controlling shareholder, holds 13,564,746, or approximately 70.79%, of our ordinary shares as of June 20, 2010.  Mr. Shaul Elovitch, our chairman and the chairman of the board of directors of Eurocom Holdings, holds 80% of Eurocom Holdings’ shares and 75% of Eurocom Holdings’ management shares, and Mr. Yossef Elovitch, his brother and our director, holds 20% of Eurocom Holdings’ shares and 25% of Eurocom Holdings’ management shares.  Eurocom Communications is 50.33% owned by Eurocom Holdings and 49.0% of its shares are held by four holding companies, which are 80% owned by Mr. Shaul Elovitch and 20% owned by Mr. Yossef Elovitch, respectively.  The remaining 0.67% interest in Eurocom Communications is directly owned by Mr. Shaul Elovitch.  Accordingly, Mr. Shaul Elovitch may be deemed to have the sole voting and dispositive power over our ordinary shares held of record by Eurocom Communications.  In addition, Mr. Shaul Elovitch may be deemed to be the beneficial holder of 4,128 ordinary shares held of record by Mrs. Elovitch. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (4)    | Based solely upon, and qualified in its entirety with reference to, a notification dated March 28, 2010 provided to us.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

B .  Related Party Transactions

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|   | ● | Agreement pursuant to which Bezeq International agreed to provide SatLink international data communication services between Israel and France for a period of 12 months and SatLink has an annual option to extend the agreement for periods of 12 months.                                |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                      |
|   | ● | Agreement pursuant to which Bezeq International agreed to grant to SatLink the right to use an international data communications infrastructure between Israel and Greece for a period of 12 months and SatLink has an option to extend the agreement for periods of 12 months each time. |
|   |    |                                                                                                                                                                                                                                                                                      |
|   | ● | Agreement pursuant to which Bezeq International agreed to provide SatLink international data communication services between Israel and the United Kingdom for a period of 12 months and SatLink has an option to extend the agreement for periods of 12 months each time.                 |

C.  Interests of Experts and Counsel

ITEM 8.  FINANCIAL INFORMATION

A.  Consolidated Statements and Other Financial Information

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|   | ● | In September 2000, a lawsuit was filed in the Jerusalem Regional Labor Court against Bezeq by 2,423 retired employees of Bezeq.  The plaintiffs were seeking declaratory relief to determine that grossed up compensation for tax purposes, clothing allowance and incentive payments are considered part of the regular salary and therefore should be considered as part of determining wages for the purpose of calculating their pension and payments made to them upon retirement.  The plaintiffs were also seeking declaratory relief to determine that their last determining salary for pension should be calculated according to the last salary actually paid and not according to the average staff grade held by them.  The claim was subsequently amended so that the request for declaratory relief relating to the plaintiff’s pension rights was deleted and the plaintiffs also narrowed their claim to the incentive pay component and withdrew their claim with respect to grossing up compensation and clothing allowance.  In January 2007, an additional claim was filed by 85 retired employees of Bezeq who were seeking declaratory relief to determine that grossed up compensation for tax purposes, clothing allowance and incentive pay should be included in the determining salary for their rights pursuant to the Hours of Work and Rest Law and the Annual Vacation Law.  This claim was consolidated with the above claim.  On December 16, 2008, the Court denied the claim.  The plaintiffs filed an appeal against the Courts decision on March 3, 2009 and the appeal proceedings are continuing. |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | ● | In February 2002, a notice of a party to a collective agreement, or Party Notice, was filed in the Jerusalem Regional Labor Court by the labor union that represents Bezeq’s employees in the name of all of Bezeq employees.  The applicant alleges that grossed up consideration for tax purposes, the salary component for on-call duty and clothing allowances which were paid to Bezeq’s employees constitute regular pay which forms part of the determining salary of each employee, including for the calculation of payments upon retirement.  The Israeli Attorney General joined the claim.  In April 2006, the Court issued its decision, denying all parts of the Party Notice.  An appeal was filed against the decision, in which it was alleged that the decision is procedurally void, and the hearing was returned, with the consent of the parties and the Attorney General, to the Regional Labor Court.  On February 10, 2010, a new party notice was filed, referring only to the on-call duty component and requesting that the Court determine that such component be included in the hourly rate for the purpose of calculating the remuneration for overtime hours and the redemption of annual leave.  A preliminary hearing has been scheduled for July 2010.                                                                                                                                                                                                                                                                                                                                                     |

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|   | ● | In September 2000, a lawsuit and motion for certification as a class action were filed against Bezeq in the Tel Aviv District Court.  The amount of the claim is estimated at NIS 103 million ($27.3 million).  According to the plaintiffs, Bezeq unlawfully collected “collection expenses” from its subscribers for bills which were not paid by their due date but were paid within 14 days of their due date, although Bezeq took no collection action until 14 days after the due date.  In March 2010, the District Court certified the lawsuit as a class action.  The plaintiffs are seeking the return of the fee that Bezeq allegedly collected unlawfully, with the class of the claim including all those who were charged collection expenses despite having paid their bill before Bezeq began collections, from March 11, 1999 through December 7, 2006.  Bezeq intends to file a motion for leave to appeal the decision.                                                                                                                                                    |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | ● | In January 2002, a lawsuit was filed in the Tel Aviv District Court (in 2007, the lawsuit was transferred to the new Central Region District Court) by an international communications operator against Bezeq and Bezeq International.  The plaintiff is seeking compensation in the amount of NIS 53 million ($14 million) for alleged damages allegedly sustained by that operator due to alleged acts and omissions in connection with the allocation of international calls to the various international call operators in Israel.  In addition, the plaintiff is seeking an order requiring Bezeq to provide certain documents and to prohibit Bezeq from giving allocation priority to Bezeq International.  Alternatively, the operator is seeking restitution of the access fees that it paid to Bezeq.  On January 27, 2009, the plaintiff filed a motion to amend the lawsuit, which if allowed in full, would increase the monetary compensation sought to approximately NIS 77 million ($20.4 million).  The parties were referred to a mediation proceeding and the proceedings are ongoing. |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | ● | In 2003, Bezeq filed a lawsuit in the Tel Aviv Regional Labor Court against the Makefet Fund (a pension fund) for compensation for the alleged breach of agreements between Bezeq and the Makefet Find relating to the calculation of the cost of early retirement of retired employees of Bezeq.  Bezeq is seeking compensation in the amount of approximately NIS 280 million ($74.2 million).  The trial is currently underway and evidence in the lawsuit is being heard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | ● | Between 2003 and 2005, three lawsuits were filed in the Central Region District Court by various plaintiffs against Bezeq, the Israeli Broadcasting Authority and the State of Israel, seeking compensation for physical injury and property damage allegedly caused by radiation from the one of Bezeq’s broadcasting stations.  The plaintiffs are seeking compensation for alleged damages of more than NIS 15 million ($3.97 million) in one of the lawsuits, NIS 46 million ($12.2 million) in another and damages are not stated in the third lawsuit.  The plaintiffs in the three lawsuits filed a motion to consolidate the lawsuits.  The Court has ordered the plaintiffs to submit documents and affidavits and has issued a stay of proceedings until after the plaintiffs comply with such order.                                                                                                                                                                                                                                                                                                         |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | ● | On December 25, 2005, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Bezeq, alleging that Bezeq unlawfully collects payment for browsing high-speed Internet while technically it is unable to provide the service in certain areas at the promised speed.  The plaintiffs estimate the amount of the class action at NIS 100 million ($37.7 million) for all subscribers.  On March 6, 2008, the Court certified the lawsuit as a class action in part for a group of subscribers defined in the Court’s decision.  On April 7, 2008, Bezeq filed a motion for leave to appeal the decision of the District Court.  The parties are currently negotiating a settlement arrangement.                                                                                                                                                                                                                                                                                                                                                              |

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|   | ● | In May 2006, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court, alleging deception in advertising relating to a charge.  According to the plaintiff, Bezeq deceived the public in its advertisements regarding fees for calls from a Bezeq line to a cellular line and did not disclose that the charge for the calls was made according to segments of 12 seconds.  The plaintiff estimates the amount of the claim, if certified as a class action, at NIS 68.5 million ($18.14 million).  On May 10 2010, the District Court certified the lawsuit as a class action.  On June 9, 2010, Bezeq filed a motion for leave to appeal the decision of the District Court.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | ● | In November 2006, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Bezeq.  The plaintiffs claim that because Bezeq charged customers who connected to its ADSL service a monthly fee rather than a two-monthly fee, they incurred financing losses and expenses.  The plaintiff estimates the amount of the claim, if certified as a class action, at approximately NIS 79 million ($20.92 million).  A hearing in the lawsuit is scheduled for July 2010.  The parties are currently pursuing settlement negotiations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | ● | In November 2006, a lawsuit and motion for certification as a class action were filed against Bezeq in the Tel Aviv District Court, alleging that Bezeq unlawfully collected a fee in the event of disconnection due to non-payment of customer bills.  The plaintiff estimates the amount of the claim, if certified as a class action, at approximately NIS 189 million if certified as a class action.  The trial is currently underway and evidence in the lawsuit is being heard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | ● | In November 2006, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Bezeq, HOT, Cellcom, Partner and Pelephone.  The plaintiffs allege that when completing a call made from a cellular line to a landline, if the call is disconnected by the landline call recipient, Bezeq and HOT, both of which are landline operators, delay sending the disconnection signal for about 60 seconds and as a result, the plaintiffs incur a loss which is reflected in air-time costs and call fees.  The plaintiffs are the seeking aggregate compensation of approximately NIS 158 million ($41.9 million) if the lawsuit is certified as a class action.  In a procedural arrangement reached between the parties, it was determined that the lawsuit would be heard against Bezeq and HOT, while the lawsuit against Cellcom, Partner and Pelephone would be heard as part of a similar lawsuit filed against them in August 2006, as described below.  The hearing on the motion to certify the lawsuit as a class action is underway; the parties have submitted written closing statements and are awaiting the Court’s decision on the motion. |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | ● | In May 2007, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Bezeq, two former chief executive officers of Bezeq, directors of Bezeq who served during the period relevant to the lawsuit and against Ap.Sb.Ar. Holdings Ltd., which at the time was Bezeq’s controlling shareholder.  The plaintiff, who claims that he had purchased shares of Bezeq in 2006, alleges that the financial statements of Bezeq for fiscal years 2004 and 2005 included false and misleading material information regarding Bezeq’s annual profits, property, plant and equipment and equity, in view of the retroactive write-down of NIS 320 million of property, plant and equipment which was not being used by Pelephone.  The total compensation sought in the lawsuit if certified as a class action amounts to approximately NIS 56.5 million ($15.9 million).  The lawsuit is in preliminary stages of document disclosure and discovery.                                                                                                                                                                                                             |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | ● | In September 2007, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Bezeq, alleging that Bezeq unlawfully collected VAT on interest due to late payments and collection fees.  The total compensation sought in the lawsuit, if certified as a class action, amounts to approximately NIS 114 million ($30.2 million).  The lawsuit is in preliminary stages of document disclosure and discovery.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

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|   | ●   | On October 26, 2008, one of the shareholders of DBS initiated arbitration proceedings against Bezeq and another DBS shareholder, alleging that she incurred losses as a result of the conduct of Bezeq and the other DBS shareholder relating to the management of DBS and the use of DBS for promoting purposes not provided for in the shareholders agreement to which she is a party.  The plaintiff is seeking cancellation of the agreement, restitution and compensation in the amount of NIS 160 million ($42.4 million).  The parties are currently in the process of document disclosure and discovery proceedings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | ●   | In December 2009, a motion was filed in the Tel Aviv District Court by the liquidator of Adanet Business Ltd., or Adanet, which is 50%-held by Bezeq and currently in liquidation proceedings, pursuant to which the Court is requested to order Bezeq and three directors who it appointed to the Adanet board to pay, jointly and severally, the liquidator all the alleged debt of Adanet, amounting to approximately NIS 54 million ($14.3 million), plus statutory linkage and interest commencing November 11, 2003.  According to the liquidator, Bezeq acted knowingly, directly and through the directors it appointed, to ensure the collapse of Adanet and its subsidiaries in order to rid itself of its obligations to Adanet.  Bezeq and the three directors filed motions to strike the liquidator’s motion.  In accordance with Israeli law, the liquidator’s motion and the motions to strike the liquidator’s motion are awaiting the response of the Official Receiver, which is an Israeli statutory office that is a formal party to liquidation proceedings brought before a court in order to oversee the liquidation process.                                                                                                                                                                                                                                                                                   |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | Pelephone |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | ●   | In December 2000, the State of Israel filed a lawsuit in the Tel Aviv District Court, which was subsequently transferred to the Central Region District Court, against Pelephone relating to royalties payable by Pelephone to the State of Israel on Pelephone’s revenues allegedly owed by it to the Sate of Israel for the period from January 1994 until February 1996.  The State is seeking payment in the amount of NIS 260 million ($68.9 million), including principal, linkage differences and interest.  An examination conducted as part of a mediation procedure found that the maximum amount of royalties with respect to Pelephone’s revenues from January 1, 1994 to February 7, 1996 was NIS 118 million ($31.3 million) (before interest, linkage differences and the sum actually paid).  Bezeq undertook to reimburse Pelephone any amount that Pelephone is ordered to pay the State in a final decision for royalties with respect to Pelephone’s revenues for the period from January 1, 1994 to October 10, 1994.  Bezeq’s position is that it already paid such royalties to the State of Israel under a settlement agreement between Bezeq and the State of Israel from November 29, 1995 relating to various matters, including royalty payments.  All proceedings in the lawsuit have been completed and the parties are currently waiting for the Court to render its judgment. |
|   |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | ●   | In September 2001, a lawsuit was filed in the Ramallah District Court by the General Public Palestinian Communications Company Ltd. against Pelephone and another company.  The plaintiff alleges that Pelephone and the other defendant have unlawfully been operating landline and cellular communication services in the Palestinian Authority, while allegedly the exclusive right to provide such services has been granted to the plaintiff.  The plaintiff is seeking a permanent injunction preventing the defendants from providing such communications services in the areas of the Palestinian Authority, as well as compensation in the amount of NIS 676 million ($179 million) solely from Pelephone.  Pelephone was informed that the Ramallah Court may have given a decision in the lawsuit.  Enforcement of decisions rendered by a court of the Palestinian Authority may only be executed if approved by the Israeli Ministry of Justice.  Pelephone is of the opinion that if such a decision was rendered, it was rendered without jurisdiction.  If an attempt is made to serve the decision for the approval of the Israeli Ministry of Justice or to enforce it in any way whatsoever, Pelephone will act to prevent such approval and/or enforcement.                                                                                                                                                  |

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|   | ● | In April 2003, a motion for certification as a class action was filed in the Tel Aviv District Court against the three principal Israeli cellular operators.  The plaintiffs allege that the three cellular companies formed a cartel among themselves for the collection of a high and unfair tariff for text messages during the period of March-June 2002.  The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 90 million ($23.84 million).  The hearing on the motion to certify the lawsuit as a class action is underway.                                                                                                                                                                                                                             |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | ● | In August 2006, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone, Cellcom and Partner.  The plaintiffs allege that when Bezeq or HOT customers initiate the termination of a call made to the customer from a cellular network there is an excess charge until the call is actually disconnected.  The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 100 million ($26.5 million).  In a procedural arrangement reached between the parties, it was determined that this lawsuit would be combined with a similar lawsuit filed against the defendants in November 2006, as described above.  The hearing on the motion to certify the lawsuit as a class action is underway. |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | ● | In June 2007, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone.  The plaintiffs claim that Pelephone misled the subscribers of the New Immigrants Plan with respect to call connection fees.  The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 239 million ($63.3 million).  The hearing on the motion to certify the lawsuit as a class action is underway.                                                                                                                                                                                                                                                                                                                          |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | ● | In December 2007, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone, Cellcom and Partner.  The plaintiffs claim that the defendants have exposed them to radiation from cellular antennae which were allegedly unlawfully established and as a result, have caused damage to their health.  The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 1 billion ($377 million).  The hearing on the motion to certify the lawsuit as a class action is underway.                                                                                                                                                                                                                                |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | ● | In April 2008, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone.  The plaintiffs claim that Pelephone unlawfully collected amounts from it subscribers for calls to Pelephone’s service centers in connection with “dial-on” calls from the voice mail box and in excess of tariff plans.  The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 60 million ($15.9 million).  The hearing on the motion to certify the lawsuit as a class action is underway.                                                                                                                                                                                                            |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | ● | In July 2008, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court.  The plaintiffs are seeking the refund of amounts which they allege was unlawfully collected from Pelephone’s subscribers in connection with “dial-on” calls from Bezeq’s information service, late payments and for services provided at Pelephone’s service centers, in violation of Pelephone’s license.  The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 240 million ($63.57 million).  The hearing on the motion to certify the lawsuit as a class action is underway.                                                                                                                             |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | ● | In January 2009, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court.  The plaintiffs are seeking the refund of amounts allegedly collected by Pelephone from its subscribers for surfing on the handset by representatives of Pelephone when repairing the handset.  The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 219 million ($58.4 million), plus compensation for distress in an amount to be determined by the Court.  The hearing on the motion to certify the lawsuit as a class action is underway.                                                                                                                                                                                            |

----

|   | ● | In July 2009, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone, Shamir Systems Ltd., or Shamir, and Unicell Advanced Cellular Solutions Ltd., or Unicell.  The plaintiffs are seeking the refund of amounts allegedly unlawfully collected by the respondents (which are charged through the cellular bill issued by Pelephone) for data services provided by Shamir and Unicell.  The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 200 million ($53 million).  The plaintiffs are also seeking an order instructing the respondents to discontinue the collection of such amount.  The hearing on the motion to certify the lawsuit as a class action is underway.                                                                                                                                                               |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | ● | In October 2009, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone.  The plaintiff claims that Pelephone is in violation of its license in connection with benefits offered to customers and customer commitment periods.  The plaintiff is seeking compensation in a total amount, if the lawsuit if certified as a class action, of approximately NIS 331 million ($87.7 million).  The hearing on the motion to certify the lawsuit as a class action is underway.                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | ● | In December 2009, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone.  The plaintiffs are seeking cancellation and a refund of the exit fee which Pelephone charges subscribers who wish to disconnect from the service during the commitment period.  The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 50 million ($13.25 million).  The hearing on the motion to certify the lawsuit as a class action is underway.                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | ● | In February 2010, a lawsuit and motion for certification as a class action were filed in the Jerusalem District Court against Pelephone.  The plaintiffs are seeking the refund of amounts that Pelephone allegedly unlawfully collected as a full exit fee from customers who terminated their agreement during the commitment period instead of a proportionate exit fee.  In addition, the plaintiffs are seeking the refund of amounts that Pelephone allegedly unlawfully collected for an exit fee for a basic television package over cellular despite the fact that the package was given to the plaintiff free of charge.  The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 50 million ($13.25 million).  The plaintiffs are also seeking an order instructing Bezeq to cease collecting such charges.  The hearing on the motion to certify the lawsuit as a class action is underway. |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | ● | In March 2010, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone and Cellcom.  The plaintiffs have asserted an adjust enrichment claim against Pelephone on the basis that in alleged violation of its license, Pelephone has allegedly failed to procure insurance covering liability for bodily harm caused by exposure to cellular radiation.  The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 4.2 billion ($1.11 million), of which NIS 2.1 billion is sought from Pelephone.  The plaintiffs are also seeking an order instructing Pelephone to obtain such insurance.  The hearing on the motion to certify the lawsuit as a class action is underway.                                                                                                                                                                           |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | ● | In May 2010, a lawsuit and motion for certification as a class action were filed in the Central District Court against Pelephone and three other cellular operators.  The plaintiffs claim that the defendants violated their duty to establish cellular antenna sites in the required amount and spread, that they violated their duty to test, repair and provide notice regarding levels of non-ionizing radiation emitted from cellular phones after they have been repaired, and also violated their duty to provide a warning with respect to the hazard involved in the holding of cellular phones.  The plaintiffs are seeking aggregate compensation from Pelephone of approximately NIS 3.68 billion ($ 0.97 billion) and aggregate compensation from the defendants of approximately NIS 12 billion ($ 3.17 billion).  The hearing on the motion to certify the lawsuit as a class action is underway.                                                |

----

|   | ●             | In June 2010, a lawsuit and motion for certification as a class action were filed in the Central District Court against Pelephone.  The plaintiff claims that Pelephone unlawfully charges its customers for several services that were not requested by the customers and transferred customers’ details to third party suppliers without their consent.  The plaintiff is seeking compensation for personal damages in the amount of NIS 958 (approximately $252).  The total amount of the lawsuit if certified as a class action was not indicated in the lawsuit, but the lawsuit estimates it would be hundreds of millions of NIS.  The hearing on the motion to certify the lawsuit as a class action is underway.                                                                                                                                                                                                                 |
|--------|---------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | Bezeq International |
|   |                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | ●             | The following four lawsuits and motions for certification as a class action were filed against Bezeq International by plaintiffs who claim that Bezeq International’s international calling cards to certain foreign destinations provide less than the amount of time indicated on the cards.  The plaintiffs in each of the lawsuits also allege that Bezeq International unlawfully deducted the time spent when unsuccessfully attempting to call someone from the card and formed a cartel with other international communication companies that raised the prices of calling cards.  The plaintiffs in each of the lawsuits also petitioned the Court to order Bezeq International to cease the foregoing acts.  The hearing in the motions to certify the lawsuits as a class action is underway.  The lawsuits are being heard together in the Tel Aviv District Court, although their proceedings have not formally been consolidated. |

| o       | In April 2008, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Bezeq International, with respect to international calling cards to Nepal.  The plaintiffs’ are seeking compensation in the aggregate amount of NIS 115 million ($30.5 million), if the lawsuit is certified as a class action. |
|---------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o       | In April 2008, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Bezeq International with respect to international calling cards to the Philippines.  The plaintiffs’ are seeking compensation in the aggregate amount of NIS 566 million ($151 million), if the lawsuit is certified as a class action. |
|---------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o       | In April 2008, a lawsuit and motion for certification as a class action was filed in the Central Region District Court against Bezeq International with respect to international calling cards to Thailand.  The lawsuit was subsequently transferred to the Tel Aviv District Court.  The plaintiffs are seeking compensation in the aggregate amount of NIS 478 million ($127 million), if the lawsuit is certified as a class action. |
|---------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o       | In June 2008, a lawsuits and motion for certification as a class action was filed in the Tel Aviv District Court against Bezeq International with respect to international calling cards to Thailand.  The plaintiffs are seeking compensation in the aggregate amount of NIS 478 million ($127 million), if the lawsuit is certified as a class action. |
|---------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | In July 2008, two lawsuits and motions for certification as a class action were filed in the Tel Aviv District Court against Bezeq International by customers of Bezeq International.  The plaintiffs claim that Bezeq International unlawfully charged customers who were being billed based on a dollar tariff on the basis of a higher dollar exchange rate than the representative dollar exchange rate.  Since the facts and legal arguments in both cases are similar, with the consent of the parties, one of the lawsuits was withdrawn and the first lawsuit filed will be heard.  The lawsuit does not specify the amount claimed, but the plaintiffs estimate the damages to be tens of millions of NIS.  Following a preliminary hearing, the plaintiffs asked the Court to reduce the class action group to those customers of Bezeq International who were originally customers of “Bezeq Zahav.”  The hearing on the motion to certify the lawsuit as a class action is underway. |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | ● | On May 4, 2009, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Bezeq International.  The plaintiff is seeking reimbursement of excess amounts allegedly unlawfully collected by Bezeq International for services that the plaintiff claims he did not order and for the increase of the rate for Internet access after the first year.  The plaintiff is seeking personal compensation in the amount of NIS 2,800 ($745) and if certified as a class action, in the amount of NIS 216 million ($58 million) for the entire class.  The hearing on the motion to certify the lawsuit as a class action is underway. |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | ● | On January 24, 2010, a lawsuit and motion for certification as a class action were filed in the Central Region District Court against Bezeq International and four other communication licensees.  The plaintiffs are seeking reimbursement of the amounts allegedly unlawfully collection for call made to the technical support call centers.  The total amount of the claim against Bezeq International, if certified as a class action, is NIS 105 million ($28 million).  The hearing on the motion to certify the lawsuit as a class action is underway.                                                                                                                 |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | DBS     |
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | ● | On October 3, 2007, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against DBS.  The plaintiff claims that due to reception disturbances in DBS’s broadcasts in September 2007, daily malfunctions and long interruptions in television broadcasts were caused to DBS’s subscribers and that DBS’s service center was not operational during such time.  The plaintiffs are seeking aggregate compensation of approximately NIS 121 million ($32 million) in the lawsuit, if certified as a class action.  The hearing on the motion to certify the lawsuit as a class action is underway.               |

----

B.  Significant Changes

ITEM 9.  THE OFFER AND LISTING

A.  Offer and Listing Details

|   |   | NASDAQ |   | TASE   |
|--------|--------|--------|--------|--------|
| Year   |   | High   |   |   | Low |   | High |   | Low |
|   |   |   |   |   |   |   |   |   |   |   |   |
| 2005   |   | $      | 8.15   |   |   | $ | 4.60 |   | NIS 35.89 |   | NIS 21.36 |
| 2006   |   | $      | 12.93  |   |   | $ | 4.20 |   | NIS 51.80 |   | NIS 18.45 |
| 2007   |   | $      | 17.32  |   |   | $ | 9.68 |   | NIS 68.20 |   | NIS 36.01 |
| 2008   |   | $      | 12.20  |   |   | $ | 2.20 |   | NIS 46.28 |   | NIS 8.67 |
| 2009   |   | $      | 22.91  |   |   | $ | 4.28 |   | NIS 77.54 |   | NIS 8.86 |

|                             |   | NASDAQ |   | TASE   |
|----------------------------------|--------|--------|--------|--------|
|                             |   | High   |   |   | Low |   | High |   | Low |
|                             |   |   |   |   |   |   |   |   |   |
| 2008                             |   |   |   |   |   |   |   |   |   |   |   |
| First Quarter               |   | $      | 12.20  |   |   | $ | 6.77 |   | NIS 46.28 |   | NIS 22.91 |
| Second Quarter                   |   | $      | 12.07  |   |   | $ | 7.21 |   | NIS 39.50 |   | NIS 26.50 |
| Third Quarter                    |   | $      | 8.99   |   |   | $ | 2.82 |   | NIS 29.62 |   | NIS 19.50 |
| Fourth Quarter                   |   | $      | 6.15   |   |   | $ | 2.20 |   | NIS 22.30 |   | NIS  8.67 |
|                             |   |   |   |   |   |   |   |   |   |   |   |
| 2009                             |   |   |   |   |   |   |   |   |   |   |   |
| First Quarter               |   | $      | 5.33   |   |   | $ | 2.70 |   | NIS 21.89 |   | NIS  8.86 |
| Second Quarter                   |   | $      | 7.49   |   |   | $ | 3.80 |   | NIS 29.54 |   | NIS 18.04 |
| Third Quarter                    |   | $      | 9.92   |   |   | $ | 6.23 |   | NIS 38.99 |   | NIS 24.23 |
| Fourth Quarter                   |   | $      | 19.95  |   |   | $ | 8.01 |   | NIS 77.54 |   | NIS 30.60 |
|                             |   |   |   |   |   |   |   |   |   |   |   |
| 2010                             |   |   |   |   |   |   |   |   |   |   |   |
| First Quarter               |   | $      | 32.91  |   |   | $ | 20.01 |   | NIS 124.00 |   | NIS 71.80 |
| Second Quarter (through June 28) |   | $      | 34.19  |   |   | $ | 21.84 |   | NIS 125.90 |   | NIS 84.35 |

----

|                               |   | NASDAQ |   | TASE   |
|------------------------------------|--------|--------|--------|--------|
|                               |   | High   |   |   | Low |   | High |   | Low |
|                               |   |   |   |   |   |   |   |   |   |
| December 2009                      |   | $      | 19.95  |   |   | $ | 14.70 |   | NIS 77.54 |   | NIS 55.00 |
| January 2010                       |   | $      | 23.10  |   |   | $ | 20.01 |   | NIS 86.40 |   | NIS 71.80 |
| February 2010                      |   | $      | 26.40  |   |   | $ | 22.32 |   | NIS 98.90 |   | NIS 82.01 |
| March 2010                         |   | $      | 32.91  |   |   | $ | 26.00 |   | NIS 124.00 |   | NIS 96.54 |
| April 2010                         |   | $      | 34.19  |   |   | $ | 28.01 |   | NIS 125.90 |   | NIS 105.50 |
| May 2010                           |   | $      | 28.87  |   |   | $ | 21.84 |   | NIS 108.10 |   | NIS 84.35 |
| June 2010 (through June 28 )  |   | $      | 26.36  |   |   | $ | 22.04 |   | NIS 93.00 |   | NIS 87.10 |

B.  Plan of Distribution

C.  Markets

D.  Selling Shareholders

E.  Dilution

F.  Expense of the Issue

ITEM 10.  ADDITIONAL INFORMATION

A.  Share Capital

B.  Memorandum and Articles of Association

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----

----

----

|   | ● | the acquisition was made in a private placement the object of which was to confer to the acquiring party a ‘‘control block’’ where there is no holder of a ‘‘control block,’’ or to confer to the acquiring party 45% of the voting rights in the company where there is no holder of 45% of the voting rights in the company, and the private placement received the general meeting’s approval; or |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | ● | the acquisition was from the holder of a ‘‘control block’’ and resulted in a person becoming the holder of a ‘‘control block;’’ or                |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                              |
|   | ● | the acquisition was from a shareholder holding more than 45% of the voting rights in the company and resulted in a person becoming a holder of more than 45% of the voting rights in the company. |

|   | ● | the merger does not require the alteration of the memorandum or articles of association of the surviving company;                                                                                                                                                                          |
|--------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                       |
|   | ● | the acquiring company would not issue more than 20% of the voting rights thereof to the shareholders of the target company in the course of the merger and no person will become, as a result of the merger, a controlling shareholder of the surviving company, on a fully diluted basis; |
|   |    |                                                                                                                                                                                                                                                                                       |
|   | ● | neither the target company, nor any shareholder that holds 25% of the means of control of the target company is a shareholder of the surviving company; and                                                                                                                                |
|   |    |                                                                                                                                                                                                                                                                                       |
|   | ● | there is no person that holds 25% or more of the means of control in both companies.                                                                                                                                                                                                       |

----

C.  Material Contracts

D.  Exchange Controls

E.  Taxation

----

----

|   | ● | who qualifies as a resident of the United States within the meaning of the U.S.-Israel tax treaty; and |
|--------|---------|--------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                   |
|   | ● | who is entitled to claim the benefits available to the person by the U.S.-Israel tax treaty.           |

----

|   | ● | broker-dealers,                                                                                                                                      |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                 |
|   | ● | financial institutions,                                                                                                                              |
|   |    |                                                                                                                                                 |
|   | ● | certain insurance companies,                                                                                                                         |
|   |    |                                                                                                                                                 |
|   | ● | real estate investment companies or real estate investment trusts,                                                                                   |
|   |    |                                                                                                                                                 |
|   | ● | investors liable for alternative minimum tax,                                                                                                        |
|   |    |                                                                                                                                                 |
|   | ● | tax-exempt organizations,                                                                                                                            |
|   |    |                                                                                                                                                 |
|   | ● | non-resident aliens of the U.S. or taxpayers whose functional currency is not the U.S. dollar,                                                       |
|   |    |                                                                                                                                                 |
|   | ● | persons who hold the ordinary shares through partnerships or other pass-through entities,                                                            |
|   |    |                                                                                                                                                 |
|   | ● | persons who acquire their ordinary shares through the exercise or cancellation of employee stock options or otherwise as compensation for services,  |
|   |    |                                                                                                                                                 |
|   | ● | investors that actually or constructively own 10% or more of our voting shares, and                                                                  |
|   |    |                                                                                                                                                 |
|   | ● | investors holding ordinary shares as part of a straddle or appreciated financial position or a hedging, constructive sale or conversion transaction. |

|   | ● | For purposes of this summary, a U.S. Holder is:                                                                    |
|--------|---------|--------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                               |
|   | ● | an individual who is a citizen or, for U.S. federal income tax purposes, a resident of the United States;          |
|   |    |                                                                                                               |
|   | ● | a corporation created or organized in or under the laws of the United States or any political subdivision thereof; |

----

|   | ● | an estate whose income is subject to U.S. federal income tax regardless of its source; or                                                                                                                                                               |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                    |
|   | ● | a trust that (a) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons or (b) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person. |

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----

----

F.  Dividends and Paying Agents

G.  Statement by Experts

H.  Documents on Display

----

I.  Subsidiary Information

ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

----

----

ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

PART II

ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

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

ITEM 15.  CONTROLS AND PROCEDURES

----

ITEM 16.  RESERVED.

ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT

ITEM 16B.  CODE OF ETHICS

ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

----

|                                                                                                                                                                                                           |   | Year Ended December 31, |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
| Services Rendered                                                                                                                                                                                              |   | 2008                    |    |   | 2009 |   |
|                                                                                                                                                                                                           |   |                    |    |   |   |   |   |   |
| Audit (1)                                      |   | $                       | 364,500 |   |   | $ | 543,783 |   |
| Audit-related.                                 |   |                    | – |   |   |   | – |   |
| Tax                                            |   |                    | – |   |   |   | – |   |
| Other                                          |   |                    | – |   |   |   | – |   |
| Total                                          |   | $                       | 364,500 |   |   | $ | 543,783 |   |

----

| (1) | Audit fees are for audit services for each of the years shown in the table, including fees associated with the annual audit and audit services provided in connection with other statutory and regulatory filings.  |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

ITEM 16E.  PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

----

| Period in 2009 |   | Total Number of Shares Purchased |   | Average Price Paid per ShareNIS |    | Average Price Paid per Share $($1=NIS 3.775) |   | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |   | Approximate NIS Value of Shares that May Yet Be Purchased Under the Plans or Programs |      | Approximate $Value ($1=NIS 3.775) of Shares that May Yet Be Purchased Under the Plans or Programs |
|----------------|--------|----------------------------------|--------|---------------------------------|---------|----------------------------------------------|--------|----------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|-----------|---------------------------------------------------------------------------------------------------|
|           |   |                             |   |                            |    |                                         |   |                                                                             |   |                                                                                  |      |                                                                                              |   |   |   |   |   |   |
| January        |   | 801,804                          |   |                            | 15.1    |                                         |   | 4.0                                                                              |   |                                                                                  | 4,666,285 |                                                                                              |   | 21,252,381 |   |   | 5,629,770 |   |
| February       |   | 103,800                          |   |                            | 19.3    |                                         |   | 5.1                                                                              |   |                                                                                  | 4,770,085 |                                                                                              |   | 19,247,181 |   |   | 5,098,591 |   |
| March          |   | 173,209                          |   |                            | 20.4    |                                         |   | 5.4                                                                              |   |                                                                                  | 4,943,294 |                                                                                              |   | 15,717,328 |   |   | 4,163,531 |   |
| April          |   | 37,200                           |   |                            | 20.4    |                                         |   | 5.4                                                                              |   |                                                                                  | 4,980,494 |                                                                                              |   | 14,959,649 |   |   | 3,962,821 |   |
| May            |   | 310,901                          |   |                            | 20.7    |                                         |   | 5.5                                                                              |   |                                                                                  | 5,291,395 |                                                                                              |   | 8,512,562 |   |   | 2,254,983 |   |
| June           |   | 75,273                           |   |                            | 25.8    |                                         |   | 6.8                                                                              |   |                                                                                  | 5,366,668 |                                                                                              |   | 6,572,454 |   |   | 1,741,047 |   |
| July           |   | 62,300                           |   |                            | 28.7    |                                         |   | 7.6                                                                              |   |                                                                                  | 5,428,968 |                                                                                              |   | 4,786,543 |   |   | 1,267,958 |   |
| August         |   | 48,891                           |   |                            | 33.0    |                                         |   | 8.7                                                                              |   |                                                                                  | 5,477,859 |                                                                                              |   | 3,175,262 |   |   | 841,129 |   |
| September      |   | 4,000                            |   |                            | 37.0    |                                         |   | 9.8                                                                              |   |                                                                                  | 5,481,859 |                                                                                              |   | 3,027,279 |   |   | 801,928 |   |
| October        |   | –                          |   |                            | – |                                         |   | –                                                                          |   |                                                                                  | 5,481,859 |                                                                                              |   | 3,027,279 |   |   | 801,928 |   |
| November       |   | –                          |   |                            | – |                                         |   | –                                                                          |   |                                                                                  | 5,481,859 |                                                                                              |   | 3,027,279 |   |   | 801,928 |   |
| December       |   | 50,000                           |   |                            | 60.0    |                                         |   | 15.9                                                                             |   |                                                                                  | 5,531,859 |                                                                                              |   | 27,279 |   |   | 7,226 |   |

ITEM 16F.  CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT

ITEM 16G.  CORPORATE GOVERNANCE

|   | ● | The requirement that the majority of the company’s board of directors qualify as independent directors, as defined under NASDAQ Listing Rules.  Instead, we follow Israeli law and practice which requires that we appoint at least two outside directors, within the meaning of the Israeli Companies Law, to our board of directors.  In addition, we have the mandated three independent directors, within the meaning of the rules of the Securities and Exchange Commission and NASDAQ, on our audit committee.  See Item 6C. “Directors, Senior Management and Employees - Board Practices - Outside and Independent Directors.” |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | ● | The requirement that the compensation of the chief executive officer and all other executive officers be determined, or recommended to the board of directors for determination, either by (i) a majority of the independent directors or (ii) a compensation committee comprised solely of independent directors.  Under the Israeli Companies Law, arrangements as to compensation of office holders who are not directors require approval by the board of directors, provided that they are not deemed extraordinary transactions, unless otherwise provided in the articles of association.  Our articles of association do not provide otherwise.  Any compensation arrangement with an office holder who is not a director that is deemed an extraordinary transaction, the exemption of such office holder from liability, the insurance of such office holder and the indemnification of such office holder, or an undertaking to indemnify such office holder, require both audit committee and board of directors approval.  The compensation, exemption, indemnification and insurance of office holders who are directors must be approved by our audit committee, board of directors and shareholders.  If the office holder is a controlling shareholder or a relative of a controlling shareholder, any extraordinary transaction, compensation, exemption, indemnification and insurance of the office holder must be approved by our audit committee, board of directors and shareholders, supported by the vote of at least one-third of the shares of the shareholders that have no personal interest in the transaction voting on the matter, or provided that the total number of shares held by shareholders that have no personal interest in the transaction that voted against the proposal did not exceed one percent of all of the voting rights in the company. |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | ● | The requirement that director nominees either be selected or recommended for the board of directors’ selection, either by (a) a majority of independent directors or (b) a nominations committee comprised solely of independent directors.  Instead, we follow Israeli law and practice, in accordance with which directors may be recommended by our board of directors for election by our shareholders;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

PART III

ITEM 17.  FINANCIAL STATEMENTS

----

ITEM 18.  FINANCIAL STATEMENTS

| Report of Independent Registered Public Accounting Firm |   |   | F-2    |   |
|---------------------------------------------------------|--------|--------|--------|--------|
|                                                    |   |   |   |   |
| Consolidated Statements of Financial Position           |   |   | F-3    |   |
| Consolidated Statements of Income                       |   |   | F-5    |   |
| Consolidated Statements of Comprehensive Income         |   |   | F-6    |   |
| Consolidated Statements of Changes in Equity            |   |   | F-7    |   |
| Consolidated Statements of Cash Flows                   |   |   | F-9    |   |
| Notes to the Consolidated Financial Statements          |   |   | F-11   |   |

ITEM 19.  EXHIBITS

| Exhibit |   | Description |
|---------|--------|-------------|

| 1.1 |   | Memorandum of Association of the Registrant*                                                                                                                                                                                                                                                                                                                                            |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.2 |   | Amended and Restated Articles of Association of the Registrant                                                                                                                                                                                                                                                                                                                     |
| 2.1 |   | Specimen of Share Certificate*                                                                                                                                                                                                                                                                                                                                                          |
| 2.2 |   | Terms of Convertible Debentures Traded on Tel Aviv Stock Exchange**                                                                                                                                                                                                                                                                                                                     |
| 2.3 |   | Terms of Warrants Traded on Tel Aviv Stock Exchange**                                                                                                                                                                                                                                                                                                                                   |
| 2.4 |   | Form of B Communications Ltd. Series A Debenture Certificate for Notes issued in March 2007 and May 2007***                                                                                                                                                                                                                                                                             |
| 4.1 |   | Registration Rights Agreement, dated July 30, 1999, among the Registrant, Euronet Communications Ltd., Shaul Elovitch and Eli Holtzman*                                                                                                                                                                                                                                                 |
| 4.2 |   | Share Purchase Agreement dated October 25, 2009, between B Communications Ltd. (formerly 012 Smile.Communications Ltd.) and Ap.Sb.Ar. Holdings Ltd.                                                                                                                                                                                                                                     |
| 4.3 |   | First Amendment to the Share Purchase Agreement dated as of March 28, 2010, between B Communications (SP2) Ltd. and Ap.Sb.Ar. Holdings Ltd.                                                                                                                                                                                                                                             |
| 4.4 |   | Asset Purchase Agreement dated November 16, 2009, between Ampal Communication 2010 Ltd., B Communications Ltd. (formerly 012 Smile.Communications Ltd.) and Merhav Ampal Energy Ltd., as Guarantor****                                                                                                                                                                                  |
| 4.5 |   | English translation of Bezeq Control Permit issued by the Prime Minister of Israel and Israeli Minister of Communication to members of the Eurocom Group on April 13, 2010                                                                                                                                                                                                              |
| 4.6 |   | English translation of Credit Agreement dated February 11, 2010 between B Communications (SP2) Ltd. and Bank Hapoalim Ltd. (as Lender, Facility Agent and Security Trustee), Bank Leumi le-Israel BM, Amitim (Senior Pension Funds), Israel Discount Bank Ltd., Mizrahi Tefahot Bank Ltd., HSBC Bank PLC, First International Bank of Israel Ltd. and Union Bank of Israel (as Lenders) |
| 4.7 |   | English translation of Loan Agreement dated February 18, 2010, between B Communications (SP1) Ltd. and entities within the Migdal Insurance and Financial Holdings Ltd. group                                                                                                                                                                                                           |

----

| Exhibit |   | Description |
|---------|--------|-------------|

| 4.8  |   | English translation of Addendum and Amendment No. 1 the Credit Agreement dated February 11, 2010, dated April 14, 2010, between B Communications (SP2) Ltd. and Bank Hapoalim Ltd. (as Lender, Facility Agent and Security Trustee), Bank Leumi le-Israel BM, Israel Discount Bank Ltd., Mizrahi Tefahot Bank Ltd., HSBC Bank PLC, First International Bank of Israel Ltd., Union Bank of Israel, Central Benefits Fund of Histadrut Employees Ltd. (under special management), Makefet Fund Pension and Provident Center - AS Ltd. Pension Fund, Makefet Fund Pension and Provident Center - AS Ltd. (under special management) – Other-Purpose Funds, Mivtachim The Workers Social Insurance Fund Ltd. (under special management) - Pension Fund, Mivtachim The Workers Social Insurance Fund Ltd. (under special management) Illness and Accident Provident Fund, Hadassa Employees Pension Fund Ltd. (under special management), “Egged” Members Pension Fund Ltd. (under special management) – Pension Track and “Egged” Members Pension Fund Ltd. (under special management) – Full Pension Track (as Lenders) |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.9  |   | English translation of Addendum and Amendment No. 1 the Loan Agreement dated February 18, 2010, dated April 14, 2010, between B Communications (SP1) Ltd. and entities within the Migdal Insurance and Financial Holdings Ltd. group                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 8    |   | List of Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 12.1 |   | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 12.2 |   | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 13.1 |   | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 13.2 |   | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

----

| *      | Previously filed as an exhibit to the Registrant’s Registration Statement on Form F-1 (Registration No. 333-10576), and incorporated herein by reference.                                                  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                             |
| **     | Previously filed as exhibit to the Registrant’s Report on Form 6-K for the month of April 2005 submitted to Securities and Exchange Commission on April 11, 2005, and incorporated herein by reference.    |
|   |                                                                                                                                                                                                             |
| ***    | Previously filed as exhibit to the Registrant’s Annual Report on Form 20-F for the year ended December 31, 2006, and incorporated herein by reference.                                                     |
|   |                                                                                                                                                                                                             |
| ****   | Previously filed as Exhibit 99.1 to the Registrant’s Report on Form 6-K for the month of June 2010 submitted to Securities and Exchange Commission on June 23, 2010, and incorporated herein by reference. |

----

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|                                                    | Page   |
|---------------------------------------------------------|--------|
|                                                    |   |
| Report of Independent Registered Public Accounting Firm | F-2    |
|                                                    |   |
| Consolidated Statements of Financial Position           | F-3    |
|                                                    |   |
| Consolidated Statements of Income                       | F-5    |
|                                                    |   |
| Consolidated Statements of Comprehensive Income         | F-6    |
|                                                    |   |
| Consolidated Statements of Changes in Equity            | F-7    |
|                                                    |   |
| Consolidated Statements of Cash Flows                   | F-9    |
|                                                    |   |
| Notes to the Consolidated Financial Statements          | F-11   |

----

Report 

----

Internet 

----

|                               |   |   |   |   |      |   |      |        |   |   |      |   |   | Convenience      |      |
|------------------------------------|--------|--------|--------|--------|-----------|--------|-----------|-------------|--------|--------|-----------|--------|--------|------------------|-----------|
|                               |   |   |   |   |      |   |      |        |   |   |      |   |   | translation into |      |
|                               |   |   |   |   |      |   |      |        |   |   |      |   |   | U.S. dollars     |      |
|                               |   |   |   |   | January 1 |   |      | December 31 |   |   | (Note 2)  |   |
|                               |   |   |   |   | 2008      |   |      | 2008        |   |   | 2009      |   |   | 2009             |      |
|                               |   | Note   |   |   | NIS       |   |      | NIS         |   |   | NIS       |   |   | US$              |      |
|                               |   |   |   |   |      |   |      |        |   |   |      |   |   |             |      |
| Assets                             |   |   |   |   |      |   |      |        |   |   |      |   |   |             |      |
| Cash and cash equivalents          |   |   | 7      |   |      |   | 601,926   |        |   |   | 86,090    |   |   |             | 1,349,759 |   |   |   | 357,552 |   |
| Marketable securities              |   |   | 8      |   |      |   | 161,353   |        |   |   | 214,895   |   |   |             | 99,131    |   |   |   | 26,260 |   |
| Trade receivables                  |   |   | 9      |   |      |   | 224,616   |        |   |   | 217,796   |   |   |             | 12,677    |   |   |   | 3,358 |   |
| Parent company receivables         |   |   | 27     |   |      |   | -         |        |   |   | -         |   |   |             | 1,765     |   |   |   | 467 |   |
| Related parties receivables        |   |   | 27     |   |      |   | 4,294     |        |   |   | 1,729     |   |   |             | 4,017     |   |   |   | 1,064 |   |
| Other receivables                  |   |   | 9      |   |      |   | 23,683    |        |   |   | 27,046    |   |   |             | 7,590     |   |   |   | 2,011 |   |
| Assets classified as held-for-sale |   |   | 6      |   |      |   | -         |        |   |   | -         |   |   |             | 1,360,274 |   |   |   | 360,337 |   |
|                               |   |   |   |   |      |   |      |        |   |   |      |   |   |             |      |   |   |   |   |   |
| Total current assets               |   |   |   |   |      |   | 1,015,872 |        |   |   | 547,556   |   |   |             | 2,835,213 |   |   |   | 751,049 |   |
|                               |   |   |   |   |      |   |      |        |   |   |      |   |   |             |      |   |   |   |   |   |
| Long-term trade receivables        |   |   | 9      |   |      |   | 3,460     |        |   |   | 6,350     |   |   |             | -         |   |   |   | - |   |
| Marketable securities              |   |   | 8      |   |      |   | -         |        |   |   | 279,823   |   |   |             | -         |   |   |   | - |   |
| Property and equipment             |   |   | 10     |   |      |   | 137,850   |        |   |   | 139,104   |   |   |             | 1,044     |   |   |   | 277 |   |
| Intangible assets                  |   |   | 11     |   |      |   | 663,487   |        |   |   | 631,989   |   |   |             | 8,034     |   |   |   | 2,128 |   |
| Employee benefit assets            |   |   | 19     |   |      |   | 12,339    |        |   |   | 10,061    |   |   |             | -         |   |   |   | - |   |
| Deferred expenses                  |   |   | 12     |   |      |   | 288,653   |        |   |   | 284,581   |   |   |             | -         |   |   |   | - |   |
| Deferred tax assets                |   |   | 20     |   |      |   | 333       |        |   |   | 1,440     |   |   |             | 1,315     |   |   |   | 348 |   |
|                               |   |   |   |   |      |   |      |        |   |   |      |   |   |             |      |   |   |   |   |   |
| Total non-current assets           |   |   |   |   |      |   | 1,106,122 |        |   |   | 1,353,348 |   |   |             | 10,393    |   |   |   | 2,753 |   |
|                               |   |   |   |   |      |   |      |        |   |   |      |   |   |             |      |   |   |   |   |   |
| Total assets                       |   |   |   |   |      |   | 2,121,994 |        |   |   | 1,900,904 |   |   |             | 2,845,606 |   |   |   | 753,802 |   |

----

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|                                         |   |   |      |   |   |        |      |   |     |   |      | Convenience      |   |
|----------------------------------------------|--------|--------|-----------|--------|--------|-------------|-----------|--------|----------|--------|-----------|------------------|--------|
|                                         |   |   |      |   |   |        |      |   |     |   |      | translation into |   |
|                                         |   |   |      |   |   |        |      |   |     |   |      | U.S. dollars     |   |
|                                         |   |   | January 1 |   |   | December 31 |      |   | (Note 2) |   |
|                                         |   |   | 2008      |   |   | 2008        |      |   | 2009     |   |      | 2009             |   |
|                                         |   | Note   |      |   | NIS    |        |      | NIS    |     |   | NIS       |             |   | US$ |   |
|                                         |   |   |      |   |   |        |      |   |     |   |      |             |   |   |   |
| Liabilities                                  |   |   |      |   |   |        |      |   |     |   |      |             |   |   |   |
| Current maturities of long-term              |   |   |      |   |   |        |      |   |     |   |      |             |   |   |   |
|  liabilities and short term bank credit |   |   | 13        |   |   |        | 88,732    |   |     |   | 53,976    |             |   |   | 462,835 |   |   |   | 122,605 |   |
| Current maturities of debentures             |   |   | 15        |   |   |        | 5,330     |   |     |   | 100,142   |             |   |   | 215,994 |   |   |   | 57,217 |   |
| Current maturities of convertible            |   |   |      |   |   |        |      |   |     |   |      |             |   |   |   |   |   |   |   |   |
|  debentures                             |   |   | 16        |   |   |        | 19,039    |   |     |   | 17,516    |             |   |   | 17,682 |   |   |   | 4,684 |   |
| Trade payables                               |   |   | 14        |   |   |        | 170,797   |   |     |   | 148,580   |             |   |   | 7,096 |   |   |   | 1,880 |   |
| Other payables                               |   |   | 14        |   |   |        | 69,084    |   |     |   | 71,741    |             |   |   | 8,817 |   |   |   | 2,336 |   |
| Related parties payables                     |   |   | 27        |   |   |        | 211       |   |     |   | 3,223     |             |   |   | 90 |   |   |   | 24 |   |
| Current tax liabilities                      |   |   |      |   |   |        | 32,270    |   |     |   | 23,528    |             |   |   | 24,569 |   |   |   | 6,508 |   |
| Deferred income                              |   |   |      |   |   |        | 7,871     |   |     |   | 5,561     |             |   |   | 1,251 |   |   |   | 331 |   |
| Liabilities classified as held-for-sale      |   |   | 6         |   |   |        | -         |   |     |   | -         |             |   |   | 270,394 |   |   |   | 71,628 |   |
| Total current liabilities                    |   |   |      |   |   |        | 393,334   |   |     |   | 424,267   |             |   |   | 1,008,728 |   |   |   | 267,213 |   |
|                                         |   |   |      |   |   |        |      |   |     |   |      |             |   |   |   |   |   |   |   |   |
| Debentures                                   |   |   | 15        |   |   |        | 839,433   |   |     |   | 804,346   |             |   |   | 1,043,645 |   |   |   | 276,462 |   |
| Convertible debentures                       |   |   | 16        |   |   |        | 111,072   |   |     |   | 79,429    |             |   |   | 100,260 |   |   |   | 26,559 |   |
| Long-term obligations                        |   |   |      |   |   |        | 32,265    |   |     |   | 760       |             |   |   | - |   |   |   | - |   |
| Employee benefits                            |   |   | 19        |   |   |        | 254       |   |     |   | 467       |             |   |   | 175 |   |   |   | 46 |   |
| Deferred tax liabilities                     |   |   | 20        |   |   |        | 626       |   |     |   | -         |             |   |   | - |   |   |   | - |   |
| Total non-current liabilities                |   |   |      |   |   |        | 983,650   |   |     |   | 885,002   |             |   |   | 1,144,080 |   |   |   | 303,067 |   |
|                                         |   |   |      |   |   |        |      |   |     |   |      |             |   |   |   |   |   |   |   |   |
| Total liabilities                            |   |   |      |   |   |        | 1,376,984 |   |     |   | 1,309,269 |             |   |   | 2,152,808 |   |   |   | 570,280 |   |
|                                         |   |   |      |   |   |        |      |   |     |   |      |             |   |   |   |   |   |   |   |   |
| Equity                                       |   |   | 22        |   |   |        |      |   |     |   |      |             |   |   |   |   |   |   |   |   |
| Share capital                                |   |   |      |   |   |        | 248       |   |     |   | 248       |             |   |   | 248 |   |   |   | 66 |   |
| Share premium                                |   |   |      |   |   |        | 486,640   |   |     |   | 487,921   |             |   |   | 491,603 |   |   |   | 130,225 |   |
| Treasury shares                              |   |   |      |   |   |        | (6,423    | )      |     |   | (106,550  | )                |   |   | (139,864 | ) |   |   | (37,050 | ) |
| Capital reserve for financial assets         |   |   |      |   |   |        |      |   |     |   |      |             |   |   |   |   |   |   |   |   |
|  available-for-sale                     |   |   |      |   |   |        | -         |   |     |   | (42,757   | )                |   |   | 745 |   |   |   | 197 |   |
| Retained earnings                            |   |   |      |   |   |        | 68,511    |   |     |   | 46,459    |             |   |   | 106,791 |   |   |   | 28,289 |   |
| Total equity attributable to                 |   |   |      |   |   |        |      |   |     |   |      |             |   |   |   |   |   |   |   |   |
|  equity holders of the Company          |   |   |      |   |   |        | 548,976   |   |     |   | 385,321   |             |   |   | 459,523 |   |   |   | 121,727 |   |
| Non-controlling interest                     |   |   |      |   |   |        | 196,034   |   |     |   | 206,314   |             |   |   | 233,275 |   |   |   | 61,795 |   |
| Equity                                       |   |   |      |   |   |        | 745,010   |   |     |   | 591,635   |             |   |   | 692,798 |   |   |   | 183,522 |   |
|                                         |   |   |      |   |   |        |      |   |     |   |      |             |   |   |   |   |   |   |   |   |
| Total liabilities and equity                 |   |   |      |   |   |        | 2,121,994 |   |     |   | 1,900,904 |             |   |   | 2,845,606 |   |   |   | 753,802 |   |

| /s/ Eli HoltzmanEli HoltzmanChief Executive Officer and Director |   | /s/ Doron TurgemanDoron TurgemanChief Financial Officer |   |
|-----------------------------------------------------------------------|--------|---------------------------------------------------------|--------|

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Internet 

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|                                 |   |   |   |   |   |      |      |   | Convenience      |      |
|--------------------------------------|--------|--------|--------|--------|--------|-----------|-----------|--------|------------------|-----------|
|                                 |   |   |   |   |   |      |      |   | translation into |      |
|                                 |   |   |   |   |   |      |      |   | U.S. dollars     |      |
|                                 |   |   |   |   |   |      |      |   | (Note 2)         |      |
|                                 |   |   | 2008   |   |   | 2009      |      |   | 2009             |      |
|                                 |   | Note   |   |   |   | NIS       |      |   |             | NIS       |   |   |   | US$ |   |
|                                 |   |   |   |   |   |      |      |   |             |      |   |   |   |   |   |
| Revenues                             |   |   |   |   |   | 1,167,327 |      |   |             | 1,243,088 |   |   |   | 329,295 |   |
|                                 |   |   |   |   |   |      |      |   |             |      |   |   |   |   |   |
| Cost and expenses                    |   |   |   |   |   |      |      |   |             |      |   |   |   |   |   |
| Depreciation and amortization        |   |   |   |   |   | 117,503   |      |   |             | 98,642    |   |   |   | 26,130 |   |
| Salaries                             |   |   | 23     |   |   |      | 183,917   |   |             |      | 171,139 |   |   |   | 45,335 |   |
| General and operating expenses       |   |   | 24     |   |   |      | 741,055   |   |             |      | 810,963 |   |   |   | 214,825 |   |
| Other operating expenses             |   |   |   |   |   |      | 7,258     |   |             |      | 2,448 |   |   |   | 648 |   |
| Other operating income               |   |   |   |   |   |      | (12,839   | )      |             |      | - |   |   |   | - |   |
|                                 |   |   |   |   |   |      |      |   |             |      |   |   |   |   |   |   |
|                                 |   |   |   |   |   |      | 1,036,894 |   |             |      | 1,083,192 |   |   |   | 286,938 |   |
|                                 |   |   |   |   |   |      |      |   |             |      |   |   |   |   |   |   |
| Operating income                     |   |   |   |   |   |      | 130,433   |   |             |      | 159,896 |   |   |   | 42,357 |   |
|                                 |   |   |   |   |   |      |      |   |             |      |   |   |   |   |   |   |
| Finance expense                      |   |   |   |   |   |      | 138,700   |   |             |      | 133,908 |   |   |   | 35,471 |   |
| Finance income                       |   |   |   |   |   |      | (27,202   | )      |             |      | (131,806 | ) |   |   | (34,915 | ) |
|                                 |   |   |   |   |   |      |      |   |             |      |   |   |   |   |   |   |
| Finance expense, net                 |   |   | 25     |   |   |      | 111,498   |   |             |      | 2,102 |   |   |   | 556 |   |
|                                 |   |   |   |   |   |      |      |   |             |      |   |   |   |   |   |   |
| Income before income tax             |   |   |   |   |   |      | 18,935    |   |             |      | 157,794 |   |   |   | 41,800 |   |
| Income tax                           |   |   | 20     |   |   |      | 22,747    |   |             |      | 57,784 |   |   |   | 15,307 |   |
|                                 |   |   |   |   |   |      |      |   |             |      |   |   |   |   |   |   |
| Net income (loss) for the year       |   |   |   |   |   |      | (3,812    | )      |             |      | 100,010 |   |   |   | 26,493 |   |
|                                 |   |   |   |   |   |      |      |   |             |      |   |   |   |   |   |   |
| Income (loss) attributable to:       |   |   |   |   |   |      |      |   |             |      |   |   |   |   |   |   |
|   Owners of the Company    |   |   |   |   |   |      | (18,315   | )      |             |      | 62,239 |   |   |   | 16,487 |   |
|   Non-controlling interest |   |   |   |   |   |      | 14,503    |   |             |      | 37,771 |   |   |   | 10,006 |   |
| Income (loss) for the year           |   |   |   |   |   |      | (3,812    | )      |             |      | 100,010 |   |   |   | 26,493 |   |
|                                 |   |   |   |   |   |      |      |   |             |      |   |   |   |   |   |   |
| Earnings per share                   |   |   | 26     |   |   |      |      |   |             |      |   |   |   |   |   |   |
| Basic earnings (loss) per share      |   |   |   |   |   |      | (0.85     | )      |             |      | 3.39 |   |   |   | 0.89 |   |
|                                 |   |   |   |   |   |      |      |   |             |      |   |   |   |   |   |   |
| Diluted earnings (loss) per share    |   |   |   |   |   |      | (0.89     | )      |             |      | 3.39 |   |   |   | 0.89 |   |

----

Internet 

----

|                                                      |   |   |   |   |   |    |    |   |   |    | Convenience      |   |
|-----------------------------------------------------------|--------|--------|--------|--------|--------|---------|---------|--------|--------|---------|------------------|--------|
|                                                      |   |   |   |   |   |    |    |   |   |    | translation into |   |
|                                                      |   |   |   |   |   |    |    |   |   |    | U.S. dollars     |   |
|                                                      |   |   |   |   |   |    |    |   |   |    | (Note 2)         |   |
|                                                      |   |   |   |   | 2008   |    |    | 2009   |   |    | 2009             |   |
|                                                      |   | Note   |   |   | NIS    |    |    | NIS    |   |    | US$              |   |
|                                                      |   |   |   |   |   |    |    |   |   |    |             |   |   |   |   |
| Net (loss) income for the year                            |   |   |   |   |   | (3,812  | )       |   |   | 100,010 |             |   |   | 26,493 |   |
| Net change in fair value of available-for-                |   |   |   |   |   |    |    |   |   |    |             |   |   |   |   |
|  sale financial assets                               |   |   |   |   |   | (53,533 | )       |   |   | 84,762  |             |   |   | 22,454 |   |
| Net change in fair value of available-for-                |   |   |   |   |   |    |    |   |   |    |             |   |   |   |   |
|  sale financial assets transferred to profit or loss |   |   |   |   |   | 2,569   |    |   |   | (32,481 | )                |   |   | (8,604 | ) |
| Defined benefit plan actuarial losses, net                |   |   | 19     |   |   |    | (6,079  | )      |   |    | (1,253           | )      |   |   | (332 | ) |
| Income tax on comprehensive income                        |   |   | 20     |   |   |    | 5,807   |   |   |    | (4,537           | )      |   |   | (1,202 | ) |
|                                                      |   |   |   |   |   |    |    |   |   |    |             |   |   |   |   |   |
| Total comprehensive (loss) income for the year            |   |   |   |   |   |    | (55,048 | )      |   |    | 146,501          |   |   |   | 38,809 |   |
| Total comprehensive (loss) income attributable to:        |   |   |   |   |   |    |    |   |   |    |             |   |   |   |   |   |
|   Owners of the Company                         |   |   |   |   |   |    | (64,809 | )      |   |    | 105,026          |   |   |   | 27,822 |   |
|   Non-controlling interest                      |   |   |   |   |   |    | 9,761   |   |   |    | 41,475           |   |   |   | 10,987 |   |
|                                                      |   |   |   |   |   |    |    |   |   |    |             |   |   |   |   |   |
| Total comprehensive (loss) income for the year            |   |   |   |   |   |    | (55,048 | )      |   |    | 146,501          |   |   |   | 38,809 |   |

----

Internet 

----

|                                 |   | Attributable to equity holders of the Company |       |   |   |   |   |    |   |   |          |   |
|--------------------------------------|--------|----------------------------------------------------|------------|--------|--------|--------|--------|---------|--------|--------|---------------|--------|
|                                 |   |                                               |       |   |   |   |   |    |   |   |          |   |   | Capital |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   |                                               |       |   |   |   |   |    |   |   |          |   |   | reserve |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   | Share capital                                      |       |   |   |   |   |    |   |   | for financial |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   |                                               |       |   |   |   |   |    |   |   |          |   |   | assets |   |   |   |   |   |   |   |   | Non- |   |   |   |   |
|                                 |   | Number of                                          |       |   |   |   |   | Share   |   |   | Treasury      |   |   | available |   |   | Retained |   |   |   |   |   | controlling |   |   | Total |   |
|                                 |   | Shares(1)                                          |       |   | Amount |   |   | premium |   |   | shares        |   |   | for-sale |   |   | earnings |   |   | Total |   |   | interest |   |   | equity |   |
|                                 |   | NIS 0.1 par                                        |       |   |   |   |   |    |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                 |   | value                                              |       |   | NIS    |   |   | NIS     |   |   | NIS           |   |   | NIS |   |   | NIS |   |   | NIS |   |   | NIS |   |   | NIS |   |
|                                 |   |                                               |       |   |   |   |   |    |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as at January 1, 2008        |   |                                               | 23,372,953 |   |   |   | 248    |    |   |   | 486,640       |   |   |   | (6,423 | ) |   |   | - |   |   |   | 68,511 |   |   |   | 548,976 |   |   |   | 196,034 |   |   |   | 745,010 |   |
|                                 |   |                                               |       |   |   |   |   |    |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Changes during 2008:                 |   |                                               |       |   |   |   |   |    |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income           |   |                                               | -          |   |   |   | -      |    |   |   | -             |   |   |   | - |   |   |   | (42,757 | ) |   |   | (3,737 | ) |   |   | (46,494 | ) |   |   | (4,742 | )  |   |   | (51,236 | ) |
| Net loss for the year                |   |                                               | -          |   |   |   | -      |    |   |   | -             |   |   |   | - |   |   |   | - |   |   |   | (18,315 | ) |   |   | (18,315 | ) |   |   | 14,503 |   |   |   | (3,812 | ) |
| Treasury shares at cost              |   |                                               | (3,720,292 | )      |   |   | -      |    |   |   | -             |   |   |   | (100,127 | ) |   |   | - |   |   |   | - |   |   |   | (100,127 | ) |   |   | - |   |   |   | (100,127 | ) |
| Conversion of convertible debentures |   |                                               | 1,264      |   |   |   | *) -   |    |   |   | 94            |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 94 |   |   |   | - |   |   |   | 94 |   |
| Purchase of non-controlling interest |   |                                               | -          |   |   |   | -      |    |   |   | 1,187         |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,187 |   |   |   | (2,910 | ) |   |   | (1,723 | ) |
| Share-based compensation in          |   |                                               |       |   |   |   |   |    |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  subsidiary                     |   |                                               | -          |   |   |   | -      |    |   |   | -             |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 3,429 |   |   |   | 3,429 |   |
|                                 |   |                                               |       |   |   |   |   |    |   |   |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as at December 31, 2008      |   |                                               | 19,653,925 |   |   |   | 248    |    |   |   | 487,921       |   |   |   | (106,550 | ) |   |   | (42,757 | ) |   |   | 46,459 |   |   |   | 385,321 |   |   |   | 206,314 |   |   |   | 591,635 |   |

----

----

|                                       |   | Attributable to equity holders of the Company |       |   |   |   |   |    |   |   |     |   |
|--------------------------------------------|--------|-----------------------------------------------|------------|--------|--------|--------|--------|---------|--------|--------|----------|--------|
|                                       |   |                                          |       |   |   |   |   |    |   |   |     |   |   | Capital |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                       |   |                                          |       |   |   |   |   |    |   |   |     |   |   | reserve for |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                       |   |                                          |       |   |   |   |   |    |   |   |     |   |   | financial |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Convenience |   |
|                                       |   | Share capital                                 |       |   |   |   |   |    |   |   | assets   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | translation |   |
|                                       |   |                                          |       |   |   |   |   |    |   |   |     |   |   | available- |   |   |   |   |   |   |   |   | Non- |   |   |   |   |   | into |   |
|                                       |   | Number of                                     |       |   |   |   |   | Share   |   |   | Treasury |   |   | for- |   |   | Retained |   |   |   |   |   | controlling |   |   | Total |   |   | US dollars |   |
|                                       |   | Shares(1)                                     |       |   | Amount |   |   | premium |   |   | shares   |   |   | sale |   |   | earnings |   |   | Total |   |   | interest |   |   | equity |   |   | (Note 2) |   |
|                                       |   | NIS 0.1 par                                   |       |   |   |   |   |    |   |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                       |   | value                                         |       |   | NIS    |   |   | NIS     |   |   | NIS      |   |   | NIS |   |   | NIS |   |   | NIS |   |   | NIS |   |   | NIS |   |   | US$ |   |
|                                       |   |                                          |       |   |   |   |   |    |   |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as at January 1, 2009              |   |                                          | 19,653,925 |   |   |   | 248    |    |   |   | 487,921  |   |   |   | (106,550 | ) |   |   | (42,757 | ) |   |   | 46,459 |   |   |   | 385,321 |   |   |   | 206,314 |   |   |   | 591,635 |   |   |   | 156,724 |   |
|                                       |   |                                          |       |   |   |   |   |    |   |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Changes during 2009:                       |   |                                          |       |   |   |   |   |    |   |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other comprehensive income                 |   |                                          | -          |   |   |   | -      |    |   |   | -        |   |   |   | - |   |   |   | 43,502 |   |   |   | (715 | ) |   |   | 42,787 |   |   |   | 3,704 |   |   |   | 46,491 |   |   |   | 12,315 |   |
| Net income for the year                    |   |                                          | -          |   |   |   | -      |    |   |   | -        |   |   |   | - |   |   |   | - |   |   |   | 62,239 |   |   |   | 62,239 |   |   |   | 37,771 |   |   |   | 100,010 |   |   |   | 26,493 |   |
| Treasury shares at cost                    |   |                                          | (1,667,375 | )      |   |   | -      |    |   |   | -        |   |   |   | (33,314 | ) |   |   | - |   |   |   | - |   |   |   | (33,314 | ) |   |   | - |   |   |   | (33,314 | ) |   |   | (8,825 | ) |
| Conversion of convertible                  |   |                                          |       |   |   |   |   |    |   |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  debentures                           |   |                                          | 5,352      |   |   |   | *) -   |    |   |   | 1,008    |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,008 |   |   |   | - |   |   |   | 1,008 |   |   |   | 267 |   |
| Contribution by parent company             |   |                                          | -          |   |   |   | -      |    |   |   | 1,068    |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,068 |   |   |   | 349 |   |   |   | 1,417 |   |   |   | 375 |   |
| Contribution to a subsidiary               |   |                                          | -          |   |   |   | -      |    |   |   | -        |   |   |   | - |   |   |   | - |   |   |   | (1,192 | ) |   |   | (1,192 | ) |   |   | 1,192 |   |   |   | - |   |   |   | - |   |
| Shares buyback in subsidiary               |   |                                          | -          |   |   |   | -      |    |   |   | -        |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (115 | ) |   |   | (115 | ) |   |   | (30 | ) |
| Acquisition of non-controlling interest    |   |                                          | -          |   |   |   | -      |    |   |   | 1,606    |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 1,606 |   |   |   | (20,896 | ) |   |   | (19,290 | ) |   |   | (5,110 | ) |
| Share-based compensation in                |   |                                          |       |   |   |   |   |    |   |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  subsidiary                           |   |                                          | -          |   |   |   | -      |    |   |   | -        |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 4,956 |   |   |   | 4,956 |   |   |   | 1,313 |   |
|                                       |   |                                          |       |   |   |   |   |    |   |   |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as at December 31,  2009 |   |                                          | 17,991,902 |   |   |   | 248    |    |   |   | 491,603  |   |   |   | (139,864 | ) |   |   | 745 |   |   |   | 106,791 |   |   |   | 459,523 |   |   |   | 233,275 |   |   |   | 692,798 |   |   |   | 183,522 |   |

----

Internet 

----

|                                                  |   |   |     |   |   |   |      | Convenience      |   |
|-------------------------------------------------------|--------|--------|----------|--------|--------|--------|-----------|------------------|--------|
|                                                  |   |   |     |   |   |   |      | translation into |   |
|                                                  |   |   |     |   |   |   |      | U.S. dollars     |   |
|                                                  |   |   |     |   |   |   |      | (Note 2)         |   |
|                                                  |   | 2008   |     |   | 2009   |   |      | 2009             |   |
|                                                  |   | NIS    |     |   | NIS    |   |      | US$              |   |
|                                                  |   |   |     |   |   |   |      |             |   |
| Cash flows from operating activities                  |   |   |     |   |   |   |      |             |   |
| Net income                                            |   |   | (3,812   | )      |   |   | 100,010   |             |   |   | 26,493 |   |
|                                                  |   |   |     |   |   |   |      |             |   |   |   |   |
| Adjustments for:                                      |   |   |     |   |   |   |      |             |   |   |   |   |
| Depreciation                                          |   |   | 44,333   |   |   |   | 33,158    |             |   |   | 8,784 |   |
| Amortization of intangible assets                     |   |   | 46,537   |   |   |   | 41,341    |             |   |   | 10,951 |   |
| Amortization of deferred expenses                     |   |   | 26,633   |   |   |   | 24,143    |             |   |   | 6,395 |   |
| Gain on redemption of Company’s debentures      |   |   | (5,389   | )      |   |   | -         |             |   |   | - |   |
| Finance expense (income), net                         |   |   | 131,853  |   |   |   | (4,964    | )                |   |   | (1,315 | ) |
| Share-based compensation                              |   |   | 3,429    |   |   |   | 4,956     |             |   |   | 1,313 |   |
| Other operating income                                |   |   | (12,839  | )      |   |   | -         |             |   |   | - |   |
| Change in employee benefits                           |   |   | (3,588   | )      |   |   | (4,561    | )                |   |   | (1,208 | ) |
| Income tax expense                                    |   |   | 22,747   |   |   |   | 57,784    |             |   |   | 15,307 |   |
|                                                  |   |   | 253,716  |   |   |   | 151,857   |             |   |   | 40,227 |   |
| Changes in operating assets and liabilities:          |   |   |     |   |   |   |      |             |   |   |   |   |
| Decrease (increase) in trade receivables              |   |   | 3,935    |   |   |   | (11,778   | )                |   |   | (3,120 | ) |
| Decrease (increase) in other receivables              |   |   | (6,748   | )      |   |   | 10,034    |             |   |   | 2,658 |   |
| Increase (decrease) in trade payable                  |   |   | (21,444  | )      |   |   | 14,915    |             |   |   | 3,951 |   |
| Increase in other payables                            |   |   | 5,087    |   |   |   | 6,029     |             |   |   | 1,597 |   |
| Parent company payables (receivables) and             |   |   |     |   |   |   |      |             |   |   |   |   |
|  related parties, net                            |   |   | 5,576    |   |   |   | (2,874    | )                |   |   | (761 | ) |
| Change in other income                                |   |   | (2,310   | )      |   |   | (216      | )                |   |   | (57 | ) |
|                                                  |   |   |     |   |   |   |      |             |   |   |   |   |
| Income tax paid, net                                  |   |   | (26,164  | )      |   |   | (30,694   | )                |   |   | (8,131 | ) |
|                                                  |   |   | (42,068  | )      |   |   | (14,584   | )                |   |   | (3,863 | ) |
|                                                  |   |   |     |   |   |   |      |             |   |   |   |   |
| Net cash provided by operating activities             |   |   | 207,836  |   |   |   | 237,283   |             |   |   | 62,857 |   |
|                                                  |   |   |     |   |   |   |      |             |   |   |   |   |
| Cash flows from investing activities                  |   |   |     |   |   |   |      |             |   |   |   |   |
| Purchase of property and equipment                    |   |   | (48,318  | )      |   |   | (45,775   | )                |   |   | (12,125 | ) |
| Investment in intangible assets and deferred expenses |   |   | (45,633  | )      |   |   | (112,914  | )                |   |   | (29,911 | ) |
| Investment in marketable securities                   |   |   | (694,148 | )      |   |   | (483,452  | )                |   |   | (128,067 | ) |
| Proceeds from sale of marketable securities           |   |   | 266,418  |   |   |   | 1,033,106 |             |   |   | 273,670 |   |
| Proceeds in respect of MSN transaction                |   |   | 22,000   |   |   |   | -         |             |   |   | - |   |
| Interest received                                     |   |   | 17,605   |   |   |   | 16,701    |             |   |   | 4,424 |   |
|                                                  |   |   |     |   |   |   |      |             |   |   |   |   |
| Net cash (used in) provided by investing activities   |   |   | (482,076 | )      |   |   | 407,666   |             |   |   | 107,991 |   |

----

----

|                                                      |   |   |     |   |   |   |      | Convenience      |   |
|-----------------------------------------------------------|--------|--------|----------|--------|--------|--------|-----------|------------------|--------|
|                                                      |   |   |     |   |   |   |      | translation into |   |
|                                                      |   |   |     |   |   |   |      | U.S. dollars     |   |
|                                                      |   |   |     |   |   |   |      | (Note 2)         |   |
|                                                      |   | 2008   |     |   | 2009   |   |      | 2009             |   |
|                                                      |   | NIS    |     |   | NIS    |   |      | US$              |   |
|                                                      |   |   |     |   |   |   |      |             |   |
| Cash flows from financing activities                      |   |   |     |   |   |   |      |             |   |
| Short-term borrowing, net                                 |   |   | (34,755  | )      |   |   | 411,657   |             |   |   | 109,048 |   |
| Repayment of long-term loans from bank                    |   |   | (7,176   | )      |   |   | -         |             |   |   | - |   |
| Redemption of Company’s debentures                  |   |   | (31,385  | )      |   |   | -         |             |   |   | - |   |
| Repayment of debentures                                   |   |   | -        |   |   |   | (54,635   | )                |   |   | (14,473 | ) |
| Repayment of convertible debentures                       |   |   | (15,406  | )      |   |   | (14,528   | )                |   |   | (3,848 | ) |
| Repayment of long-term obligations                        |   |   | (3,275   | )      |   |   | (3,133    | )                |   |   | (830 | ) |
| Issuance of debentures                                    |   |   | -        |   |   |   | 399,148   |             |   |   | 105,735 |   |
| Interest paid                                             |   |   | (27,714  | )      |   |   | (71,924   | )                |   |   | (19,053 | ) |
| Purchase of non-controlling interest                      |   |   | (1,723   | )      |   |   | (19,405   | )                |   |   | (5,140 | ) |
| Purchase of treasury shares at cost                       |   |   | (100,127 | )      |   |   | (33,314   | )                |   |   | (8,825 | ) |
|                                                      |   |   |     |   |   |   |      |             |   |   |   |   |
| Net cash (used in) provided by financing activities       |   |   | (221,561 | )      |   |   | 613,866   |             |   |   | 162,614 |   |
|                                                      |   |   |     |   |   |   |      |             |   |   |   |   |
| Net increase/decrease in cash and cash equivalents        |   |   | (495,801 | )      |   |   | 1,258,815 |             |   |   | 333,462 |   |
| Cash and cash equivalents as at the beginning of the year |   |   | 601,926  |   |   |   | 86,090    |             |   |   | 22,805 |   |
| Effect of exchange rate fluctuations on cash and          |   |   |     |   |   |   |      |             |   |   |   |   |
|  cash equivalents                                    |   |   | (20,035  | )      |   |   | 5,789     |             |   |   | 1,533 |   |
|                                                      |   |   |     |   |   |   |      |             |   |   |   |   |
| Cash and cash equivalents as at the end of the years (1)  |   |   | 86,090   |   |   |   | 1,350,694 |             |   |   | 357,800 |   |

----

Internet 

----

|   | A. | Statement of compliance |
|--------|----|-------------------------|

|   | B. | Early adoption of amendment to IAS 1, Presentation of Financial Statements, Presentation of the statement of changes in shareholders' equity |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | C. | Functional and presentation currency |
|--------|----|--------------------------------------|

|   | D. | Basis of measurement |
|--------|----|----------------------|

|   | E. | Convenience translation into U.S. dollars (“dollars” or “$”) |
|--------|----|--------------------------------------------------------------------------------------|

|   | F. | Use of estimates and judgments |
|--------|----|--------------------------------|

|   | — | Employee benefits - The present value of employee post retirement benefits depends on several factors that are determined on an actuarial basis using assumptions. The assumptions used in determining the net expense (income) in respect of such benefits include the long-term yield rate of the plan assets, the rate of future salary rises and the discount rate.  Any change in these assumptions affects the carrying amount of the liability for employee benefits.    |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | F. | Use of estimates and judgments (cont’d) |
|--------|----|-----------------------------------------------|

|   | — | (cont’d) |
|--------|---------|----------------|

|   | — | Contingent liabilities - When assessing the possible outcomes of legal claims that were filed against the Group, the Group relied on the opinions of their legal counsel. The opinions of their legal counsel are based on the best of their professional judgment, and take into consideration the current stage of the proceedings and the legal experience accumulated with respect to the various matters. As the results of the claims will ultimately be determined by the courts, they may be different from such estimates. |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | — | Impairment of assets - the Company examines on every reporting date whether there have been any events or changes in circumstances which would indicate impairment of one or more non-monetary assets. When there are indications of impairment, it examines whether the carrying amount of the investment can be recovered from the discounted cash flows anticipated to be derived from the asset, and if necessary, it records an impairment provision up to the amount of the recoverable value. The estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The estimates regarding cash flows are based on past experience with respect to this asset or similar assets, and on the best possible assessments of the Company regarding the economic conditions that will exist during the remaining useful life of the asset. Changes in these estimates may result in material changes to the carrying amounts of the assets and to the results of operations. |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | — | Trade receivables - The financial statements include an impairment loss in trade and other receivables which properly reflects, according to management’s estimation, the potential loss from non-recoverable amounts. The Company provides for impairment loss based on its experience in collecting past debts, as well as on information on specific debtors. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | — | Conversion feature in CPI-linked convertible debentures - The conversion feature is measured at fair value through profit or loss using a binomial model for valuing convertible bonds. The valuation model takes into account estimates regarding, among other things, risk-free interest rate, credit risk of the Company, expected volatility of the Company’s share price etc. Changes in these estimates may result in material changes to the fair value of the conversion feature and to the results of operations. |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | — | Deferred taxes - the Company records deferred tax assets and liabilities based on estimates and assumptions about future taxable income and future tax consequences. |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | A. | Basis of consolidation |
|--------|----|------------------------|

|   | (1) | Business combinations |
|--------|-----|-----------------------|

|   | (2) | Acquisition of non-controlling interest |
|--------|-----|-----------------------------------------|

|   | (3) | Subsidiaries |
|--------|-----|--------------|

|   | B. | Foreign currency transactions |
|--------|----|-------------------------------|

|   | C. | Financial instruments |
|--------|----|-----------------------|

----

----

|   | C. | Financial instruments (cont’d) |
|--------|----|--------------------------------------|

|   | (1) | Non-derivative financial assets |
|--------|-----|---------------------------------|

----

----

|   | C. | Financial instruments (cont’d) |
|--------|----|--------------------------------------|

|   | (2) | Non-derivative financial liabilities |
|--------|-----|--------------------------------------|

|   | (3) | Derivative financial instruments |
|--------|-----|----------------------------------|

|   | (4) | CPI-linked assets and liabilities that are not measured at fair value |
|--------|-----|-----------------------------------------------------------------------|

|   | (5) | Share capital |
|--------|-----|---------------|

----

----

|   | D. | Property and equipment |
|--------|----|------------------------|

|   | (1) | Recognition and measurement |
|--------|-----|-----------------------------|

|   | (2) | Subsequent costs |
|--------|-----|------------------|

|   | (3) | Depreciation |
|--------|-----|--------------|

|                                                                                                     | %                                                                            |   |
|----------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------|--------|
| —           Network equipment and computers | 15-33                                                                        |
| —           Furniture and office equipment  | 6-15                                                                         |
| —           Motor vehicles                  | 15                                                                           |
| —           Leasehold improvements          | Shorter of the lease term or the useful life of the assets (mainly 10 years) |

----

----

|   | E. | Intangible assets |
|--------|----|-------------------|

|   | (1) | Goodwill and brand name |
|--------|-----|-------------------------|

|   | (2) | Other intangible assets |
|--------|-----|-------------------------|

|   | (3) | Subsequent expenditure |
|--------|-----|------------------------|

|   | (4) | Amortization |
|--------|-----|--------------|

| —           Licenses                      | 20   |   | years |
|--------------------------------------------------------------------------------------------------------|------|--------|-------|
| —           Subscribers acquisition costs | 1-3  |   | years |
| —           Customer relationships        | 8-10 |   | years |
| —           Capitalized software costs    | 5    |   | years |

----

----

|   | F. | Deferred expenses |
|--------|----|-------------------|

|   | G. | Impairment |
|--------|----|------------|

|   | (1) | Financial assets (including receivables) |
|--------|-----|------------------------------------------|

|   | (2) | Non-financial assets |
|--------|-----|----------------------|

----

----

|   | G. | Impairment (cont’d) |
|--------|----|---------------------------|

|   | (2) | Non-financial assets (cont’d) |
|--------|-----|-------------------------------------|

|   | H. | Non-current assets held-for-sale |
|--------|----|----------------------------------|

|   | I. | Employee benefits |
|--------|----|-------------------|

|   | (1) | Post-employment benefits |
|--------|-----|--------------------------|

|   | (a) | Defined contribution plans |
|--------|-----|----------------------------|

----

----

|   | I. | Employee benefits (cont’d) |
|--------|----|----------------------------------|

|   | (1) | Post-employment benefits (cont’d) |
|--------|-----|-----------------------------------------|

|   | (b) | Defined benefit plans |
|--------|-----|-----------------------|

|   | (2) | Short-term employee benefits |
|--------|-----|------------------------------|

|   | (3) | Share-based payment transactions |
|--------|-----|----------------------------------|

----

----

|   | J. | Provisions |
|--------|----|------------|

|   | K. | Revenue |
|--------|----|---------|

|   | (1) | Communication services revenue |
|--------|-----|--------------------------------|

----

----

|   | K. | Revenue (cont’d) |
|--------|----|------------------------|

|   | (2) | Media revenue |
|--------|-----|---------------|

----

----

|   | L. | Lease payments |
|--------|----|----------------|

|   | M. | Finance income and expenses |
|--------|----|-----------------------------|

|   | N. | Income tax |
|--------|----|------------|

----

----

|   | O. | Earnings per share |
|--------|----|--------------------|

|   | P. | Segment reporting |
|--------|----|-------------------|

|   | Q. | Transactions with controlling shareholder |
|--------|----|-------------------------------------------|

|   | R. | New standards and interpretations not yet adopted |
|--------|----|---------------------------------------------------|

|   | - | In the framework of the 2009 Improvements to IFRSs project, in April 2009 the IASB published and approved 15 amendments to various IFRS on a wide range of accounting issues. The amendments shall apply to periods beginning on or after January 1, 2010 and permit early adoption, subject to the specific conditions of each amendment. Presented hereunder are the amendments that may be relevant to the Group and are expected to have an effect on the financial statements: |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Amendment to IAS 39, Financial Instruments: Recognition and Measurement - Scope exemption for business combination contracts. The Amendment clarifies that the scope exemption in IAS 39 is restricted to forward contracts between an acquirer and a seller with respect to the sale or acquisition of a controlled entity, in a business combination at a future acquisition date. In addition, the term of the forward should not be longer than the period normally necessary for obtaining the approvals required for the transaction. The Amendment is to be applied prospectively to all unexpired contracts for annual periods beginning on or after January 1, 2010. The Group examines the effect that the Amendment may have on its financial statements. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | R. | New standards and interpretations not yet adopted (cont’d) |
|--------|----|------------------------------------------------------------------|

|   | · | Amendment to IAS 36, Impairment of Assets - Unit of accounting for goodwill impairment test. In accordance with the Amendment, for purposes of impairment testing the largest cash-generating unit to which goodwill should be allocated is the operating segment level as defined in IFRS 8 before applying the aggregation criteria in Paragraph 12 of IFRS 8. The Amendment is to be applied prospectively for annual periods beginning on or after January 1, 2010. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | IFRS 9, Financial Instruments. This standard is the first part of a comprehensive project to replace IAS 39 Financial Instruments: Recognition and Measurement (hereinafter - IAS 39) and it replaces the requirements included in IAS 39 regarding the classification and measurement of financial assets. In accordance with the Standard, there are two principal categories for measuring financial assets: amortized cost and fair value, with the basis of classification for debt instruments being the entity’s business model for managing financial assets and the contractual cash flow characteristics of the financial asset. In accordance with the Standard, an investment in a debt instrument will be measured at amortized cost if the objective of the entity’s business model is to hold assets in order to collect contractual cash flows and the contractual terms give rise, on specific dates, to cash flows that are solely payments of principal and interest. All other financial assets are measured at fair value through profit or loss. |
|--------|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | A. | Marketable securities |
|--------|----|-----------------------|

|   | B. | Trade and other receivables |
|--------|----|-----------------------------|

|   | C. | Derivatives |
|--------|----|-------------|

|   | D. | Non-derivative financial liabilities |
|--------|----|--------------------------------------|

|   | E. | Share-based payment transactions |
|--------|----|----------------------------------|

----

----

|   | · | The Communications Services business which includes two reportable segments, broadband services and traditional voice services:  Broadband services include broadband Internet access with a suite of value-added services, specialized data services, local telephony via VoB, server hosting and WiFi network of hotspots across Israel; Traditional voice services include incoming international telephony, hubbing services for international carriers, roaming and signaling services for cellular operators and calling card services. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Media includes website content provision, operating portals, search engines, lead-generation, e-Commerce and paid content. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|

|                            |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   | Convenience |   |
|---------------------------------|--------|-----------|---------|--------|-------------|--------|---------|--------|--------|--------|-------------|--------|--------|--------|--------|--------|-------------|--------|
|                            |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   | translation |   |
|                            |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   | into U.S.   |   |
|                            |   |      |    |   | Traditional |   |    |   |   |   |        |   |   |   |   |   | dollars     |   |
|                            |   | Broadband |    |   | Voice       |   |    | Media  |   |   | Adjustments |   |   | Total  |   |   | (Note 2)    |   |
|                            |   | NIS       |    |   | NIS         |   |    | NIS    |   |   | NIS         |   |   | NIS    |   |   | US$         |   |
|                            |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |        |   |   |   |   |   |   |   |
| External revenue                |   |      | 608,503 |   |        |   | 563,767 |   |   |   | 70,818      |   |   |   | -      |   |        |   | 1,243,088 |   |   |   | 329,295 |   |
| Internal revenues               |   |      | 824     |   |        |   | -       |   |   |   | 241         |   |   |   | (1,065 | )      |        |   | - |   |   |   | - |   |
| Total revenue                   |   |      | 609,327 |   |        |   | 563,767 |   |   |   | 71,059      |   |   |   | (1,065 | )      |        |   | 1,243,088 |   |   |   | 329,295 |   |
|                            |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |        |   |   |   |   |   |   |   |
| Segment profit                  |   |      | 273,686 |   |        |   | 95,661  |   |   |   | 16,995      |   |   |   | (801   | )      |        |   | 385,541 |   |   |   | 102,130 |   |
|                            |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |        |   |   |   |   |   |   |   |
| Unallocated expenses       |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |        |   | 225,645 |   |   |   | 59,774 |   |
| Operating income                |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |        |   | 159,896 |   |   |   | 42,357 |   |
|                            |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |        |   |   |   |   |   |   |   |
| Finance expenses                |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |        |   | 133,908 |   |   |   | 35,471 |   |
| Finance income                  |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |        |   | (131,806 | ) |   |   | (34,915 | ) |
|                            |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |        |   |   |   |   |   |   |   |
| Income before income taxes |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |        |   | 157,794 |   |   |   | 41,800 |   |

----

----

|                       |   |      |    |   | Traditional |   |    |   |   |   |        |   |   |   |   |
|----------------------------|--------|-----------|---------|--------|-------------|--------|---------|--------|--------|--------|-------------|--------|--------|--------|--------|
|                       |   | Broadband |    |   | Voice       |   |    | Media  |   |   | Adjustments |   |   | Total  |   |
|                       |   | NIS       |    |   | NIS         |   |    | NIS    |   |   | NIS         |   |   | NIS    |   |
|                       |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |   |   |   |   |
| External revenue           |   |      | 546,986 |   |        |   | 557,224 |   |   |   | 63,117      |   |   |   | -      |   |   |   | 1,167,327 |   |
| Internal revenues          |   |      | 1,993   |   |        |   | -       |   |   |   | -           |   |   |   | (1,993 | ) |   |   | - |   |
| Total revenue              |   |      | 548,979 |   |        |   | 557,224 |   |   |   | 63,117      |   |   |   | (1,993 | ) |   |   | 1,167,327 |   |
|                       |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |   |   |   |   |
| Segment profit             |   |      | 241,083 |   |        |   | 113,482 |   |   |   | 15,484      |   |   |   | (801   | ) |   |   | 369,250 |   |
|                       |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |   |   |   |   |
| Unallocated expenses       |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |   |   | 238,817 |   |
| Operating income           |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |   |   | 130,433 |   |
|                       |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |   |   |   |   |
| Finance expenses           |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |   |   | 138,700 |   |
| Finance income             |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |   |   | (27,202 | ) |
|                       |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |   |   |   |   |
| Income before income taxes |   |      |    |   |        |   |    |   |   |   |        |   |   |   |   |   |   |   | 18,935 |   |

----

----

|                        |   |   |   |   |        |   |      | Convenience      |   |
|-----------------------------|--------|--------|--------|--------|-------------|--------|-----------|------------------|--------|
|                        |   |   |   |   |        |   |      | translation into |   |
|                        |   |   |   |   | December 31 |   |      | U.S dollars      |   |
|                        |   | Note   |   |   | 2009        |   |      | (Note 2)         |   |
|                        |   |   |   |   | NIS         |   |      | US $             |   |
|                        |   |   |   |   |        |   |      |             |   |   |   |   |
| Cash and cash equivalents   |   |   | 7      |   |        |   | 934       |             |   |   | 247 |   |
| Trade and other receivables |   |   | 9      |   |        |   | 225,118   |             |   |   | 59,634 |   |
| Long-term trade receivables |   |   | 9      |   |        |   | 6,260     |             |   |   | 1,658 |   |
| Property and equipment      |   |   | 10     |   |        |   | 158,916   |             |   |   | 42,097 |   |
| Intangible assets           |   |   | 11     |   |        |   | 629,018   |             |   |   | 166,627 |   |
| Employee benefits assets    |   |   | 19     |   |        |   | 13,078    |             |   |   | 3,464 |   |
| Deferred expenses           |   |   | 12     |   |        |   | 326,950   |             |   |   | 86,610 |   |
|                        |   |   |   |   |        |   |      |             |   |   |   |   |
|                        |   |   |   |   |        |   | 1,360,274 |             |   |   | 360,337 |   |

|                                        |   |   |   |   |        |   |    | Convenience      |   |
|---------------------------------------------|--------|--------|--------|--------|-------------|--------|---------|------------------|--------|
|                                        |   |   |   |   |        |   |    | translation into |   |
|                                        |   |   |   |   | December 31 |   |    | U.S dollars      |   |
|                                        |   | Note   |   |   | 2009        |   |    | (Note 2)         |   |
|                                        |   |   |   |   | NIS         |   |    | US $             |   |
|                                        |   |   |   |   |        |   |    |             |   |   |   |   |
| Trade and other payables                    |   |   | 14     |   |        |   | 233,593 |             |   |   | 61,879 |   |
| Deferred income                             |   |   |   |   |        |   | 4,094   |             |   |   | 1,085 |   |
| Related parties payables                    |   |   |   |   |        |   | 2,422   |             |   |   | 641 |   |
| Current maturities of long-term liabilities |   |   |   |   |        |   | 149     |             |   |   | 40 |   |
| Deferred tax liabilities                    |   |   | 20     |   |        |   | 30,136  |             |   |   | 7,983 |   |
|                                        |   |   |   |   |        |   |    |             |   |   |   |   |
|                                        |   |   |   |   |        |   | 270,394 |             |   |   | 71,628 |   |

|                          |   |      |    |   |        |   |   | Convenience      |   |
|-------------------------------|--------|-----------|---------|--------|-------------|--------|--------|------------------|--------|
|                          |   |      |    |   |        |   |   | translation into |   |
|                          |   |      |    |   |        |   |   | US dollars       |   |
|                          |   | January 1 |    |   | December 31 |   |   | (Note 2)         |   |
|                          |   | 2008      |    |   | 2008        |   |   | 2009             |   |   | 2009 |   |
|                          |   | NIS       |    |   | NIS         |   |   | NIS              |   |   | US$ |   |
|                          |   |      |    |   |        |   |   |             |   |   |   |   |   |   |   |   |
| Bank balances                 |   |      | 25,480  |   |        |   | 18,878 |             |   |   | 55,239 |   |   |   | 14,633 |   |
| Call deposits                 |   |      | 576,446 |   |        |   | 67,212 |             |   |   | 1,295,454 |   |   |   | 343,167 |   |
|                          |   |      |    |   |        |   |   |             |   |   |   |   |   |   |   |   |
| Cash and cash equivalents (1) |   |      | 601,926 |   |        |   | 86,090 |             |   |   | 1,350,693 |   |   |   | 357,800 |   |

----

----

|                                 |   |      |    |   |        |   |    | Convenience      |   |
|--------------------------------------|--------|-----------|---------|--------|-------------|--------|---------|------------------|--------|
|                                 |   |      |    |   |        |   |    | translation into |   |
|                                 |   |      |    |   |        |   |    | US dollars       |   |
|                                 |   | January 1 |    |   | December 31 |   |    | (Note 2)         |   |
|                                 |   | 2008      |    |   | 2008        |   |    | 2009             |   |   | 2009 |   |
|                                 |   | NIS       |    |   | NIS         |   |    | NIS              |   |   | US$ |   |
|                                 |   |      |    |   |        |   |    |             |   |   |   |   |
| Current investments                  |   |      |    |   |        |   |    |             |   |   |   |   |
| Investments held for trading:        |   |      |    |   |        |   |    |             |   |   |   |   |
| Corporate debt securities            |   |      | 161,353 |   |        |   | 214,895 |             |   |   | 38,184 |   |   |   | 10,115 |   |
| Government debt securities           |   |      | -       |   |        |   | -       |             |   |   | 41,928 |   |   |   | 11,106 |   |
| Available-for-sale financial assets: |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
| Corporate debt securities            |   |      | -       |   |        |   | -       |             |   |   | 19,019 |   |   |   | 5,039 |   |
|                                 |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
|                                 |   |      | 161,353 |   |        |   | 214,895 |             |   |   | 99,131 |   |   |   | 26,260 |   |
|                                 |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
| Non-current investments              |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
| Available-for-sale financial assets: |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
| Corporate debt securities            |   |      | -       |   |        |   | 233,633 |             |   |   | - |   |   |   | - |   |
| Equity securities                    |   |      | -       |   |        |   | 46,190  |             |   |   | - |   |   |   | - |   |
|                                 |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
|                                 |   |      | -       |   |        |   | 279,823 |             |   |   | - |   |   |   | - |   |
|                                 |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
|                                 |   |      | 161,353 |   |        |   | 494,718 |             |   |   | 99,131 |   |   |   | 26,260 |   |

----

----

|   | A. | Composition of trade and other receivables |
|--------|----|--------------------------------------------|

|                                       |   |      |    |   |        |   |    | Convenience      |   |
|--------------------------------------------|--------|-----------|---------|--------|-------------|--------|---------|------------------|--------|
|                                       |   |      |    |   |        |   |    | translation into |   |
|                                       |   |      |    |   |        |   |    | US dollars       |   |
|                                       |   | January 1 |    |   | December 31 |   |    | (Note 2)         |   |
|                                       |   | 2008      |    |   | 2008        |   |    | 2009             |   |   | 2009 |   |
|                                       |   | NIS       |    |   | NIS         |   |    | NIS              |   |   | US$ |   |
|                                       |   |      |    |   |        |   |    |             |   |   |   |   |
| Trade receivables                          |   |      |    |   |        |   |    |             |   |   |   |   |
| Outstanding debts                          |   |      | 113,867 |   |        |   | 111,977 |             |   |   | 99,851 |   |   |   | 26,450 |   |
| Credit cards and checks receivables        |   |      | 52,783  |   |        |   | 43,303  |             |   |   | 68,160 |   |   |   | 18,056 |   |
| Income receivable                          |   |      | 57,966  |   |        |   | 62,516  |             |   |   | 61,649 |   |   |   | 16,331 |   |
| Total trade receivable(1)                  |   |      | 224,616 |   |        |   | 217,796 |             |   |   | 229,660 |   |   |   | 60,837 |   |
|                                       |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
| Other receivables                          |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
| Prepaid expenses                           |   |      | 12,001  |   |        |   | 13,397  |             |   |   | 5,528 |   |   |   | 1,464 |   |
| Other receivables                          |   |      | 11,682  |   |        |   | 13,649  |             |   |   | 10,197 |   |   |   | 2,701 |   |
| Total other receivables(2)                 |   |      | 23,683  |   |        |   | 27,046  |             |   |   | 15,725 |   |   |   | 4,165 |   |
|                                       |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
| Long-term trade and other receivables |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
| Long-term trade receivables(3)             |   |      | 3,460   |   |        |   | 6,350   |             |   |   | 6,260 |   |   |   | 1,658 |   |
|                                       |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
|                                       |   |      | 251,759 |   |        |   | 251,192 |             |   |   | 251,645 |   |   |   | 66,660 |   |

|   | (1) | As at December 31, 2009 NIS 216,983 presented under assets classified as held-for-sale. |
|--------|-----|-----------------------------------------------------------------------------------------|

|   | (2) | As at December 31, 2009 NIS 8,135 presented under assets classified as held-for-sale. |
|--------|-----|---------------------------------------------------------------------------------------|

|   | (3) | As at December 31, 2009 presented under assets classified as held-for-sale. |
|--------|-----|-----------------------------------------------------------------------------|

|   | B. | Change in provision for doubtful debts during the year |
|--------|----|--------------------------------------------------------|

|                       |   |        |   |   | Convenience      |   |
|----------------------------|--------|-------------|--------|--------|------------------|--------|
|                       |   |        |   |   | translation into |   |
|                       |   |        |   |   | US dollars       |   |
|                       |   | December 31 |   |   | (Note 2)         |   |
|                       |   | 2008        |   |   | 2009             |   |   | 2009 |   |
|                       |   | NIS         |   |   | NIS              |   |   | US$ |   |
|                       |   |        |   |   |             |   |   |   |   |   |   |   |
| Balance at January 1       |   |        | 14,239 |   |             |   | 15,660 |   |   |   | 4,148 |   |
| Provision                  |   |        | 7,251  |   |             |   | 6,778 |   |   |   | 1,795 |   |
| Recognition of bad debts   |   |        | (5,830 | )      |             |   | (4,409 | ) |   |   | (1,168 | ) |
|                       |   |        |   |   |             |   |   |   |   |   |   |   |
| Balance at December 31 (1) |   |        | 15,660 |   |             |   | 18,029 |   |   |   | 4,775 |   |

|   | (1) | As at December 31, 2009 NIS 15,039 presented under assets classified as held-for-sale. |
|--------|-----|----------------------------------------------------------------------------------------|

----

----

|                                                    |   |     |   |   |      |   |     |       |   |   |         |   |   |   |    |   |         |   |
|---------------------------------------------------------|--------|----------|--------|--------|-----------|--------|----------|------------|--------|--------|--------------|--------|--------|--------|---------|--------|--------------|--------|
|                                                    |   |     |   |   |      |   |     |       |   |   |         |   |   |   |    |   | Convenience  |   |
|                                                    |   |     |   |   | Network   |   |     |       |   |   |         |   |   |   |    |   | translation  |   |
|                                                    |   |     |   |   | equipment |   |     | Furniture  |   |   |         |   |   |   |    |   | into         |   |
|                                                    |   | Motor    |   |   | and       |   |     | and office |   |   | Leasehold    |   |   |   |    |   | U.S. dollars |   |
|                                                    |   | vehicles |   |   | computers |   |     | equipment  |   |   | improvements |   |   | Total  |    |   | (Note 2)     |   |
|                                                    |   | NIS      |   |   | NIS       |   |     | NIS        |   |   | NIS          |   |   | NIS    |    |   | US$          |   |
|                                                    |   |     |   |   |      |   |     |       |   |   |         |   |   |   |    |   |         |   |
| Cost as at January 1, 2008                         |   |     | 848    |   |      |   | 215,833  |       |   |   | 33,554       |   |   |   | 40,433  |   |         |   | 290,668 |   |   |   |   |
| Additions                                               |   |     | -      |   |      |   | 41,682   |       |   |   | 1,029        |   |   |   | 4,830   |   |         |   | 47,541 |   |   |   |   |
| Disposals                                               |   |     | -      |   |      |   | (10,273  | )          |   |   | (190         | )      |   |   | (769    | )      |         |   | (11,232 | ) |   |   |   |
| Balance as at December 31, 2008                    |   |     | 848    |   |      |   | 247,242  |       |   |   | 34,393       |   |   |   | 44,494  |   |         |   | 326,977 |   |   |   |   |
|                                                    |   |     |   |   |      |   |     |       |   |   |         |   |   |   |    |   |         |   |   |   |   |   |   |
| Balance as at January 1, 2009                      |   |     | 848    |   |      |   | 247,242  |       |   |   | 34,393       |   |   |   | 44,494  |   |         |   | 326,977 |   |   |   | 86,616 |   |
| Additions                                               |   |     | -      |   |      |   | 50,644   |       |   |   | 2,697        |   |   |   | 673     |   |         |   | 54,014 |   |   |   | 14,308 |   |
| Transfer to assets classified as held-for-sale (1) |   |     | (848   | )      |      |   | (295,150 | )          |   |   | (36,983      | )      |   |   | (44,968 | )      |         |   | (377,949 | ) |   |   | (100,118 | ) |
|                                                    |   |     |   |   |      |   |     |       |   |   |         |   |   |   |    |   |         |   |   |   |   |   |   |   |
| Balance as at December 31, 2009                    |   |     | -      |   |      |   | 2,736    |       |   |   | 107          |   |   |   | 199     |   |         |   | 3,042 |   |   |   | 806 |   |

|   | (1) | See Note 6. |
|--------|-----|-------------|

----

----

|                                                               |   |     |   |   |      |   |     |       |   |   |         |   |   |   |    |   |         |   |
|--------------------------------------------------------------------|--------|----------|--------|--------|-----------|--------|----------|------------|--------|--------|--------------|--------|--------|--------|---------|--------|--------------|--------|
|                                                               |   |     |   |   |      |   |     |       |   |   |         |   |   |   |    |   | Convenience  |   |
|                                                               |   |     |   |   | Network   |   |     |       |   |   |         |   |   |   |    |   | translation  |   |
|                                                               |   |     |   |   | equipment |   |     | Furniture  |   |   |         |   |   |   |    |   | into         |   |
|                                                               |   | Motor    |   |   | and       |   |     | and office |   |   | Leasehold    |   |   |   |    |   | U.S. dollars |   |
|                                                               |   | vehicles |   |   | computers |   |     | equipment  |   |   | improvements |   |   | Total  |    |   | (Note 2)     |   |
|                                                               |   | NIS      |   |   | NIS       |   |     | NIS        |   |   | NIS          |   |   | NIS    |    |   | US$          |   |
|                                                               |   |     |   |   |      |   |     |       |   |   |         |   |   |   |    |   |         |   |
| Depreciation and impairment losses                            |   |     |   |   |      |   |     |       |   |   |         |   |   |   |    |   |         |   |
| Balance as at January 1, 2008                                 |   |     | 328    |   |      |   | 117,383  |       |   |   | 22,611       |   |   |   | 12,496  |   |         |   | 152,818 |   |   |   |   |
| Depreciation for the year                                          |   |     | 90     |   |      |   | 38,739   |       |   |   | 1,381        |   |   |   | 4,123   |   |         |   | 44,333 |   |   |   |   |
| Disposals                                                          |   |     | -      |   |      |   | (8,941   | )          |   |   | (84          | )      |   |   | (253    | )      |         |   | (9,278 | ) |   |   |   |
|                                                               |   |     |   |   |      |   |     |       |   |   |         |   |   |   |    |   |         |   |   |   |   |   |   |
| Balance as at December 31, 2008                               |   |     | 418    |   |      |   | 147,181  |       |   |   | 23,908       |   |   |   | 16,366  |   |         |   | 187,873 |   |   |   |   |
| Balance as at January 1,  2009                           |   |     | 418    |   |      |   | 147,181  |       |   |   | 23,908       |   |   |   | 16,366  |   |         |   | 187,873 |   |   |   | 49,768 |   |
| Depreciation for the year                                          |   |     | 66     |   |      |   | 27,127   |       |   |   | 1,724        |   |   |   | 4,241   |   |         |   | 33,158 |   |   |   | 8,783 |   |
| Transfer to  assets classified as held-for-sale (1) |   |     | (484   | )      |      |   | (172,457 | )          |   |   | (25,580      | )      |   |   | (20,512 | )      |         |   | (219,033 | ) |   |   | (58,022 | ) |
| Balance as at December 31, 2009                               |   |     | -      |   |      |   | 1,851    |       |   |   | 52           |   |   |   | 95      |   |         |   | 1,998 |   |   |   | 529 |   |
|                                                               |   |     |   |   |      |   |     |       |   |   |         |   |   |   |    |   |         |   |   |   |   |   |   |   |
| Carrying amounts:                                                  |   |     |   |   |      |   |     |       |   |   |         |   |   |   |    |   |         |   |   |   |   |   |   |   |
| As at January 1, 2008                                              |   |     | 520    |   |      |   | 98,450   |       |   |   | 10,943       |   |   |   | 27,937  |   |         |   | 137,850 |   |   |   |   |   |
| As at December 31, 2008                                       |   |     | 430    |   |      |   | 100,061  |       |   |   | 10,485       |   |   |   | 28,128  |   |         |   | 139,104 |   |   |   |   |   |
| As at December 31, 2009                                       |   |     | -      |   |      |   | 885      |       |   |   | 55           |   |   |   | 104     |   |         |   | 1,044 |   |   |   | 277 |   |

|   | (1) | See Note 6. |
|--------|-----|-------------|

----

----

|                             |   |     |     |   |        |   |    |         |   |   |        |   |   |     |    |   |     |   |    |        |   |   |   |   |   |   |    |   | Convenience   |   |
|----------------------------------|--------|----------|----------|--------|-------------|--------|---------|--------------|--------|--------|-------------|--------|--------|----------|---------|--------|----------|--------|---------|-------------|--------|--------|--------|--------|--------|--------|---------|--------|---------------|--------|
|                             |   |     |     |   |        |   |    |         |   |   |        |   |   |     |    |   |     |   |    |        |   |   |   |   |   |   |    |   | translation   |   |
|                             |   |     |     |   |        |   |    |         |   |   | Subscribers |   |   |     |    |   |     |   |    | Website     |   |   |   |   |   |   |    |   | into US       |   |
|                             |   |     |     |   |  Brand |   |    | Customer     |   |   | acquisition |   |   | Computer |    |   |     |   |    | development |   |   |   |   |   |   |    |   |  dollars |   |
|                             |   | Goodwill |     |   |  name  |   |    | relationship |   |   | costs       |   |   | software |    |   | Licenses |   |    | costs       |   |   | Other  |   |   | Total  |    |   | (Note 2)      |   |
|                             |   | NIS      |     |   | NIS         |   |    | NIS          |   |   | NIS         |   |   | NIS      |    |   | NIS      |   |    | NIS         |   |   | NIS    |   |   | NIS    |    |   | US$           |   |
|                             |   |     |     |   |        |   |    |         |   |   |        |   |   |     |    |   |     |   |    |        |   |   |   |   |   |   |    |   |          |   |
| Cost                             |   |     |     |   |        |   |    |         |   |   |        |   |   |     |    |   |     |   |    |        |   |   |   |   |   |   |    |   |          |   |
| Balance as at January 1, 2008    |   |     | 417,608  |   |        |   | 90,213  |         |   |   | 144,859     |   |   |     | -       |   |     |   | 35,821  |        |   |   | 4,031  |   |   |   | 17,211  |   |          |   | 12,607 |   |   |   | 722,350 |   |   |   |   |
| Additions                        |   |     | -        |   |        |   | -       |         |   |   | -           |   |   |     | 3,815   |   |     |   | 16,764  |        |   |   | -      |   |   |   | 2,400   |   |          |   | 93 |   |   |   | 23,072 |   |   |   |   |
| Disposals                        |   |     | -        |   |        |   | -       |         |   |   | -           |   |   |     | -       |   |     |   | -       |        |   |   | -      |   |   |   | (14,260 | )      |          |   | - |   |   |   | (14,260 | ) |   |   |   |
| Balance as at December 31, 2008  |   |     | 417,608  |   |        |   | 90,213  |         |   |   | 144,859     |   |   |     | 3,815   |   |     |   | 52,585  |        |   |   | 4,031  |   |   |   | 5,351   |   |          |   | 12,700 |   |   |   | 731,162 |   |   |   |   |
|                             |   |     |     |   |        |   |    |         |   |   |        |   |   |     |    |   |     |   |    |        |   |   |   |   |   |   |    |   |          |   |   |   |   |   |   |   |   |   |   |
| Balance as at January 1, 2009    |   |     | 417,608  |   |        |   | 90,213  |         |   |   | 144,859     |   |   |     | 3,815   |   |     |   | 52,585  |        |   |   | 4,031  |   |   |   | 5,351   |   |          |   | 12,700 |   |   |   | 731,162 |   |   |   | 193,685 |   |
| Additions                        |   |     | -        |   |        |   | -       |         |   |   | -           |   |   |     | 30,480  |   |     |   | 15,436  |        |   |   | -      |   |   |   | 451     |   |          |   | 35 |   |   |   | 46,402 |   |   |   | 12,292 |   |
| Transfer to assets classified as |   |     |     |   |        |   |    |         |   |   |        |   |   |     |    |   |     |   |    |        |   |   |   |   |   |   |    |   |          |   |   |   |   |   |   |   |   |   |   |   |
|  held-for-sale (1)          |   |     | (411,171 | )      |        |   | (90,213 | )            |   |   | (144,859    | )      |   |     | (34,295 | )      |     |   | (68,021 | )           |   |   | (4,031 | )      |   |   | -       |   |          |   | (12,426 | ) |   |   | (765,016 | ) |   |   | (202,653 | ) |
| Balance as at December 31, 2009  |   |     | 6,437    |   |        |   | -       |         |   |   | -           |   |   |     | -       |   |     |   | -       |        |   |   | -      |   |   |   | 5,802   |   |          |   | 309 |   |   |   | 12,548 |   |   |   | 3,324 |   |

|   | (1) | See Note 6. |
|--------|-----|-------------|

----

----

|                             |   |     |    |   |        |   |   |         |   |   |        |   |   |     |    |   |     |   |    |        |   |   |   |   |   |   |   |   | Convenience   |   |
|----------------------------------|--------|----------|---------|--------|-------------|--------|--------|--------------|--------|--------|-------------|--------|--------|----------|---------|--------|----------|--------|---------|-------------|--------|--------|--------|--------|--------|--------|--------|--------|---------------|--------|
|                             |   |     |    |   |        |   |   |         |   |   |        |   |   |     |    |   |     |   |    |        |   |   |   |   |   |   |   |   | transslation  |   |
|                             |   |     |    |   |        |   |   |         |   |   | Subscribers |   |   |     |    |   |     |   |    | Website     |   |   |   |   |   |   |   |   | into US       |   |
|                             |   |     |    |   |  Brand |   |   | Customer     |   |   | acquisition |   |   | Computer |    |   |     |   |    | development |   |   |   |   |   |   |   |   |  dollars |   |
|                             |   | Goodwill |    |   |  name  |   |   | relationship |   |   | costs       |   |   | software |    |   | Licenses |   |    | costs       |   |   | Other  |   |   | Total  |   |   | (Note 2)      |   |
|                             |   | NIS      |    |   | NIS         |   |   | NIS          |   |   | NIS         |   |   | NIS      |    |   | NIS      |   |    | NIS         |   |   | NIS    |   |   | NIS    |   |   | US$           |   |
|                             |   |     |    |   |        |   |   |         |   |   |        |   |   |     |    |   |     |   |    |        |   |   |   |   |   |   |   |   |          |   |
| Amortization and impairment      |   |     |    |   |        |   |   |         |   |   |        |   |   |     |    |   |     |   |    |        |   |   |   |   |   |   |   |   |          |   |
|  losses                     |   |     |    |   |        |   |   |         |   |   |        |   |   |     |    |   |     |   |    |        |   |   |   |   |   |   |   |   |          |   |
| Balance as at January 1, 2008    |   |     | -       |   |        |   | -      |         |   |   | 32,696      |   |   |     | -       |   |     |   | 9,722   |        |   |   | 624    |   |   |   | 4,997  |   |          |   | 10,824 |   |   |   | 58,863 |   |   |   |   |
| Amortization for the year        |   |     | 720     |   |        |   | -      |         |   |   | 27,736      |   |   |     | 1,669   |   |     |   | 10,864  |        |   |   | 275    |   |   |   | 3,439  |   |          |   | 1,834 |   |   |   | 46,537 |   |   |   |   |
| Disposals                        |   |     | -       |   |        |   | -      |         |   |   | -           |   |   |     | -       |   |     |   | -       |        |   |   | -      |   |   |   | (6,227 | )      |          |   | - |   |   |   | (6,227 | ) |   |   |   |
| Balance as at December 31, 2008  |   |     | 720     |   |        |   | -      |         |   |   | 60,432      |   |   |     | 1,669   |   |     |   | 20,586  |        |   |   | 899    |   |   |   | 2,209  |   |          |   | 12,658 |   |   |   | 99,173 |   |   |   |   |
|                             |   |     |    |   |        |   |   |         |   |   |        |   |   |     |    |   |     |   |    |        |   |   |   |   |   |   |   |   |          |   |   |   |   |   |   |   |   |   |   |
| Balance as at January 1, 2009    |   |     | 720     |   |        |   | -      |         |   |   | 60,432      |   |   |     | 1,669   |   |     |   | 20,586  |        |   |   | 899    |   |   |   | 2,209  |   |          |   | 12,658 |   |   |   | 99,173 |   |   |   | 26,271 |   |
| Amortization for the year        |   |     | -       |   |        |   | -      |         |   |   | 19,135      |   |   |     | 8,415   |   |     |   | 12,229  |        |   |   | 263    |   |   |   | 1,293  |   |          |   | 6 |   |   |   | 41,341 |   |   |   | 10,951 |   |
| Transfer to assets classified as |   |     |    |   |        |   |   |         |   |   |        |   |   |     |    |   |     |   |    |        |   |   |   |   |   |   |   |   |          |   |   |   |   |   |   |   |   |   |   |   |
| held-for-sale (1)                |   |     | -       |   |        |   | -      |         |   |   | (79,567     | )      |   |     | (10,084 | )      |     |   | (32,815 | )           |   |   | (1,162 | )      |   |   | -      |   |          |   | (12,372 | ) |   |   | (136,000 | ) |   |   | (36,026 | ) |
| Balance as at December 31, 2009  |   |     | 720     |   |        |   | -      |         |   |   | -           |   |   |     | -       |   |     |   | -       |        |   |   | -      |   |   |   | 3,502  |   |          |   | 292 |   |   |   | 4,514 |   |   |   | 1,196 |   |
|                             |   |     |    |   |        |   |   |         |   |   |        |   |   |     |    |   |     |   |    |        |   |   |   |   |   |   |   |   |          |   |   |   |   |   |   |   |   |   |   |   |
| Carrying amounts:                |   |     |    |   |        |   |   |         |   |   |        |   |   |     |    |   |     |   |    |        |   |   |   |   |   |   |   |   |          |   |   |   |   |   |   |   |   |   |   |   |
| As at January 1, 2008            |   |     | 417,608 |   |        |   | 90,213 |         |   |   | 112,163     |   |   |     | -       |   |     |   | 26,099  |        |   |   | 3,407  |   |   |   | 12,214 |   |          |   | 1,783 |   |   |   | 663,487 |   |   |   |   |   |
| As at December 31, 2008          |   |     | 416,888 |   |        |   | 90,213 |         |   |   | 84,427      |   |   |     | 2,146   |   |     |   | 31,999  |        |   |   | 3,132  |   |   |   | 3,142  |   |          |   | 42 |   |   |   | 631,989 |   |   |   |   |   |
| As at December 31, 2009          |   |     | 5,717   |   |        |   | -      |         |   |   | -           |   |   |     | -       |   |     |   | -       |        |   |   | -      |   |   |   | 2,300  |   |          |   | 17 |   |   |   | 8,034 |   |   |   | 2,128 |   |

|   | (1) | See Note 6. |
|--------|-----|-------------|

----

----

|              |   |      |    |   |        |   |
|-------------------|--------|-----------|---------|--------|-------------|--------|
|              |   | January 1 |    |   | December 31 |   |
|              |   | 2008      |    |   | 2008        |   |   | 2009 |   |
|              |   | NIS       |    |   | NIS         |   |   | NIS |   |
|              |   |      |    |   |        |   |   |   |   |   |   |   |
| Traditional voice |   |      | 114,131 |   |        |   | 114,131 |   |   |   | 114,131 |   |
| Broadband         |   |      | 297,040 |   |        |   | 297,040 |   |   |   | 297,040 |   |
| Media             |   |      | 6,437   |   |        |   | 5,717 |   |   |   | 5,717 |   |
|              |   |      |    |   |        |   |   |   |   |   |   |   |
| Total (1)         |   |      | 417,608 |   |        |   | 416,888 |   |   |   | 416,888 |   |

|   | — | Cash flows were projected based on actual operating results and the CGU’s 2010 business plan. Cash flows for periods subsequent to 2010 were extrapolated assuming a varying negative growth rate of up to about 3%. Management believes that these assumptions are reasonable due to the long-term trend existing in the international telephony market in Israel. |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | — | The anticipated annual revenue growth included in the cash flow projections was about -1% for the years 2011 to 2013. |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------|

|   | — | A pre-tax discount rate of about 13% was applied in determining the recoverable amount of the CGUs. |
|--------|---------|-----------------------------------------------------------------------------------------------------|

----

----

|   | — | Cash flows were projected based on actual operating results and the CGU’s 2010 business plan. Cash flows subsequent 2010 were extrapolated assuming a growth rate of between 1.8% to about 3%. Management believes that these assumptions are reasonable mainly due to increased penetration of its local telephony activity and to the continuous trend of Internet penetration in the local market. |
|--------|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | — | The anticipated annual revenue growth included in the cash flow projections varied from about 3.3% to about 2.1% for the years 2011 to 2013. |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------|

|   | — | A pre-tax discount rate of 15.4% was applied in determining the recoverable amount of the units. |
|--------|---------|--------------------------------------------------------------------------------------------------|

|                                    |   |      |    |   |        |   |    | Convenience      |   |
|-----------------------------------------|--------|-----------|---------|--------|-------------|--------|---------|------------------|--------|
|                                    |   |      |    |   |        |   |    | translation into |   |
|                                    |   |      |    |   |        |   |    | US dollars       |   |
|                                    |   | January 1 |    |   | December 31 |   |    | (Note 2)         |   |
|                                    |   | 2008      |    |   | 2008        |   |    | 2009             |   |   | 2009 |   |
|                                    |   | NIS       |    |   | NIS         |   |    | NIS              |   |   | US$ |   |
|                                    |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
| ROU of international fiber optic cables |   |      | 340,030 |   |        |   | 362,591 |             |   |   | 429,103 |   |   |   | 113,670 |   |
|                                    |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
| Less - accumulated amortization         |   |      | 51,377  |   |        |   | 78,010  |             |   |   | 102,153 |   |   |   | 27,060 |   |
|                                    |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
| Total deferred expenses (1)             |   |      | 288,653 |   |        |   | 284,581 |             |   |   | 326,950 |   |   |   | 86,610 |   |

|   | (1) | Total deferred expenses as at December 31, 2009 presented under current assets classified as held-for-sale. |
|--------|-----|-------------------------------------------------------------------------------------------------------------|

----

----

|                                            |   |      |   |   |        |   |   | Convenience      |   |
|-------------------------------------------------|--------|-----------|--------|--------|-------------|--------|--------|------------------|--------|
|                                            |   |      |   |   |        |   |   | translation into |   |
|                                            |   |      |   |   |        |   |   | US dollars       |   |
|                                            |   | January 1 |   |   | December 31 |   |   | December 31      |   |   | (Note 2) |   |
|                                            |   | 2008      |   |   | 2008        |   |   | 2009             |   |   | 2009 |   |
|                                            |   | NIS       |   |   | NIS         |   |   | NIS              |   |   | US$ |   |
|                                            |   |      |   |   |        |   |   |             |   |   |   |   |   |   |   |   |
| Short-term bank credit (1)                      |   |      | 77,998 |   |        |   | 42,738 |             |   |   | 462,835 |   |   |   | 122,605 |   |
| Current maturities of long-term liabilities (2) |   |      | 10,734 |   |        |   | 11,238 |             |   |   | 149 |   |   |   | 40 |   |
|                                            |   |      |   |   |        |   |   |             |   |   |   |   |   |   |   |   |
|                                            |   |      | 88,732 |   |        |   | 53,976 |             |   |   | 462,984 |   |   |   | 122,645 |   |

|   | (1) | Annual interest rates as at December 31, 2009 are 1.8% - 2.45%. |
|--------|-----|-----------------------------------------------------------------|

|   | (2) | As at December 31, 2009 presented under liabilities classified as held-for-sale. |
|--------|-----|----------------------------------------------------------------------------------|

|                                                             |   |      |    |   |        |   |    | Convenience      |   |
|------------------------------------------------------------------|--------|-----------|---------|--------|-------------|--------|---------|------------------|--------|
|                                                             |   |      |    |   |        |   |    | translation into |   |
|                                                             |   |      |    |   |        |   |    | US dollars       |   |
|                                                             |   | January 1 |    |   | December 31 |   |    | December 31      |   |   | (Note 2) |   |
|                                                             |   | 2008      |    |   | 2008        |   |    | 2009             |   |   | 2009 |   |
|                                                             |   | NIS       |    |   | NIS         |   |    | NIS              |   |   | US$ |   |
|                                                             |   |      |    |   |        |   |    |             |   |   |   |   |
| Trade payables                                                   |   |      |    |   |        |   |    |             |   |   |   |   |
| Outstanding debts                                                |   |      | 168,673 |   |        |   | 144,291 |             |   |   | 167,013 |   |   |   | 44,242 |   |
| Notes payable                                                    |   |      | 2,124   |   |        |   | 4,289   |             |   |   | 4,720 |   |   |   | 1,250 |   |
|                                                             |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
| Total trade payables (1)                                         |   |      | 170,797 |   |        |   | 148,580 |             |   |   | 171,733 |   |   |   | 45,492 |   |
|                                                             |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
| Other payables                                                   |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
| Liabilities to employees and other liabilities for salaries |   |      | 22,497  |   |        |   | 18,970  |             |   |   | 19,282 |   |   |   | 5,108 |   |
| Institutions                                                     |   |      | 4,425   |   |        |   | 4,146   |             |   |   | 3,332 |   |   |   | 883 |   |
| Accrued expenses and other payables                              |   |      | 42,162  |   |        |   | 48,625  |             |   |   | 55,159 |   |   |   | 14,611 |   |
|                                                             |   |      |    |   |        |   |    |             |   |   |   |   |   |   |   |   |
| Total other payables (1)                                         |   |      | 69,084  |   |        |   | 71,741  |             |   |   | 77,773 |   |   |   | 20,602 |   |

|   | (1) | Total trade and other payables as at December 31, 2009 presented under short-term trade and other payables, except for an amount of NIS 164,637 and NIS 68,956, respectively presented under liabilities classified as held-for-sale. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | A. | Issuance of debentures |
|--------|----|------------------------|

|   | · | B Communications is entitled to increase the series of the debentures and to issue additional series at the same terms, providing that this does not cause the credit rating of the outstanding debentures to decrease below the rating prior to the issuance. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | B Communications is prohibited from creating any liens on its assets without the prior approval of the general meeting of the debentures holders. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | B Communications may not repay all or any portion of its shareholders’ loans for as long as the ratio of net debt (without the shareholders’ loans) to EBITDA (defined as operating income before financial expenses, taxes on income, depreciation and amortization) is more than two for the prior four quarters. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | B Communications is entitled to make an early redemption of the debentures, in whole or in part, in the last two weeks of each quarter. The amount payable will be the higher of: the principal plus accrued interest and linkage differences as at that date; or the present value of future cash flows as at that date based on a yield of Israeli Government Bonds + 0.3%. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The debentures holders are entitled to demand the immediate redemption of the debentures or are obligated to do so if a resolution is passed in a legal general meeting of the debenture holders in the following events: |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | a. | The winding-up, dissolution or liquidation of B Communications. |
|--------|--------|----|-----------------------------------------------------------------|

|   |   | b. | Non-payment by B Communications of the amounts required according to the terms of the debentures. |
|--------|--------|----|---------------------------------------------------------------------------------------------------|

|   |   | c. | A foreclosure is imposed on B Communications’ principal assets. |
|--------|--------|----|-----------------------------------------------------------------------|

|   |   | d. | Breach of a material provision of the debentures. |
|--------|--------|----|---------------------------------------------------|

----

----

|   | A. | Issuance of debentures (cont’d) |
|--------|----|---------------------------------------|

|   | · | In the event that the TASE decides to delist the debentures (Series B) because the value of such debentures falls below the threshold for delisting fixed in the regulations of the TASE, the Company will announce a date for early redemption within 45 days of the resolution of the TASE board to delist the debentures as stated above, on which date the holders of the debentures may redeem them. On the date of early redemption, the Company shall redeem the debentures whose holders have asked that the Company redeem, at the balance of their par value plus indexation and any interest accruing on the principal through the actual date of redemption, in accordance with the terms of the debentures, and the debentures shall be delisted from the TASE. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | The debentures holders are entitled to demand the immediate redemption of the debentures or are obligated to do so if a resolution is passed in a legal general meeting of the debenture holders in the following events: |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   | a. | The winding up, dissolution or liquidation of the Company. |
|--------|--------|----|------------------------------------------------------------|

|   | b. | Non-payment by the Company of the amounts required according to the terms of the debentures. |
|--------|----|----------------------------------------------------------------------------------------------|

|   | c. | A foreclosure is imposed on the Company’s principal assets. |
|--------|----|-------------------------------------------------------------------|

|   | B. | Debentures buyback program |
|--------|----|----------------------------|

----

----

|   | 1. | NIS 220,000 Debentures (Series A) of NIS 1 par value, repayable (principal) in eight equal annual installments on April 1 of each of the years 2008 to 2015 (inclusive), bearing interest of 4% per year and linked (principal and interest) to the Israeli CPI published on March 15, 2005 for February 2005. The interest is payable every twelve months, on April 1 of each of the years 2006 to 2015 (inclusive). The Debentures are convertible into ordinary shares on each trading day, until March 16, 2015. The conversion price was NIS 40 of Debentures per ordinary share until March 31, 2008 and was adjusted to NIS 50 of Debentures per ordinary share from April 1, 2008 until March 31, 2015. Debentures (Series A) not converted into ordinary shares by March 16, 2015 (inclusive) will not be convertible. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | 1,500 of Stock Purchase Warrants (Series 1), registered in the name of their owners, were exercisable into ordinary shares of NIS 0.01 par value each, from June 1, 2005 until August 15, 2005. The exercise price was NIS 32 per ordinary share. The Series 1 warrants expired unexercised. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | 2,500 of Stock Purchase Warrants (Series 2), registered in the name of their owners, were exercisable into ordinary shares of NIS 0.01 par value each, from June 1, 2005 until October 15, 2007. The exercise price was NIS 40 per ordinary share, linked to the Israeli CPI. During 2007, 2,495 of the Warrants were exercised for net proceeds of NIS 104 million and 5 Warrants expired. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | · | Credit risk |
|--------|--------|-------------|

|   | · | Liquidity risk |
|--------|--------|----------------|

|   | · | Market risk (including currency, interest and other market price risks) |
|--------|--------|-------------------------------------------------------------------------|

----

----

|   | A. | Credit risk |
|--------|----|-------------|

|   | (1) | Exposure to credit risk |
|--------|-----|-------------------------|

|                                     |        |   |    | Convenience      |   |
|------------------------------------------|-------------|--------|---------|------------------|--------|
|                                     |        |   |    | translation into |   |
|                                     |        |   |    | US dollars       |   |
|                                     | December 31 |   |    | (Note 2)         |   |
|                                     | 2008        |   |    | 2009             |   |   | 2009 |   |
|                                     | NIS         |   |    | NIS              |   |   | US$ |   |
|                                     |        |   |    |             |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                |        |   | 86,090  |             |   |   | 1,349,759 |   |   |   | 357,552 |   |
| Available-for-sale marketable securities |        |   | 233,633 |             |   |   | 19,019 |   |   |   | 5,038 |   |
| Marketable securities held for trading   |        |   | 214,895 |             |   |   | 80,112 |   |   |   | 21,222 |   |
| Trade receivables                        |        |   | 224,146 |             |   |   | 12,677 |   |   |   | 3,358 |   |
| Parent company receivables               |        |   | -       |             |   |   | 1,765 |   |   |   | 467 |   |
| Related parties receivables              |        |   | 1,729   |             |   |   | 4,017 |   |   |   | 1,064 |   |
| Other receivables                        |        |   | 6,781   |             |   |   | 1,748 |   |   |   | 463 |   |
| Derivative contracts                     |        |   | 657     |             |   |   | 3,656 |   |   |   | 968 |   |
|                                     |        |   |    |             |   |   |   |   |   |   |   |   |
|                                     |        |   | 767,931 |             |   |   | 1,472,753 |   |   |   | 390,132 |   |

----

----

|   | B. | Liquidity risk |
|--------|----|----------------|

|                                            |   | December 31, 2008 |      |
|-------------------------------------------------|--------|-------------------|-----------|
|                                            |   | Carrying          |      |   | Contractual |   |   | 6 months |   |   |   |   |   |   |   |   |   |   |   | More than |   |
|                                            |   | amount            |      |   | cash flows |   |   | or less |   |   | 6-12 months |   |   | 1-3 years |   |   | 3-5 years |   |   | 5 years |   |
|                                            |   | NIS               |      |
|                                            |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-derivative financial liabilities            |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current maturities of long-term liabilities and |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  short-term bank credit                    |   |              | 53,976    |   |   |   | 53,976 |   |   |   | 53,976 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Trade payables                                  |   |              | 148,580   |   |   |   | 148,580 |   |   |   | 148,580 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Other payables                                  |   |              | 41,153    |   |   |   | 41,153 |   |   |   | 41,153 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Related parties payables                        |   |              | 3,223     |   |   |   | 3,223 |   |   |   | 3,223 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Debentures                                      |   |              | 904,488   |   |   |   | 1,093,001 |   |   |   | 100,733 |   |   |   | 21,806 |   |   |   | 329,261 |   |   |   | 304,317 |   |   |   | 336,884 |   |
| Convertible debentures                          |   |              | 96,945    |   |   |   | 117,543 |   |   |   | 18,529 |   |   |   | - |   |   |   | 35,321 |   |   |   | 33,005 |   |   |   | 30,688 |   |
| Long-term obligations                           |   |              | 760       |   |   |   | 760 |   |   |   | - |   |   |   | - |   |   |   | 760 |   |   |   | - |   |   |   | - |   |
| Derivative financial liabilities                |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Forward exchange contracts                      |   |              | 1,055     |   |   |   | 1,055 |   |   |   | 1,055 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
|                                            |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                           |   |              | 1,250,180 |   |   |   | 1,459,291 |   |   |   | 367,249 |   |   |   | 21,806 |   |   |   | 365,342 |   |   |   | 337,322 |   |   |   | 367,572 |   |

----

----

|   | B. | Liquidity risk (cont’d) |
|--------|----|-------------------------------|

|                                        |   | December 31, 2009 |      |
|---------------------------------------------|--------|-------------------|-----------|
|                                        |   | Carrying          |      |   | Contractual |   |   | 6 months |   |   |   |   |   |   |   |   |   |   |   | More than |   |
|                                        |   | amount            |      |   | cash flows |   |   | or less |   |   | 6-12 months |   |   | 1-3 years |   |   | 3-5 years |   |   | 5 years |   |
|                                        |   | NIS               |      |
|                                        |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-derivative financial liabilities        |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current maturities of long-term liabilities |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  and short-term bank credit            |   |              | 462,835   |   |   |   | 462,835 |   |   |   | 462,835 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Trade payables                              |   |              | 7,096     |   |   |   | 7,096 |   |   |   | 7,096 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Other payables                              |   |              | 7,355     |   |   |   | 7,355 |   |   |   | 7,355 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Related parties payables                    |   |              | 90        |   |   |   | 90 |   |   |   | 90 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Debentures                                  |   |              | 1,259,639 |   |   |   | 1,475,324 |   |   |   | 76,055 |   |   |   | 184,374 |   |   |   | 491,451 |   |   |   | 452,241 |   |   |   | 271,204 |   |
| Convertible debentures                      |   |              | 117,942   |   |   |   | 102,443 |   |   |   | 18,571 |   |   |   | - |   |   |   | 35,346 |   |   |   | 32,949 |   |   |   | 15,576 |   |
|                                        |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                                       |   |              | 1,854,957 |   |   |   | 2,055,143 |   |   |   | 572,002 |   |   |   | 184,374 |   |   |   | 526,797 |   |   |   | 485,190 |   |   |   | 286,780 |   |

----

----

|   | C. | Linkage and foreign currency risks |
|--------|----|------------------------------------|

|   | (1) | The exposure to linkage and foreign currency risk |
|--------|-----|---------------------------------------------------|

|                         |   | December 31, 2008 |     |
|------------------------------|--------|-------------------|----------|
|                         |   |              |     |   |   |   |   | Foreign |   |   |   |   |
|                         |   |              |     |   |   |   |   | currency |   |   |   |   |
|                         |   |              |     |   |   |   |   | linked |   |   |   |   |
|                         |   |              |     |   |   |   |   | (mainly |   |   |   |   |
|                         |   | Unlinked          |     |   | CPI-linked |   |   | US dollar) |   |   | Total |   |
|                         |   | NIS               |     |   | NIS |   |   | NIS |   |   | NIS |   |
|                         |   |              |     |   |   |   |   |   |   |   |   |   |
| Current assets               |   |              |     |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents    |   |              | 30,219   |   |   |   | - |   |   |   | 55,871 |   |   |   | 86,090 |   |
| Marketable securities        |   |              | -        |   |   |   | 214,895 |   |   |   | - |   |   |   | 214,895 |   |
| Trade receivables            |   |              | 187,710  |   |   |   | - |   |   |   | 30,086 |   |   |   | 217,796 |   |
| Related parties receivables  |   |              | 1,729    |   |   |   | - |   |   |   | - |   |   |   | 1,729 |   |
| Other receivables            |   |              | 7,438    |   |   |   | - |   |   |   | - |   |   |   | 7,438 |   |
| Non-current assets           |   |              |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term trade receivables  |   |              | 6,350    |   |   |   | - |   |   |   | - |   |   |   | 6,350 |   |
| Marketable securities        |   |              | 46,190   |   |   |   | 233,633 |   |   |   | - |   |   |   | 279,823 |   |
| Total assets                 |   |              | 279,636  |   |   |   | 448,528 |   |   |   | 85,957 |   |   |   | 814,121 |   |
| Current liabilities          |   |              |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current maturities of long-  |   |              |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  term liabilities and   |   |              |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  short term credit      |   |              | 16,611   |   |   |   | - |   |   |   | 37,365 |   |   |   | 53,976 |   |
| Current maturities of        |   |              |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  debentures             |   |              | -        |   |   |   | 100,142 |   |   |   | - |   |   |   | 100,142 |   |
| Current maturities of        |   |              |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  convertible debentures |   |              | -        |   |   |   | 17,516 |   |   |   | - |   |   |   | 17,516 |   |
| Trade payables               |   |              | 73,760   |   |   |   | - |   |   |   | 74,820 |   |   |   | 148,580 |   |
| Other payables               |   |              | 41,153   |   |   |   | - |   |   |   | 1,055 |   |   |   | 42,208 |   |
| Related parties payables     |   |              | 3,223    |   |   |   | - |   |   |   | - |   |   |   | 3,223 |   |
| Non-current liabilities      |   |              |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debentures                   |   |              | -        |   |   |   | 804,346 |   |   |   | - |   |   |   | 804,346 |   |
| Convertible debentures       |   |              | -        |   |   |   | 79,429 |   |   |   | - |   |   |   | 79,429 |   |
| Long-term obligations        |   |              | 617      |   |   |   | - |   |   |   | 143 |   |   |   | 760 |   |
| Total liabilities            |   |              | 135,364  |   |   |   | 1,001,433 |   |   |   | 113,383 |   |   |   | 1,250,180 |   |
| Total exposure in the        |   |              |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  statement of financial |   |              |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  position               |   |              | 144,272  |   |   |   | (552,905 | ) |   |   | (27,426 | ) |   |   | (436,059 | ) |
| Currency futures             |   |              |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  transactions           |   |              |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dollar/NIS forward           |   |              |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  transactions           |   |              | (256,090 | ) |   |   | - |   |   |   | 256,090 |   |   |   | - |   |

----

----

|   | C. | Linkage and foreign currency risks (cont’d) |
|--------|----|---------------------------------------------------|

|   | (1) | The exposure to linkage and foreign currency risk (cont’d) |
|--------|-----|------------------------------------------------------------------|

|                                    |   | December 31, 2009 |      |
|-----------------------------------------|--------|-------------------|-----------|
|                                    |   |              |      |   |   |   |   |   |   |   |   |   |   | Convenience |   |
|                                    |   |              |      |   |   |   |   | Foreign |   |   |   |   |   | translation |   |
|                                    |   |              |      |   |   |   |   | currency |   |   |   |   |   | into |   |
|                                    |   |              |      |   |   |   |   | linked |   |   |   |   |   | US dollars |   |
|                                    |   |              |      |   |   |   |   | (mainly |   |   |   |   |   | (Note 2) |   |
|                                    |   | Unlinked          |      |   | CPI-linked |   |   | US dollar) |   |   | Total |   |   | 2009 |   |
|                                    |   | NIS               |      |   | NIS |   |   | NIS |   |   | NIS |   |   | US$ |   |
|                                    |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |
| Current assets                          |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents               |   |              | 1,345,447 |   |   |   | - |   |   |   | 4,312 |   |   |   | 1,349,759 |   |   |   | 357,552 |   |
| Marketable securities                   |   |              | -         |   |   |   | 99,131 |   |   |   | - |   |   |   | 99,131 |   |   |   | 26,260 |   |
| Trade receivables                       |   |              | 12,677    |   |   |   | - |   |   |   | - |   |   |   | 12,677 |   |   |   | 3,358 |   |
| Parent company receivables              |   |              | 1,765     |   |   |   | - |   |   |   | - |   |   |   | 1,765 |   |   |   | 467 |   |
| Related parties receivables             |   |              | 4,017     |   |   |   | - |   |   |   | - |   |   |   | 4,017 |   |   |   | 1,064 |   |
| Other receivables                       |   |              | 5,404     |   |   |   | - |   |   |   | - |   |   |   | 5,404 |   |   |   | 1,432 |   |
| Assets classified as                    |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  held-for-sale                     |   |              | 198,021   |   |   |   | - |   |   |   | 26,157 |   |   |   | 224,178 |   |   |   | 59,385 |   |
| Non-current assets                      |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                            |   |              | 1,567,331 |   |   |   | 99,131 |   |   |   | 30,469 |   |   |   | 1,696,931 |   |   |   | 449,968 |   |
| Current liabilities                     |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current maturities of long- term        |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  liabilities and short term credit |   |              | 460,018   |   |   |   | - |   |   |   | 2,817 |   |   |   | 462,835 |   |   |   | 122,605 |   |
| Current maturities of                   |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  debentures                        |   |              | -         |   |   |   | 215,994 |   |   |   | - |   |   |   | 215,994 |   |   |   | 57,217 |   |
| Current maturities of                   |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  convertible debentures            |   |              | -         |   |   |   | 17,682 |   |   |   | - |   |   |   | 17,682 |   |   |   | 4,684 |   |
| Trade payables                          |   |              | 7,096     |   |   |   | - |   |   |   | - |   |   |   | 7,096 |   |   |   | 1,880 |   |
| Other payables                          |   |              | 7,355     |   |   |   | - |   |   |   | - |   |   |   | 7,355 |   |   |   | 1,948 |   |
| Related parties payables                |   |              | 90        |   |   |   | - |   |   |   | - |   |   |   | 90 |   |   |   | 24 |   |
| Liabilities classified as               |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  held-for-sale                     |   |              | 128,093   |   |   |   | - |   |   |   | 83,116 |   |   |   | 211,209 |   |   |   | 59,949 |   |
| Non-current liabilities                 |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Debentures                              |   |              | -         |   |   |   | 1,043,645 |   |   |   | - |   |   |   | 1,043,645 |   |   |   | 276,462 |   |
| Convertible debentures                  |   |              | -         |   |   |   | 100,260 |   |   |   | - |   |   |   | 100,260 |   |   |   | 26,559 |   |
| Total liabilities                       |   |              | 602,652   |   |   |   | 1,377,581 |   |   |   | 85,933 |   |   |   | 2,066,166 |   |   |   | 551,328 |   |
| Total exposure in the                   |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  statement of financial            |   |              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  position                          |   |              | 964,679   |   |   |   | (1,278,450 | ) |   |   | (55,464 | ) |   |   | (369,235 | ) |   |   | (101,360 | ) |

|                                   |   | December 31, 2009 |   |
|----------------------------------------|--------|-------------------|--------|
|                                   |   | Currency/linkage  |   | Currency/linkage |   |   |   | Par value |   |   |   |   |
|                                   |   |  receivable  |   | payable |   | Expiry date |   | (currency) |   |   | Fair value |   |
|                                   |   |              |   |   |   |   |   |   |   |   |   |   |
| Instruments not used for hedging: |   |              |   |   |   |   |   |   |   |   |   |   |
| Forward exchange contracts        |   | USD               |   | NIS |   | 2009 |   |   | 67,000 |   |   |   | 1,055 |   |

----

----

|   | C. | Linkage and foreign currency risks (cont’d) |
|--------|----|---------------------------------------------------|

|   | (1) | The exposure to linkage and foreign currency risk (cont’d) |
|--------|-----|------------------------------------------------------------------|

|              |   | Year ended December 31 |   |   | Year ended December 31   |   |
|-------------------|--------|------------------------|--------|--------|--------------------------|--------|
|              |   | 2008                   |   |   | 2009                     |   |   | 2008 |   |   | 2009 |   |
|              |   | Rate of change         |   |   | Reporting date spot rate |   |
|              |   | %                      |   |   | %                        |   |   | NIS |   |   | NIS |   |
|              |   |                   |   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| 1 US dollar       |   |                   | (1.14  | )      |                     |   | (0.71 | ) |   |   | 3.802 |   |   |   | 3.775 |   |
| 1 euro            |   |                   | (6.39  | )      |                     |   | 2.73 |   |   |   | 5.297 |   |   |   | 5.44 |   |
| CPI in points (*) |   |                   | 3.8    |   |                     |   | 3.91 |   |   |   | 125.5 |   |   |   | 130.42 |   |

|   | (*) | CPI for the month at base of 100 = 1998 |
|--------|-----|-----------------------------------------|

|   | (2) | Sensitivity analysis |
|--------|-----|----------------------|

|                                                          |   |          |    |   | Convenience      |   |
|---------------------------------------------------------------|--------|---------------|---------|--------|------------------|--------|
|                                                          |   |          |    |   | translation into |   |
|                                                          |   |          |    |   | US dollars       |   |
|                                                          |   | Equity/profit |    |   | (Note 2)         |   |
|                                                          |   | or loss       |    |   | 2009             |   |
|                                                          |   | NIS           |    |   | US$              |   |
|                                                          |   |          |    |   |             |   |
| December 31, 2009                                             |   |          |    |   |             |   |
| 1 US dollar - 10% strengthening of the NIS against the dollar |   |          | 5,550   |   |             |   | 1,470 |   |
| CPI - 10% strengthening beyond the inflation forecast (*)     |   |          |    |   |             |   |   |   |
|  (inflation forecast of 2% per year)                     |   |          | (28,126 | )      |             |   | (7,451 | ) |
|                                                          |   |          |    |   |             |   |   |   |
| December 31, 2008                                             |   |          |    |   |             |   |   |   |
| 1 US dollar - 10% strengthening of the NIS against the dollar |   |          | (21,683 | )      |             |   |   |   |
| CPI - 10% strengthening beyond the inflation forecast (*)     |   |          |    |   |             |   |   |   |
|  (inflation forecast of 2% per year)                     |   |          | (12,164 | )      |             |   |   |   |

|   | (*) | Sensitivity rates are determined according to assessments based on variable conditions in the economy. |
|--------|-----|--------------------------------------------------------------------------------------------------------|

----

----

|   | D. | Interest rate risk |
|--------|----|--------------------|

|   | (1) | Profile |
|--------|-----|---------|

|                      |        |   |       | Convenience      |   |
|---------------------------|-------------|--------|------------|------------------|--------|
|                      |        |   |       | translation into |   |
|                      |        |   |       | US dollars       |   |
|                      | December 31 |   |       | (Note 2)         |   |
|                      | 2008        |   |       | 2009             |   |   | 2009 |   |
|                      | NIS         |   |       | NIS              |   |   | US$ |   |
|                      |        |   |       |             |   |   |   |   |   |
| Fixed rate instruments    |        |   |       |             |   |   |   |   |   |
| Financial assets          |        |   | 512,324    |             |   |   | 1,227,498 |   |   |   | 325,165 |   |
| Financial liabilities     |        |   | (1,052,612 | )                |   |   | (1,825,260 | ) |   |   | (483,513 | ) |
|                      |        |   |       |             |   |   |   |   |   |   |   |   |
|                      |        |   | (540,288   | )                |   |   | (597,762 | ) |   |   | (158,348 | ) |
| Variable rate instruments |        |   |       |             |   |   |   |   |   |   |   |   |
| Financial assets          |        |   | 892        |             |   |   | 209,367 |   |   |   | 55,461 |   |
| Financial liabilities     |        |   | (51,179    | )                |   |   | (15,154 | ) |   |   | (4,014 | ) |
|                      |        |   | (50,287    | )                |   |   | 194,213 |   |   |   | 51,447 |   |

|   | (2) | Fair value sensitivity for conversion feature of convertible debentures |
|--------|-----|-------------------------------------------------------------------------|

|   | (3) | Cash flow sensitivity analysis for variable rate instruments |
|--------|-----|--------------------------------------------------------------|

----

----

|   | E. | Fair value |
|--------|----|------------|

|   | (1) | Fair values versus carrying amounts |
|--------|-----|-------------------------------------|

|                   |   | December 31, 2008 |    |   | December 31, 2009 |   |
|------------------------|--------|-------------------|---------|--------|-------------------|--------|
|                   |   | Carrying          |    |   |              |   |   | Carrying |   |   |   |   |
|                   |   | amount            |    |   | Fair value        |   |   | amount |   |   | Fair value |   |
|                   |   | NIS               |    |   | NIS               |   |   | NIS |   |   | NIS |   |
|                   |   |              |    |   |              |   |   |   |   |   |   |   |
| Debentures             |   |              |    |   |              |   |   |   |   |   |   |   |
| CPI-linked             |   |              | 904,488 |   |              |   | 751,075 |   |   |   | 1,259,639 |   |   |   | 1,335,424 |   |
|                   |   |              |    |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Convertible debentures |   |              |    |   |              |   |   |   |   |   |   |   |   |   |   |   |
| CPI - linked           |   |              | 96,945  |   |              |   | 80,282 |   |   |   | 117,942 |   |   |   | 114,813 |   |

|   | (2) | Fair value hierarchy |
|--------|-----|----------------------|

|   | — | Level 1: quoted prices (unadjusted) in active markets for identical instruments |
|--------|---------|---------------------------------------------------------------------------------|

|   | — | Level 2: inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly |
|--------|---------|---------------------------------------------------------------------------------------------------------------------|

|   | — | Level 3: inputs that are not based on observable market data (unobservable inputs) |
|--------|---------|------------------------------------------------------------------------------------|

----

----

|   | E. | Fair value (cont’d) |
|--------|----|---------------------------|

|   | (3) | Level 3 financial instruments carried at fair value |
|--------|-----|-----------------------------------------------------|

|                                                      |   | 2009   |                                                    |
|-----------------------------------------------------------|--------|--------|---------------------------------------------------------|
|                                                      |   |   | Conversionfeaturein the CPI-linkedconvertibledebentures |   |   |   | Conveniencetranslation intoUS dollars(Note 2) |   |
|                                                      |   |   | NIS                                                     |   |   |   | US$ |   |
|                                                      |   |   |                                                    |   |   |   |   |   |
| Balance at January 1, 2009                                |   |   | 43                                                      |   |   |   | 11 |   |
| Net change in fair value recognized in profit or loss (*) |   |   | 31,207                                                  |   |   |   | 8,267 |   |
| Conversion of convertible debentures                      |   |   | (717                                                    | ) |   |   | (188 | ) |
|                                                      |   |   |                                                    |   |   |   |   |   |
| Balance at December 31, 2009                              |   |   | 30,533                                                  |   |   |   | 8,088 |   |

|   | (*) | Finance income and expense |
|--------|-----|----------------------------|

----

----

|                                 |   |      |    |   |        |   |    |        |   |   | Convenience      |   |
|--------------------------------------|--------|-----------|---------|--------|-------------|--------|---------|-------------|--------|--------|------------------|--------|
|                                 |   |      |    |   |        |   |    |        |   |   | translation into |   |
|                                 |   |      |    |   |        |   |    |        |   |   | US dollars       |   |
|                                 |   | January 1 |    |   | December 31 |   |    | December 31 |   |   | (Note 2)         |   |
|                                 |   | 2008      |    |   | 2008        |   |    | 2009        |   |   | 2009             |   |
|                                 |   | NIS       |    |   | NIS         |   |    | NIS         |   |   | US$              |   |
|                                 |   |      |    |   |        |   |    |        |   |   |             |   |
| Present value of unfunded            |   |      |    |   |        |   |    |        |   |   |             |   |
|  obligations                    |   |      | 34      |   |        |   | 72      |        |   |   | 72               |   |   |   | 19 |   |
| Present value of funded obligations  |   |      | 7,334   |   |        |   | 7,664   |        |   |   | 8,548            |   |   |   | 2,264 |   |
| Total present value of obligations   |   |      | 7,368   |   |        |   | 7,736   |        |   |   | 8,620            |   |   |   | 2,283 |   |
| Fair value of plan assets            |   |      | (19,453 | )      |        |   | (17,330 | )           |   |   | (21,523          | )      |   |   | (5,701 | ) |
| Total employee benefits              |   |      | (12,085 | )      |        |   | (9,594  | )           |   |   | (12,903          | )      |   |   | (3,418 | ) |
|                                 |   |      |    |   |        |   |    |        |   |   |             |   |   |   |   |   |
| Presented under the following items: |   |      |    |   |        |   |    |        |   |   |             |   |   |   |   |   |
| Long-term employee benefits          |   |      |    |   |        |   |    |        |   |   |             |   |   |   |   |   |
|  assets (1)                     |   |      | (12,339 | )      |        |   | (10,061 | )           |   |   | (13,078          | )      |   |   | (3,464 | ) |
| Long-term employee benefits          |   |      | 254     |   |        |   | 467     |        |   |   | 175              |   |   |   | 46 |   |
|                                 |   |      | (12,085 | )      |        |   | (9,594  | )           |   |   | (12,903          | )      |   |   | (3,418 | ) |

|   | (1) | As at December 31, 2009 presented under assets classified as held-for-sale. |
|--------|-----|-----------------------------------------------------------------------------|

|   | A. | Post-employment benefit plans – defined benefit plan |
|--------|----|------------------------------------------------------------|

|   | (1) | Movement in the present value of the defined benefit obligations |
|--------|-----|------------------------------------------------------------------|

|                                         |   |   |   |   |   |   |   | Convenience      |   |
|----------------------------------------------|--------|--------|--------|--------|--------|--------|--------|------------------|--------|
|                                         |   |   |   |   |   |   |   | translation into |   |
|                                         |   |   |   |   |   |   |   | US dollars       |   |
|                                         |   |   |   |   |   |   |   | (Note 2)         |   |
|                                         |   | 2008   |   |   | 2009   |   |   | 2009             |   |
|                                         |   | NIS    |   |   | NIS    |   |   | US$              |   |
|                                         |   |   |   |   |   |   |   |             |   |   |   |   |
| Defined benefit obligation as at January 1   |   |   | 7,368  |   |   |   | 7,736  |             |   |   | 2,049 |   |
| Benefits paid                                |   |   | (6,001 | )      |   |   | (4,607 | )                |   |   | (1,220 | ) |
| Current service costs and interest costs     |   |   | 3,086  |   |   |   | 2,630  |             |   |   | 696 |   |
| Actuarial losses recognized in equity        |   |   | 3,283  |   |   |   | 2,861  |             |   |   | 758 |   |
|                                         |   |   |   |   |   |   |   |             |   |   |   |   |
| Defined benefit obligation as at December 31 |   |   | 7,736  |   |   |   | 8,620  |             |   |   | 2,283 |   |

----

----

|   | A. | Post-employment benefit plans – defined benefit plan (cont’d) |
|--------|----|---------------------------------------------------------------------------|

|   | (2) | Movement in the present value of plan assets |
|--------|-----|----------------------------------------------|

|                                          |   |   |   |   |   |   |   | Convenience      |   |
|-----------------------------------------------|--------|--------|--------|--------|--------|--------|--------|------------------|--------|
|                                          |   |   |   |   |   |   |   | translation into |   |
|                                          |   |   |   |   |   |   |   | US dollars       |   |
|                                          |   |   |   |   |   |   |   | (Note 2)         |   |
|                                          |   | 2008   |   |   | 2009   |   |   | 2009             |   |
|                                          |   | NIS    |   |   | NIS    |   |   | US$              |   |
|                                          |   |   |   |   |   |   |   |             |   |   |   |   |
| Fair value of plan assets as at January 1     |   |   | 19,452 |   |   |   | 17,330 |             |   |   | 4,590 |   |
| Contributions paid into the plan              |   |   | 4,594  |   |   |   | 4,672  |             |   |   | 1,238 |   |
| Benefits paid by the plan                     |   |   | (4,655 | )      |   |   | (2,575 | )                |   |   | (682 | ) |
| Expected return on plan assets                |   |   | 735    |   |   |   | 487    |             |   |   | 129 |   |
| Actuarial gains (losses) recognized in equity |   |   | (2,796 | )      |   |   | 1,609  |             |   |   | 426 |   |
|                                          |   |   |   |   |   |   |   |             |   |   |   |   |
| Fair value of plan assets as at December 31   |   |   | 17,330 |   |   |   | 21,523 |             |   |   | 5,701 |   |

|   | (3) | Expense recognized in profit or loss |
|--------|-----|--------------------------------------|

|                           |   |                   |   |   |     |   |   | Convenience      |   |
|--------------------------------|--------|------------------------|--------|--------|----------|--------|--------|------------------|--------|
|                           |   |                   |   |   |     |   |   | translation into |   |
|                           |   |                   |   |   |     |   |   | US dollars       |   |
|                           |   | Year ended December 31 |   |   | (Note 2) |   |
|                           |   | 2008                   |   |   | 2009     |   |   | 2009             |   |
|                           |   | NIS                    |   |   | NIS      |   |   | US$              |   |
|                           |   |                   |   |   |     |   |   |             |   |   |   |   |
| Current service costs          |   |                   | 2,731  |   |     |   | 2,301  |             |   |   | 609 |   |
| Interest costs                 |   |                   | 356    |   |     |   | 329    |             |   |   | 87 |   |
| Expected return on plan assets |   |                   | (736   | )      |     |   | (487   | )                |   |   | (129 | ) |
| Termination benefits           |   |                   | 1,622  |   |     |   | 33     |             |   |   | 9 |   |
|                           |   |                   |   |   |     |   |   |             |   |   |   |   |
|                           |   |                   | 3,973  |   |     |   | 2,176  |             |   |   | 576 |   |

|            |   |                   |   |   |     |   |   | Convenience      |   |
|-----------------|--------|------------------------|--------|--------|----------|--------|--------|------------------|--------|
|            |   |                   |   |   |     |   |   | translation into |   |
|            |   |                   |   |   |     |   |   | US dollars       |   |
|            |   | Year ended December 31 |   |   | (Note 2) |   |
|            |   | 2008                   |   |   | 2009     |   |   | 2009             |   |
|            |   | NIS                    |   |   | NIS      |   |   | US$              |   |
|            |   |                   |   |   |     |   |   |             |   |   |   |   |
| Salaries        |   |                   | 4,353  |   |     |   | 2,334  |             |   |   | 618 |   |
| Finance expense |   |                   | (380   | )      |     |   | (158   | )                |   |   | (42 | ) |
|            |   |                   |   |   |     |   |   |             |   |   |   |   |
|            |   |                   | 3,973  |   |     |   | 2,176  |             |   |   | 576 |   |

----

----

|   | A. | Post-employment benefit plans – defined benefit plan (cont’d) |
|--------|----|---------------------------------------------------------------------------|

|   | (4) | Actual return: |
|--------|-----|----------------|

|                         |   | Year ended December 31 |   |   | Conveniencetranslation intoUS dollars(Note 2) |   |
|------------------------------|--------|------------------------|--------|--------|-----------------------------------------------|--------|
|                         |   | 2008                   |   |   | 2009                                          |   |   | 2009 |   |
|                         |   | NIS                    |   |   | NIS                                           |   |   | US$ |   |
|                         |   |                   |   |   |                                          |   |   |   |   |   |   |   |
| Actual return on plan assets |   |                   | (2,060 | )      |                                          |   | 2,095 |   |   |   | 555 |   |

|   | (5) | Actuarial gains and losses recognized in other comprehensive income |
|--------|-----|---------------------------------------------------------------------|

|                                 |   |   |   |   |   |   |   | Convenience      |   |
|--------------------------------------|--------|--------|--------|--------|--------|--------|--------|------------------|--------|
|                                 |   |   |   |   |   |   |   | translation into |   |
|                                 |   |   |   |   |   |   |   | US dollars       |   |
|                                 |   |   |   |   |   |   |   | (Note 2)         |   |
|                                 |   | 2008   |   |   | 2009   |   |   | 2009             |   |
|                                 |   | NIS    |   |   | NIS    |   |   | US$              |   |
|                                 |   |   |   |   |   |   |   |             |   |   |   |   |
| Cumulative amount as at January 1    |   |   | -      |   |   |   | 6,079  |             |   |   | 1,610 |   |
| Recognized amount during the period  |   |   | 6,079  |   |   |   | 1,253  |             |   |   | 332 |   |
|                                 |   |   |   |   |   |   |   |             |   |   |   |   |
| Cumulative amounts as at December 31 |   |   | 6,079  |   |   |   | 7,332  |             |   |   | 1,942 |   |

|   | (6) | Actuarial assumptions |
|--------|-----|-----------------------|

|                                           |   | 2008   |      |   | 2009   |   |
|------------------------------------------------|--------|--------|-----------|--------|--------|--------|
|                                           |   | %      |      |   | %      |   |
|                                           |   |   |      |   |   |   |   |   |
| Discount rate as at December 31                |   |   | 3.43-5.49 |   |   |   | 3.77-5.69 |   |
| Expected return on plan assets as at January 1 |   |   | 3.70-4.49 |   |   |   | 1.68-2.88 |   |
| Future salary increases (*)                    |   |   | 1.5-4     |   |   |   | 1.5-4 |   |

|   | (*) | Future salary increases were determined on the basis of the past experience of the Group, distinguishing between different employee population. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | B. | Post-employment benefit plans – defined contribution plan |
|--------|----|-----------------------------------------------------------------|

|                                               |   | Year ended December 31 |   |   | Conveniencetranslation intoUS dollars(Note 2) |   |
|----------------------------------------------------|--------|------------------------|--------|--------|-----------------------------------------------|--------|
|                                               |   | 2008                   |   |   | 2009                                          |   |   | 2009 |   |
|                                               |   | NIS                    |   |   | NIS                                           |   |   | US$ |   |
|                                               |   |                   |   |   |                                          |   |   |   |   |
| Amount recognized as expense in respect of defined |   |                   |   |   |                                          |   |   |   |   |
|  contribution plan                            |   |                   | 611    |   |                                          |   | 2,321 |   |   |   | 615 |   |

|   | A. | Details regarding the tax environment of the Group |
|--------|----|----------------------------------------------------|

|   | (1) | Amendments to the Income Tax Ordinance and the Land Appreciation Tax Law |
|--------|-----|--------------------------------------------------------------------------|

|   | (2) | Taxation under inflation |
|--------|-----|--------------------------|

----

----

|   | A. | Details regarding the tax environment of the Group (cont'd) |
|--------|----|-------------------------------------------------------------|

|   | (2) | Taxation under inflation (cont'd) |
|--------|-----|-----------------------------------|

|   | (3) | On February 4, 2010, the Tax Authorities issued a Temporary Order for amendment to the Income Tax Ordinance for the 2007, 2008 and 2009 tax years, prescribing that Accounting under IFRSs rules cannot determine taxable income even though the IFRS applies in the financial statements. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | Composition of income tax expenses (income) |
|--------|----|---------------------------------------------|

|                               |   |                   |   |   |     |   |   | Convenience      |   |
|------------------------------------|--------|------------------------|--------|--------|----------|--------|--------|------------------|--------|
|                               |   |                   |   |   |     |   |   | translation into |   |
|                               |   |                   |   |   |     |   |   | U.S. dollars     |   |
|                               |   | Year ended December 31 |   |   | (Note 2) |   |
|                               |   | 2008                   |   |   | 2009     |   |   | 2009             |   |
|                               |   | NIS                    |   |   | NIS      |   |   | US$              |   |
|                               |   |                   |   |   |     |   |   |             |   |
| Current tax expenses               |   |                   |   |   |     |   |   |             |   |
| Current period                     |   |                   | 18,161 |   |     |   | 32,053 |             |   |   | 8,491 |   |
| Adjustments for prior periods, net |   |                   | 512    |   |     |   | 480    |             |   |   | 127 |   |
|                               |   |                   | 18,673 |   |     |   | 32,533 |             |   |   | 8,618 |   |
|                               |   |                   |   |   |     |   |   |             |   |   |   |   |
| Deferred tax expenses              |   |                   | 4,074  |   |     |   | 25,251 |             |   |   | 6,689 |   |
|                               |   |                   |   |   |     |   |   |             |   |   |   |   |
| Income tax expense                 |   |                   | 22,747 |   |     |   | 57,784 |             |   |   | 15,307 |   |

----

----

|   | C. | Income tax recognized in equity |
|--------|----|---------------------------------|

|                 |   | Year ended December 31 |   |   | Convenience |   |
|----------------------|--------|------------------------|--------|--------|-------------|--------|
|                 |   | 2008                   |   |   | 2009        |   |   | translation |   |
|                 |   |                   |   |   | Tax         |   |   |   |   |   |   |   |   | Tax |   |   |   |   |   | into |   |
|                 |   | Before                 |   |   | expenses    |   |   | Net of |   |   | Before |   |   | expenses |   |   | Net of |   |   | US dollars |   |
|                 |   | tax                    |   |   | (benefit)   |   |   | tax |   |   | tax |   |   | (benefit) |   |   | tax |   |   | (Note 2) |   |
|                 |   | NIS                    |   |   | US$         |   |
|                 |   |                   |   |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale   |   |                   | 18,065 |   |        |   | (4,516 | ) |   |   | 13,549 |   |   |   | (19,386 | ) |   |   | 4,846 |   |   |   | (14,540 | ) |   |   | 1,284 |   |
| Defined benefit      |   |                   |   |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  plan actuarial |   |                   |   |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  losses, net    |   |                   | 5,163  |   |        |   | (1,291 | ) |   |   | 3,872 |   |   |   | 1,236 |   |   |   | (309 | ) |   |   | 927 |   |   |   | (82 | ) |
| Contribution by      |   |                   |   |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  parent company |   |                   | -      |   |        |   | - |   |   |   | - |   |   |   | (1,890 | ) |   |   | 473 |   |   |   | (1,417 | ) |   |   | 125 |   |
|                 |   |                   | 23,228 |   |        |   | (5,807 | ) |   |   | 17,421 |   |   |   | (20,040 | ) |   |   | 5,010 |   |   |   | (15,030 | ) |   |   | 1,327 |   |

|   | D. | Reconciliation between the theoretical tax on the pre-tax income and the tax expense: |
|--------|----|---------------------------------------------------------------------------------------|

|                                                        |   |                   |   |    |     |   |    | Convenience      |   |
|-------------------------------------------------------------|--------|------------------------|--------|---------|----------|--------|---------|------------------|--------|
|                                                        |   |                   |   |    |     |   |    | translation into |   |
|                                                        |   |                   |   |    |     |   |    | U.S. dollars     |   |
|                                                        |   | Year ended December 31 |   |    | (Note 2) |   |
|                                                        |   | 2008                   |   |    | 2009     |   |    | 2009             |   |
|                                                        |   | NIS                    |   |    | NIS      |   |    | US$              |   |
|                                                        |   |                   |   |    |     |   |    |             |   |   |   |   |
| Income before income tax                                    |   |                   | 18,935 |    |     |   | 157,794 |             |   |   | 41,800 |   |
|                                                        |   |                   |   |    |     |   |    |             |   |   |   |   |
| Statutory tax rate of the Company                           |   |                   | 27     | %  |     |   | 26      | %           |   |   | 26 | %  |
|                                                        |   |                   |   |    |     |   |    |             |   |   |   |   |
| Tax calculated according to statutory tax rate              |   |                   | 5,112  |    |     |   | 41,026  |             |   |   | 10,868 |   |
|                                                        |   |                   |   |    |     |   |    |             |   |   |   |   |
| Additional tax (tax saving) in respect of:                  |   |                   |   |    |     |   |    |             |   |   |   |   |
|                                                        |   |                   |   |    |     |   |    |             |   |   |   |   |
| Non-deductible expenses                                     |   |                   | 2,981  |    |     |   | 2,126   |             |   |   | 563 |   |
| Share-based compensation                                    |   |                   | 926    |    |     |   | 1,289   |             |   |   | 341 |   |
| Utilization of tax losses and benefits from prior years     |   |                   |   |    |     |   |    |             |   |   |   |   |
|  for which deferred taxes were not created             |   |                   | -      |    |     |   | 3,218   |             |   |   | 852 |   |
| Differences between the definition of capital and           |   |                   |   |    |     |   |    |             |   |   |   |   |
|  assets for Israeli tax purposes and other differences |   |                   | (1,731 | )       |     |   | (3,982  | )                |   |   | (1,054 | ) |
| Current year tax losses and benefits for which              |   |                   |   |    |     |   |    |             |   |   |   |   |
|  deferred taxes were not created                       |   |                   | 13,792 |    |     |   | 13,299  |             |   |   | 3,523 |   |
| Taxes in respect of previous years                          |   |                   | 505    |    |     |   | 477     |             |   |   | 126 |   |
| Effect of change in tax rate                                |   |                   | 1,162  |    |     |   | 334     |             |   |   | 88 |   |
| Income tax expenses                                         |   |                   | 22,747 |    |     |   | 57,787  |             |   |   | 15,307 |   |

----

----

|   | E. | Deferred tax assets and liabilities |
|--------|----|-------------------------------------|

|   | (1) | Recognized deferred tax assets and liabilities |
|--------|-----|------------------------------------------------|

|                                     |   |   Property, |    |   |     |   |   |         |   |   |   Carry- |   |   |       |    |   |   |   |   |   |   |   | Convenience |   |
|------------------------------------------|--------|------------------|---------|--------|----------|--------|--------|--------------|--------|--------|---------------|--------|--------|------------|---------|--------|--------|--------|--------|--------|--------|--------|-------------|--------|
|                                     |   | equipment        |    |   |     |   |   |         |   |   | forward       |   |   | Unrealized |    |   |   |   |   |   |   |   | translation |   |
|                                     |   | and              |    |   |     |   |   | Allowance    |   |   | tax losses    |   |   | losses on  |    |   |   |   |   |   |   |   | into US     |   |
|                                     |   | intangible       |    |   | Employee |   |   | for doubtful |   |   | and           |   |   | marketable |    |   |   |   |   |   |   |   | dollars     |   |
|                                     |   | assets           |    |   | benefits |   |   | debts        |   |   | deductions    |   |   | securities |    |   | Other  |   |   | Total  |   |   | (Note 2)    |   |
|                                     |   | NIS              |    |   | NIS      |   |   | NIS          |   |   | NIS           |   |   | NIS        |    |   | NIS    |   |   | NIS    |   |   | US$         |   |
| Balance of deferred tax assets           |   |             |    |   |     |   |   |         |   |   |          |   |   |       |    |   |   |   |   |   |   |   |        |   |
|  (liability)as at January 1, 2008   |   |             | (21,593 | )      |     |   | (677   | )            |   |   | 5,277         |   |   |       | 14,648  |   |   |   | -      |   |   |   | 2,052       |   |   |   | (293 | ) |   |   |   |
| Recognized in profit or loss             |   |             | (3,785  | )      |     |   | (1,541 | )            |   |   | (213          | )      |   |       | (1,224  | )      |   |   | 2,743  |   |   |   | (54         | )      |   |   | (4,074 | ) |   |   |   |
| Recognized in equity                     |   |             | -       |   |     |   | 1,291  |         |   |   | -             |   |   |       | -       |   |   |   | 4,516  |   |   |   | -           |   |   |   | 5,807 |   |   |   |   |
|                                     |   |             |    |   |     |   |   |         |   |   |          |   |   |       |    |   |   |   |   |   |   |   |        |   |   |   |   |   |   |   |   |
| Balance of deferred tax asset            |   |             |    |   |     |   |   |         |   |   |          |   |   |       |    |   |   |   |   |   |   |   |        |   |   |   |   |   |   |   |   |
|  (liability) as at January 1, 2009  |   |             | (25,378 | )      |     |   | (927   | )            |   |   | 5,064         |   |   |       | 13,424  |   |   |   | 7,259  |   |   |   | 1,998       |   |   |   | 1,440 |   |   |   | 381 |   |
| Recognized in profit or loss             |   |             | (9,366  | )      |     |   | (1,030 | )            |   |   | 377           |   |   |       | (10,205 | )      |   |   | (4,012 | )      |   |   | (1,015      | )      |   |   | (25,251 | ) |   |   | (6,689 | ) |
| Recognized in equity                     |   |             | -       |   |     |   | 309    |         |   |   | -             |   |   |       | -       |   |   |   | (4,846 | )      |   |   | (473        | )      |   |   | (5,010 | ) |   |   | (1,327 | ) |
| Transfer to assets and liabilities       |   |             |    |   |     |   |   |         |   |   |          |   |   |       |    |   |   |   |   |   |   |   |        |   |   |   |   |   |   |   |   |   |
|  classified as held-for-sale        |   |             | 34,744  |   |     |   | 1,684  |         |   |   | (5,342        | )      |   |       | -       |   |   |   | -      |   |   |   | (950        | )      |   |   | 30,136 |   |   |   | 7,983 |   |
| Balance of deferred tax asset            |   |             |    |   |     |   |   |         |   |   |          |   |   |       |    |   |   |   |   |   |   |   |        |   |   |   |   |   |   |   |   |   |
|  (liability)as at December 31, 2009 |   |             | -       |   |     |   | 36     |         |   |   | 99            |   |   |       | 3,219   |   |   |   | (1,599 | )      |   |   | (440        | )      |   |   | 1,315 |   |   |   | 348 |   |

----

----

|   | E. | Deferred tax assets and liabilities (cont’d) |
|--------|----|----------------------------------------------------|

|   | (2) | Unrecognized deferred tax assets and carry-forward tax losses |
|--------|-----|---------------------------------------------------------------|

|   | F. | Tax assessments |
|--------|----|-----------------|

|   | A. | Contingent liabilities |
|--------|----|------------------------|

|   | 1. | On January 2, 2005, a claim was made against B Communications and three other companies regarding alleged infringement of Israeli Patent No. 76993 (hereinafter - the 2005 Claim). The 2005 Claim states that the monetary amount cannot be determined at this stage and that it has been assessed for the purpose of court fees only at NIS 10 million, against all defendants collectively and separately. On July 17, 2005, a statement of defense was filed against plaintiffs and a third party notice was filed against the providers of the telecommunications systems allegedly infringing on the patent (hereinafter - the Third Party Defendants), seeking indemnification and compensation for any liability that may be imposed in the context of the 2005 Claim (hereinafter - the Third Party Proceedings). The plaintiffs have also initiated similar proceedings against other telecommunication companies in other countries, including the United Kingdom and the United States. Some telecommunication companies, including one of the initial defendants named in this 2005 Claim, have settled with the plaintiffs and obtained a license, whereas other telecommunication companies have refused to settle. One of the Third Party Defendants in the Third Party Proceedings is Nortel Networks Israel (Sales and Marketing) Ltd. (hereinafter - Nortel Israel). Further to insolvency proceeding which has been taken against Nortel, on November 24, 2009, B Communications and Nortel Israel's Trustees have reached a Settlement Agreement, resolving all disputes in connection with the Third Party Proceedings, between B Communications and Nortel Israel (hereinafter - Settlement Agreement). Under the terms of the Settlement Agreement, Nortel Israel paid B Communications NIS 420,000 (hereinafter - the First Consideration), and an additional amount of up to NIS 367,500 will be paid out of the future consideration that may be received by Nortel Israel from future sales of its divisions or business activities to third parties. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | A. | Contingent liabilities (cont’d) |
|--------|----|---------------------------------------|

|   | 2. | In June 2006, the Ministry of Communications demanded that 012 Golden Lines pay NIS 7.5 million in royalties based on its calling card income for the years 1997 through 2000. In response to the Ministry of Communications’ demand, 012 Golden Lines provided a legal opinion indicating that the demand is beyond the scope of authority of the Ministry of Communications. The response by 012 Golden Lines also included a demand for the return of NIS 9.9 million in previously made payments to the Ministry of Communications due to overcharges. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | As part of the agreement with Ampal, as described in Note 6, all of the legal proceedings which related to B Communications’ legacy communication business, including the legal proceedings mentioned in this financial report, were fully assumed by Ampal. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | On September 2, 2007, a motion to certify a class action was filed with the Tel Aviv - Jaffa District Court, against several corporations operating eCommerce sites, including GoldMind’s P1000 website, as well as against several suppliers. The petitioners claim that these sites have deceived and defrauded participants in online auctions, by unrightfully preventing them from wining products that the sites determined as “under-priced.”  The petition also claims that this practice was carried out through the use of fictitious bidders during the auction process.  In addition, the petitioners asked for a temporary injunction to prevent the websites from amending, erasing, or disposing of any auction or sales data that is in their possession, in order to enable the petitioners to discover the extent of the alleged fraud and related damages.  On October 15, 2007, the Court granted the petitioners such temporary injunction.  On January 13, 2008, we filed our response to these petitions.  |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | A. | Contingent liabilities (cont’d) |
|--------|----|---------------------------------------|

|   | 5. | From time to time, claims arising from the normal course of business are brought against the Company. In the opinion of management, based on the advice of legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the financial position, liquidity or results of operations of the Company. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | Commitments |
|--------|----|-------------|

|   | The Board of Directors resolved to indemnify the directors and officers of the Company for damages that they may incur in connection with the Company being a public company, to the extent that these damages are not covered by the directors’ and officers’ liability insurance. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A. | Share Based Payments |
|--------|----|----------------------|

|   | B. | Treasury Shares |
|--------|----|-----------------|

----

----

|   | C. | B Communications 2007 Equity Incentive Plan |
|--------|----|---------------------------------------------|

|                               |   | February 2008  |   |
|------------------------------------|--------|----------------|--------|
|                               |   |           |   |
| Valuation assumptions:             |   |           |   |
| Fair value of option at grant date |   | NIS 18.03 |   |
| Share price at grant date          |   | NIS 36.34 |   |
| Exercise price                     |   | NIS 36.34 |   |
| Expected dividend yield            |   |           | 0      | % |
| Expected volatility                |   |           | 52     | % |
| Expected term (years)              |   |           | 5      |   |
| Risk-free interest rate            |   |           | 5.2    | % |

|   | D. | Reserve for available-for-sale financial assets |
|--------|----|-------------------------------------------------|

----

----

|                                                       |   |                   |    |   |     |   |    | Convenience      |   |
|------------------------------------------------------------|--------|------------------------|---------|--------|----------|--------|---------|------------------|--------|
|                                                       |   |                   |    |   |     |   |    | translation into |   |
|                                                       |   |                   |    |   |     |   |    | US dollars       |   |
|                                                       |   | Year ended December 31 |    |   | (Note 2) |   |
|                                                       |   | 2008                   |    |   | 2009     |   |    | 2009             |   |
|                                                       |   | NIS                    |    |   | NIS      |   |    | US$              |   |
|                                                       |   |                   |    |   |     |   |    |             |   |
| Salaries and incidentals:                                  |   |                   |    |   |     |   |    |             |   |
| Operating                                                  |   |                   | 156,911 |   |     |   | 148,664 |             |   |   | 39,381 |   |
| General and administrative                                 |   |                   | 30,258  |   |     |   | 28,104  |             |   |   | 7,445 |   |
| Share-based payments                                       |   |                   | 3,248   |   |     |   | 4,956   |             |   |   | 1,313 |   |
|                                                       |   |                   | 190,417 |   |     |   | 181,724 |             |   |   | 48,139 |   |
| Total salaries and incidentals                             |   |                   |    |   |     |   |    |             |   |   |   |   |
| Less – salaries recognized in intangible assets |   |                   | (6,500  | )      |     |   | (10,585 | )                |   |   | (2,804 | ) |
|                                                       |   |                   |    |   |     |   |    |             |   |   |   |   |
|                                                       |   |                   | 183,917 |   |     |   | 171,139 |             |   |   | 45,335 |   |

|                                        |   |                   |    |   |     |   |    | Convenience      |   |
|---------------------------------------------|--------|------------------------|---------|--------|----------|--------|---------|------------------|--------|
|                                        |   |                   |    |   |     |   |    | translation into |   |
|                                        |   |                   |    |   |     |   |    | US dollars       |   |
|                                        |   | Year ended December 31 |    |   | (Note 2) |   |
|                                        |   | 2008                   |    |   | 2009     |   |    | 2009             |   |
|                                        |   | NIS                    |    |   | NIS      |   |    | US$              |   |
|                                        |   |                   |    |   |     |   |    |             |   |   |   |   |
| General expenses                            |   |                   | 696,813 |   |     |   | 760,911 |             |   |   | 201,567 |   |
| Building maintenance                        |   |                   | 11,591  |   |     |   | 13,177  |             |   |   | 3,491 |   |
| Services and maintenance by sub-contractors |   |                   | 13,900  |   |     |   | 21,100  |             |   |   | 5,589 |   |
| Vehicle maintenance expenses                |   |                   | 7,027   |   |     |   | 5,068   |             |   |   | 1,342 |   |
| Royalties to the State of Israel            |   |                   | 4,400   |   |     |   | 3,046   |             |   |   | 807 |   |
| Collection fees                             |   |                   | 7,324   |   |     |   | 7,661   |             |   |   | 2,029 |   |
|                                        |   |                   |    |   |     |   |    |             |   |   |   |   |
|                                        |   |                   | 741,055 |   |     |   | 810,963 |             |   |   | 214,825 |   |

----

----

|                                                |   |                   |    |   |     |   |     | Convenience      |   |
|-----------------------------------------------------|--------|------------------------|---------|--------|----------|--------|----------|------------------|--------|
|                                                |   |                   |    |   |     |   |     | translation into |   |
|                                                |   |                   |    |   |     |   |     | US dollars       |   |
|                                                |   | Year ended December 31 |    |   | (Note 2) |   |
|                                                |   | 2008                   |    |   | 2009     |   |     | 2009             |   |
|                                                |   | NIS                    |    |   | NIS      |   |     | US$              |   |
|                                                |   |                   |    |   |     |   |     |             |   |   |   |   |
| Interest income on bank deposits                    |   |                   | (13,411 | )      |     |   | (6,128   | )                |   |   | (1,623 | ) |
| Income from marketable securities, net              |   |                   | -       |   |     |   | (118,169 | )                |   |   | (31,303 | ) |
| Net change in fair value of conversion feature with |   |                   |    |   |     |   |     |             |   |   |   |   |
|  respect to convertible debentures             |   |                   | (12,377 | )      |     |   | -        |             |   |   | - |   |
| Foreign exchange differences                        |   |                   | (1,015  | )      |     |   | (7,275   | )                |   |   | (1,927 | ) |
| Other finance income                                |   |                   | (399    | )      |     |   | (234     | )                |   |   | (62 | ) |
| Total finance income                                |   |                   | (27,202 | )      |     |   | (131,806 | )                |   |   | (34,915 | ) |
|                                                |   |                   |    |   |     |   |     |             |   |   |   |   |
| Interest expenses for financial liabilities         |   |                   | 87,609  |   |     |   | 92,257   |             |   |   | 24,438 |   |
| Expenses from marketable securities, net            |   |                   | 38,568  |   |     |   | -        |             |   |   | - |   |
| Net change in fair value of conversion feature with |   |                   |    |   |     |   |     |             |   |   |   |   |
|  respect to convertible debentures             |   |                   | -       |   |     |   | 31,207   |             |   |   | 8,267 |   |
| Foreign exchange differences                        |   |                   | 10,138  |   |     |   | 8,750    |             |   |   | 2,317 |   |
| Other finance expenses                              |   |                   | 2,385   |   |     |   | 1,694    |             |   |   | 449 |   |
| Total finance expenses                              |   |                   | 138,700 |   |     |   | 133,908  |             |   |   | 35,471 |   |
| Finance expense (income) recognized in profit       |   |                   |    |   |     |   |     |             |   |   |   |   |
| or loss, net (1)                                    |   |                   | 111,498 |   |     |   | 2,102    |             |   |   | 556 |   |

|   | (1) | Less amounts recognized directly in other comprehensive income. |
|--------|-----|-----------------------------------------------------------------|

----

----

|                                                      |   | Year ended December 31 |   |
|-----------------------------------------------------------|--------|------------------------|--------|
|                                                      |   | 2008                   |   |   | 2009 |   |
|                                                      |   | Thousands of           |   |   | Thousands of |   |
|                                                      |   | shares of NIS 1        |   |   | shares of NIS 1 |   |
|                                                      |   | par value              |   |   | par value |   |
|                                                      |   |                   |   |   |   |   |   |   |
| Balance as at January 1                                   |   |                   | 23,373 |   |   |   | 19,654 |   |
| Effect of own shares held by the Group                    |   |                   | (1,822 | ) |   |   | (1,308 | ) |
| Effect of conversion of convertible debt into shares      |   |                   | *-     |   |   |   | - |   |
|                                                      |   |                   |   |   |   |   |   |   |
| Weighted average number of ordinary shares at December 31 |   |                   | 21,551 |   |   |   | 18,346 |   |

|                                                                  |   | Year ended December 31 |    |
|-----------------------------------------------------------------------|--------|------------------------|---------|
|                                                                  |   | 2008                   |    |   | 2009 |   |
|                                                                  |   | NIS                    |    |   | NIS |   |
|                                                                  |   |                   |    |   |   |   |   |   |
| Profit (loss) attributable to ordinary shareholders (basic)           |   |                   | (18,315 | ) |   |   | 62,239 |   |
| Effect of expense of convertible debt                                 |   |                   | (2,536  | ) |   |   | - |   |
| Profit attributable to ordinary shareholders (diluted) at December 31 |   |                   | (20,851 | ) |   |   | 62,239 |   |

|                                                                |   | Year ended December 31 |   |
|---------------------------------------------------------------------|--------|------------------------|--------|
|                                                                |   | 2008                   |   |   | 2009 |   |
|                                                                |   | NIS                    |   |   | NIS |   |
|                                                                |   |                   |   |   |   |   |   |   |
| Weighted average number of ordinary shares (basic)                  |   |                   | 21,551 |   |   |   | 18,346 |   |
| Effect of convertible debt                                          |   |                   | 1,837  |   |   |   | - |   |
|                                                                |   |                   |   |   |   |   |   |   |
| Weighted average number of ordinary shares (diluted) at December 31 |   |                   | 23,388 |   |   |   | 18,346 |   |

----

----

|   | A. | Key management personnel compensation (including directors) |
|--------|----|-------------------------------------------------------------|

|                 |   |                   |   |   |             |   |   | Convenience |   |
|----------------------|--------|------------------------|--------|--------|------------------|--------|--------|-------------|--------|
|                 |   | Year ended December 31 |   |   | translation into |   |
|                 |   | 2008                   |   |   | 2009             |   |   | US dollars  |   |
|                 |   |                   |   |   |             |   |   | (Note 2)    |   |
|                 |   | Amount                 |   |   | Amount           |   |   | 2009        |   |
|                 |   | NIS                    |   |   | NIS              |   |   | US$         |   |
|                 |   |                   |   |   |             |   |   |        |   |   |   |   |
| Employee benefits    |   |                   | 11,106 |   |             |   | 11,112 |        |   |   | 2,944 |   |
| Share-based payments |   |                   | 3,429  |   |             |   | 4,956  |        |   |   | 1,313 |   |
|                 |   |                   |   |   |             |   |   |        |   |   |   |   |
|                 |   |                   | 14,535 |   |             |   | 16,068 |        |   |   | 4,257 |   |

|                                |   |                   |   |   |             |   |   | Convenience |   |
|-------------------------------------|--------|------------------------|--------|--------|------------------|--------|--------|-------------|--------|
|                                |   | Year ended December 31 |   |   | translation into |   |
|                                |   | 2008                   |   |   | 2009             |   |   | US dollars  |   |
|                                |   |                   |   |   |             |   |   | (Note 2)    |   |
|                                |   | Amount                 |   |   | Amount           |   |   | 2009        |   |
|                                |   | NIS                    |   |   | NIS              |   |   | US$         |   |
|                                |   |                   |   |   |             |   |   |        |   |
| Total compensation to director      |   |                   |   |   |             |   |   |        |   |
|  not employed by the Company   |   |                   | 460    |   |             |   | 492    |        |   |   | 130 |   |
| Total compensation to key           |   |                   |   |   |             |   |   |        |   |   |   |   |
|  management personnel employed |   |                   |   |   |             |   |   |        |   |   |   |   |
|  by the Company                |   |                   | 14,535 |   |             |   | 16,070 |        |   |   | 4,257 |   |
|                                |   |                   |   |   |             |   |   |        |   |   |   |   |
|                                |   |                   | 14,995 |   |             |   | 16,562 |        |   |   | 4,387 |   |

----

----

|   | C. | Transactions with related and interested parties |
|--------|----|--------------------------------------------------|

|               |   |                   |   |   |     |   |   | Convenience      |   |
|--------------------|--------|------------------------|--------|--------|----------|--------|--------|------------------|--------|
|               |   |                   |   |   |     |   |   | translation into |   |
|               |   |                   |   |   |     |   |   | US dollars       |   |
|               |   | Year ended December 31 |   |   | (Note 2) |   |
|               |   | 2008                   |   |   | 2009     |   |   | 2009             |   |
|               |   | Value of transactions  |   |
|               |   | NIS                    |   |   | NIS      |   |   | US$              |   |
|               |   |                   |   |   |     |   |   |             |   |   |   |   |
| Revenues           |   |                   | 5,395  |   |     |   | 11,857 |             |   |   | 3,141 |   |
|               |   |                   |   |   |     |   |   |             |   |   |   |   |
| Operating expenses |   |                   | 13,283 |   |     |   | 13,288 |             |   |   | 3,520 |   |
|               |   |                   |   |   |     |   |   |             |   |   |   |   |
| Finance expenses   |   |                   | 768    |   |     |   | 837    |             |   |   | 222 |   |

|                |   |                  |   |   |                   |   |   |     |   |   | Convenience      |   |
|---------------------|--------|-----------------------|--------|--------|------------------------|--------|--------|----------|--------|--------|------------------|--------|
|                |   |                  |   |   |                   |   |   |     |   |   | translation into |   |
|                |   |                  |   |   |                   |   |   |     |   |   | US dollars       |   |
|                |   | January 1,            |   |   | Year ended December 31 |   |   | (Note 2) |   |
|                |   | 2008                  |   |   | 2008                   |   |   | 2009     |   |   | 2009             |   |
|                |   | Value of transactions |   |
|                |   | NIS                   |   |   | NIS                    |   |   | NIS      |   |   | US$              |   |
|                |   |                  |   |   |                   |   |   |     |   |   |             |   |   |   |   |   |
| Current assets (1)  |   |                  | 4,294  |   |                   |   | 1,729  |     |   |   | 5,782            |   |   |   | 1,531 |   |
|                |   |                  |   |   |                   |   |   |     |   |   |             |   |   |   |   |   |
| Current liabilities |   |                  | 211    |   |                   |   | 3,223  |     |   |   | 90               |   |   |   | 24 |   |

|   | (1) | For the purpose of financing the acquisition of the controlling interest in Bezeq The Israel Telecommunications Corp., Ltd. (for more details see Note 30), B Communications received an undertaking by Eurocom, whereby Eurocom granted B Communications an option to provide upon B Communications demand at any time after 120 days a loan of up to NIS 1.2 billion, bearing interest at the “risk-free” or lower rate and subordinated to any committed third-party financing for the abovementioned acquisition. B Communications did not exercise this option. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                                                            |   | Country of    |   | Ownership |   |
|-----------------------------------------------------------------|--------|---------------|--------|-----------|--------|
|                                                            |   | incorporation |   | interest  |   |
|                                                            |   |          |   | 2009      |   |
|                                                            |   |          |   |      |   |   |
| B Communications Ltd. (formerly: 012 Smile.Communications Ltd.) |   | Israel        |   |      | 76.62  | % |
| Goldmind-Media Ltd. (formerly: Smile.Media Ltd.)                |   | Israel        |   |      | 100    | % |
| Internet Gold International Ltd.                                |   | Israel        |   |      | 100    | % |
| IG Vest Ltd.*                                                   |   | Israel        |   |      | 100    | % |
|                                                            |   |          |   |      |   |   |
| Subsidiary of B Communications Ltd.                             |   |          |   |      |   |   |
| 012 Telecom Ltd.                                                |   | Israel        |   |      | 100    | % |
|                                                            |   |          |   |      |   |   |
| Subsidiaries of Goldmind–Media Ltd.                       |   |          |   |      |   |   |
| Start Net Ltd.                                                  |   | Israel        |   |      | 100    | % |
| Nirshamim Lalimudim Ltd.                                        |   | Israel        |   |      | 100    | % |
| Hype Active Media Ltd.                                          |   | Israel        |   |      | 100    | % |
| Seret Israel's Movies Portal Ltd.                               |   | Israel        |   |      | 51     | % |
|                                                            |   |          |   |      |   |   |
| The Money Interactive Ltd. *                                    |   | Israel        |   |      | 100    | % |
| Goldmind.Limudim Ltd.                                           |   | Israel        |   |      | 100    | % |

|   | * | Inactive |
|--------|---|----------|

|   | A. | General |
|--------|----|---------|

----

----

|   | B. | Reconciliation of equity |
|--------|----|--------------------------|

|                        |   |   |   |   |            |    |      | Effect of the     |   |   |     |   |   |    |      |   | Effect of the |    |      |   |   |
|-----------------------------|--------|--------|--------|--------|-----------------|---------|-----------|-------------------|--------|--------|----------|--------|--------|---------|-----------|--------|---------------|---------|-----------|--------|--------|
|                        |   |   |   |   |            |    |      | transition to     |   |   |     |   |   |    |      |   | transition to |    |      |   |   |
|                        |   |   |   |   | US GAAP         |    |      | IFRS              |   |   | IFRS     |   |   | US GAAP |      |   | IFRS          |    |      | IFRS   |   |
|                        |   |   |   |   | January 1, 2008 |    |      | December 31, 2008 |   |
|                        |   | Note   |   |   | NIS             |    |      | NIS               |   |   | NIS      |   |   | NIS     |      |   | NIS           |    |      | NIS    |   |
|                        |   |   |   |   |            |    |      |              |   |   |     |   |   |    |      |   |          |    |      |   |   |
| Assets                      |   |   |   |   |            |    |      |              |   |   |     |   |   |    |      |   |          |    |      |   |   |
| Cash and cash equivalents   |   |   |   |   |            | 601,926 |      |              |   | -      |     |   |   | 601,926 |      |   |          | 86,090  |      |   |   | - |   |   |   | 86,090 |   |
| Marketable securities       |   |   |   |   |            | 161,353 |      |              |   | -      |     |   |   | 161,353 |      |   |          | 214,895 |      |   |   | - |   |   |   | 214,895 |   |
| Trade receivables           |   |   |   |   |            | 224,616 |      |              |   | -      |     |   |   | 224,616 |      |   |          | 217,796 |      |   |   | - |   |   |   | 217,796 |   |
| Related parties receivables |   |   |   |   |            | 4,294   |      |              |   | -      |     |   |   | 4,294   |      |   |          | 1,729   |      |   |   | - |   |   |   | 1,729 |   |
| Other receivables           |   |   |   |   |            | 23,683  |      |              |   | -      |     |   |   | 23,683  |      |   |          | 27,046  |      |   |   | - |   |   |   | 27,046 |   |
| Deferred tax assets         |   |   | 5,11   |   |            |    | 9,707     |              |   |   | (9,707   | )      |   |    | -         |   |          |    | 26,116    |   |   |   | (26,116 | ) |   |   | - |   |
| Total current assets        |   |   |   |   |            |    | 1,025,579 |              |   |   | (9,707   | )      |   |    | 1,015,872 |   |          |    | 573,672   |   |   |   | (26,116 | ) |   |   | 547,556 |   |
| Long-term trade receivables |   |   |   |   |            |    | 3,460     |              |   |   | -        |   |   |    | 3,460     |   |          |    | 6,350     |   |   |   | - |   |   |   | 6,350 |   |
| Marketable securities       |   |   |   |   |            |    | -         |              |   |   | -        |   |   |    | -         |   |          |    | 279,823   |   |   |   | - |   |   |   | 279,823 |   |
| Employee benefit assets     |   |   | 1      |   |            |    | 20,639    |              |   |   | (8,300   | )      |   |    | 12,339    |   |          |    | 17,786    |   |   |   | (7,725 | ) |   |   | 10,061 |   |
| Property and equipment      |   |   | 6      |   |            |    | 163,949   |              |   |   | (26,099  | )      |   |    | 137,850   |   |          |    | 171,104   |   |   |   | (32,000 | ) |   |   | 139,104 |   |
| Other assets                |   |   | 4,7,8  |   |            |    | 317,780   |              |   |   | (317,780 | )      |   |    | -         |   |          |    | 302,934   |   |   |   | (302,934 | ) |   |   | - |   |
| Intangible assets           |   |   | 6,8,10 |   |            |    | 202,376   |              |   |   | 461,111  |   |   |    | 663,487   |   |          |    | 174,640   |   |   |   | 457,349 |   |   |   | 631,989 |   |
| Goodwill                    |   |   | 10     |   |            |    | 417,608   |              |   |   | (417,608 | )      |   |    | -         |   |          |    | 416,888   |   |   |   | (416,888 | ) |   |   | - |   |
| Deferred expenses           |   |   | 7      |   |            |    | -         |              |   |   | 288,653  |   |   |    | 288,653   |   |          |    | -         |   |   |   | 284,581 |   |   |   | 284,581 |   |
| Deferred tax assets         |   |   | 5,11   |   |            |    | 192       |              |   |   | 141      |   |   |    | 333       |   |          |    | 57        |   |   |   | 1,383 |   |   |   | 1,440 |   |
| Total non-current assets    |   |   |   |   |            |    | 1,126,004 |              |   |   | (19,882  | )      |   |    | 1,106,122 |   |          |    | 1,369,582 |   |   |   | (16,234 | ) |   |   | 1,353,348 |   |
| Total assets                |   |   |   |   |            |    | 2,151,583 |              |   |   | (29,589  | )      |   |    | 2,121,994 |   |          |    | 1,943,254 |   |   |   | (42,350 | ) |   |   | 1,900,904 |   |

----

----

|   | B. | Reconciliation of equity (cont’d) |
|--------|----|-----------------------------------------|

|                                                                   |   |   |   |   |            |    |      | Effect of the     |   |   |     |   |   |    |      |   | Effect of the |    |      |   |   |
|------------------------------------------------------------------------|--------|--------|--------|--------|-----------------|---------|-----------|-------------------|--------|--------|----------|--------|--------|---------|-----------|--------|---------------|---------|-----------|--------|--------|
|                                                                   |   |   |   |   |            |    |      | transition to     |   |   |     |   |   |    |      |   | transition to |    |      |   |   |
|                                                                   |   |   |   |   | US GAAP         |    |      | IFRS              |   |   | IFRS     |   |   | US GAAP |      |   | IFRS          |    |      | IFRS   |   |
|                                                                   |   |   |   |   | January 1, 2008 |    |      | December 31, 2008 |   |
|                                                                   |   | Note   |   |   | NIS             |    |      | NIS               |   |   | NIS      |   |   | NIS     |      |   | NIS           |    |      | NIS    |   |
|                                                                   |   |   |   |   |            |    |      |              |   |   |     |   |   |    |      |   |          |    |      |   |   |
| Liabilities                                                            |   |   |   |   |            |    |      |              |   |   |     |   |   |    |      |   |          |    |      |   |   |
| Current maturities of long-term liabilities and short-term bank credit |   |   |   |   |            | 88,732  |      |              |   | -      |     |   |   | 88,732  |      |   |          | 53,976  |      |   |   | - |   |   |   | 53,976 |   |
| Current maturities of debentures                                       |   |   |   |   |            | 5,330   |      |              |   | -      |     |   |   | 5,330   |      |   |          | 100,142 |      |   |   | - |   |   |   | 100,142 |   |
| Current maturities of convertible debentures                           |   |   |   |   |            | 19,039  |      |              |   | -      |     |   |   | 19,039  |      |   |          | 17,516  |      |   |   | - |   |   |   | 17,516 |   |
| Trade payables                                                         |   |   |   |   |            | 170,797 |      |              |   | -      |     |   |   | 170,797 |      |   |          | 148,580 |      |   |   | - |   |   |   | 148,580 |   |
| Other payables and accrued expenses                                    |   |   | 5,9    |   |            |    | 120,734   |              |   |   | (120,734 | )      |   |    | -         |   |          |    | 125,388   |   |   |   | (125,388 | ) |   |   | - |   |
| Other payables                                                         |   |   |   |   |            |    | -         |              |   |   | 69,084   |   |   |    | 69,084    |   |          |    | -         |   |   |   | 71,741 |   |   |   | 71,741 |   |
| Related party payables                                                 |   |   |   |   |            |    | 211       |              |   |   | -        |   |   |    | 211       |   |          |    | 3,223     |   |   |   | - |   |   |   | 3,223 |   |
| Current tax liabilities                                                |   |   | 5      |   |            |    | -         |              |   |   | 32,270   |   |   |    | 32,270    |   |          |    | -         |   |   |   | 23,528 |   |   |   | 23,528 |   |
| Deferred income                                                        |   |   | 9      |   |            |    | -         |              |   |   | 7,871    |   |   |    | 7,871     |   |          |    | -         |   |   |   | 5,561 |   |   |   | 5,561 |   |
| Total current liabilities                                              |   |   |   |   |            |    | 404,843   |              |   |   | (11,509  | )      |   |    | 393,334   |   |          |    | 448,825   |   |   |   | (24,558 | ) |   |   | 424,267 |   |
| Debentures                                                             |   |   | 4      |   |            |    | 848,616   |              |   |   | (9,183   | )      |   |    | 839,433   |   |          |    | 812,254   |   |   |   | (7,908 | ) |   |   | 804,346 |   |
| Convertible debentures                                                 |   |   | 3,4    |   |            |    | 104,640   |              |   |   | 6,432    |   |   |    | 111,072   |   |          |    | 84,857    |   |   |   | (5,428 | ) |   |   | 79,429 |   |
| Long-term liabilities                                                  |   |   |   |   |            |    | 32,265    |              |   |   | -        |   |   |    | 32,265    |   |          |    | 760       |   |   |   | - |   |   |   | 760 |   |
| Deferred tax liabilities                                               |   |   | 5,11   |   |            |    | 59,104    |              |   |   | (58,478  | )      |   |    | 626       |   |          |    | 46,856    |   |   |   | (46,856 | ) |   |   | - |   |
| Liabilities for employee severance benefits                            |   |   | 1      |   |            |    | 35,918    |              |   |   | (35,664  | )      |   |    | 254       |   |          |    | 34,626    |   |   |   | (34,159 | ) |   |   | 467 |   |
| Total non-current liabilities                                          |   |   |   |   |            |    | 1,080,543 |              |   |   | (96,893  | )      |   |    | 983,650   |   |          |    | 979,353   |   |   |   | (94,351 | ) |   |   | 885,002 |   |
| Total liabilities                                                      |   |   |   |   |            |    | 1,485,386 |              |   |   | (108,402 | )      |   |    | 1,376,984 |   |          |    | 1,428,178 |   |   |   | (118,909 | ) |   |   | 1,309,269 |   |
| Minority interest                                                      |   |   | 12     |   |            |    | 180,410   |              |   |   | (180,410 | )      |   |    | -         |   |          |    | 190,472   |   |   |   | (190,472 | ) |   |   | - |   |
| Shareholders’ equity                                             |   |   |   |   |            |    |      |              |   |   |     |   |   |    |      |   |          |    |      |   |   |   |   |   |   |   |   |   |
| Share capital                                                          |   |   |   |   |            |    | 248       |              |   |   | -        |   |   |    | 248       |   |          |    | 211       |   |   |   | 37 |   |   |   | 248 |   |
| Share premium                                                          |   |   | 3      |   |            |    | 436,131   |              |   |   | 50,509   |   |   |    | 486,640   |   |          |    | 436,182   |   |   |   | 51,739 |   |   |   | 487,921 |   |
| Treasury shares                                                        |   |   |   |   |            |    | (6,423    | )                 |   |   | -        |   |   |    | (6,423    | )      |          |    | (106,513  | )      |   |   | (37 | ) |   |   | (106,550 | ) |
| Capital reserve for financial assets available-for-sale                |   |   | 2      |   |            |    | -         |              |   |   | -        |   |   |    | -         |   |          |    | -         |   |   |   | (42,757 | ) |   |   | (42,757 | ) |
| Accumulated other comprehensive loss                                   |   |   | 2,14   |   |            |    | -         |              |   |   | -        |   |   |    | -         |   |          |    | (36,812   | )      |   |   | 36,812 |   |   |   | - |   |
| Retained earnings                                                      |   |   | 14     |   |            |    | 55,831    |              |   |   | 12,680   |   |   |    | 68,511    |   |          |    | 31,536    |   |   |   | 14,923 |   |   |   | 46,459 |   |
| Total shareholders’ equity                                       |   |   |   |   |            |    | 485,787   |              |   |   | 63,189   |   |   |    | 548,976   |   |          |    | 324,604   |   |   |   | 60,717 |   |   |   | 385,321 |   |
| Non-controlling interest                                               |   |   | 12     |   |            |    | -         |              |   |   | 196,034  |   |   |    | 196,034   |   |          |    | -         |   |   |   | 206,314 |   |   |   | 206,314 |   |
| Total liabilities and equity                                           |   |   |   |   |            |    | 2,151,583 |              |   |   | (29,589  | )      |   |    | 2,121,994 |   |          |    | 1,943,254 |   |   |   | (42,350 | ) |   |   | 1,900,904 |   |

----

----

|   | C. | Reconciliation of statement of income |
|--------|----|---------------------------------------|

|                                            |   |   |   |   | Year ended December 31, 2008 |      |
|-------------------------------------------------|--------|--------|--------|--------|------------------------------|-----------|
|                                            |   |   |   |   |                         |      |   | Effect of |   |   |   |   |
|                                            |   |   |   |   | US                           |      |   | transition to |   |   |   |   |
|                                            |   |   |   |   | GAAP                         |      |   | IFRS |   |   | IFRS |   |
|                                            |   | Note   |   |   | NIS                          |      |   | NIS |   |   | NIS |   |
|                                            |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |
| Revenues                                        |   |   |   |   |                         | 1,167,327 |   |   |   | - |   |   |   | 1,167,327 |   |
| Cost of revenues                                |   |   | 13     |   |                         |      | 799,914 |   |   |   | (799,914 | ) |   |   | - |   |
| Selling and marketing                           |   |   | 13     |   |                         |      | 175,780 |   |   |   | (175,780 | ) |   |   | - |   |
| General and administrative                      |   |   | 13     |   |                         |      | 71,548 |   |   |   | (71,548 | ) |   |   | - |   |
| Depreciation and amortization                   |   |   | 13     |   |                         |      | - |   |   |   | 117,503 |   |   |   | 117,503 |   |
| Salaries                                        |   |   | 1,13   |   |                         |      | - |   |   |   | 183,917 |   |   |   | 183,917 |   |
| General and operating expenses                  |   |   | 13     |   |                         |      | - |   |   |   | 741,055 |   |   |   | 741,055 |   |
| Other operating expenses                        |   |   |   |   |                         |      | 7,258 |   |   |   | - |   |   |   | 7,258 |   |
| Other operating income                          |   |   |   |   |                         |      | (12,839 | ) |   |   | - |   |   |   | (12,839 | ) |
| Operating income                                |   |   |   |   |                         |      | 125,666 |   |   |   | 4,767 |   |   |   | 130,432 |   |
|                                            |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
| Finance expenses                                |   |   | 2      |   |                         |      | 158,250 |   |   |   | (19,550 | ) |   |   | 138,700 |   |
| Finance income                                  |   |   | 1,3    |   |                         |      | (36,177 | ) |   |   | 8,975 |   |   |   | (27,202 | ) |
| Finance expenses, net                           |   |   |   |   |                         |      | 122,073 |   |   |   | (10,575 | ) |   |   | 111,498 |   |
|                                            |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
| Income before income tax                        |   |   |   |   |                         |      | 3,593 |   |   |   | 15,342 |   |   |   | 18,935 |   |
|                                            |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
| Income tax                                      |   |   | 5,14   |   |                         |      | 14,550 |   |   |   | 8,197 |   |   |   | 22,747 |   |
|                                            |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
| Net loss for the year                           |   |   |   |   |                         |      | (10,957 | ) |   |   | 7,145 |   |   |   | (3,812 | ) |
|                                            |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
| Minority share in income                        |   |   | 12     |   |                         |      | (13,338 | ) |   |   | 13,338 |   |   |   | - |   |
|                                            |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
| Net loss for the year                           |   |   |   |   |                         |      | (24,295 | ) |   |   | 20,483 |   |   |   | (3,812 | ) |
|                                            |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
| Income (loss) attributable to:                  |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
| Owners of the Company                           |   |   |   |   |                         |      | - |   |   |   | (18,315 | ) |   |   | (18,315 | ) |
| Non-controlling interest                        |   |   |   |   |                         |      | - |   |   |   | 14,503 |   |   |   | 14,503 |   |
| Net loss for the year                           |   |   |   |   |                         |      | - |   |   |   | (3,812 | ) |   |   | (3,812 | ) |
| Other Comprehensive income:                     |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
|                                            |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
| Net loss for the year                           |   |   |   |   |                         |      | (24,295 | ) |   |   | 20,483 |   |   |   | (3,812 | ) |
| Net change in fair value of available-for-      |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
|  sale financial assets                     |   |   |   |   |                         |      | (54,398 | ) |   |   | 865 |   |   |   | (53,533 | ) |
| Net change in fair value of available-for- sale |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
|  financial assets transferred to profit    |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
|  or loss                                   |   |   |   |   |                         |      | - |   |   |   | 2,569 |   |   |   | 2,569 |   |
| Defined benefit plan actuarial losses, net      |   |   |   |   |                         |      | - |   |   |   | (6,079 | ) |   |   | (6,079 | ) |
| Income tax on other comprehensive income        |   |   |   |   |                         |      | 13,599 |   |   |   | (7,792 | ) |   |   | 5,807 |   |
|                                            |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
| Total comprehensive income for theyear          |   |   |   |   |                         |      | (65,094 | ) |   |   | 10,046 |   |   |   | (55,048 | ) |
|                                            |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
| Earnings per share                              |   |   |   |   |                         |      |   |   |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per share                 |   |   |   |   |                         |      | (1.13 | ) |   |   | 0.28 |   |   |   | (0.85 | ) |
| Diluted earnings (loss) per share               |   |   |   |   |                         |      | (1.13 | ) |   |   | 0.24 |   |   |   | (0.89 | ) |

----

----

|   | (1) | Employee benefits |
|--------|-----|-------------------|

|   | (2) | Available-for-sale corporate debt securities |
|--------|-----|----------------------------------------------|

----

----

|   | (3) | Convertible debentures and Stock Purchase Warrants (Series 2) |
|--------|-----|---------------------------------------------------------------|

|                                               |   | January 1 |   |   | December 31 |   |
|----------------------------------------------------|--------|-----------|--------|--------|-------------|--------|
|                                               |   | 2008      |   |   | 2008        |   |
|                                               |   | NIS       |   |   | NIS         |   |
|                                               |   |      |   |   |        |   |
| Consolidated Statement of Income:                  |   |      |   |   |        |   |
| Finance income                                     |   |      | -      |   |        |   | 12,377 |   |
| Adjustment before income tax                       |   |      | -      |   |        |   | 12,377 |   |
|                                               |   |      |   |   |        |   |   |   |
| Consolidated Statement of Financial Position: |   |      |   |   |        |   |   |   |
| Convertible debentures                             |   |      | 8,969  |   |        |   | (3,445 | ) |
| Share premium                                      |   |      | 50,509 |   |        |   | 50,546 |   |
| Adjustment to retained earnings                    |   |      | 59,478 |   |        |   | 47,101 |   |

|   | (4) | Issuance expenses of debentures |
|--------|-----|---------------------------------|

|   | (5) | Income tax exposures |
|--------|-----|----------------------|

----

----

|   | (6) | Classification of software costs |
|--------|-----|----------------------------------|

|   | (7) | Deferred expenses |
|--------|-----|-------------------|

|   | (8) | Licenses for telecom-communication services, website development costs and other |
|--------|-----|----------------------------------------------------------------------------------|

|   | (9) | Deferred income |
|--------|-----|-----------------|

|   | (10) | Goodwill |
|--------|------|----------|

|   | (11) | Deferred taxes |
|--------|------|----------------|

----

----

|   | (11) | Deferred taxes (cont’d) |
|--------|------|-------------------------------|

|                                     |   | January 1 |    |   | December 31 |   |
|------------------------------------------|--------|-----------|---------|--------|-------------|--------|
|                                     |   | 2008      |    |   | 2008        |   |
|                                     |   | NIS       |    |   | NIS         |   |
|                                     |   |      |    |   |        |   |   |   |
| Issuance of shares in a subsidiary       |   |      | (30,077 | )      |        |   | (30,077 | ) |
| Intangible assets                        |   |      | (25,548 | )      |        |   | (15,458 | ) |
| Employee benefits                        |   |      | 6,713   |   |        |   | 6,611 |   |
| Unrealized loss on marketable securities |   |      | -       |   |        |   | 16,801 |   |
|                                     |   |      |    |   |        |   |   |   |
| Decrease in deferred tax liability       |   |      | (48,912 | )      |        |   | (22,123 | ) |

|   | (12) | Non-controlling interests |
|--------|------|---------------------------|

|   | (13) | Cost and expenses |
|--------|------|-------------------|

|   | (14) | The effect of the aforementioned adjustments on retained earnings is as follows: |
|--------|------|----------------------------------------------------------------------------------|

|                                     |   | 2008   |    |   | 2008   |   |
|------------------------------------------|--------|--------|---------|--------|--------|--------|
|                                     |   | NIS    |    |   | NIS    |   |
|                                     |   |   |    |   |   |   |   |   |
| Marketable securities available-for-sale |   |   | -       |   |   |   | (3,071 | ) |
| Employee benefits                        |   |   | 27,364  |   |   |   | 26,434 |   |
| Deferred taxes                           |   |   | 48,912  |   |   |   | 30,772 |   |
| Current taxes liabilities                |   |   | 11,510  |   |   |   | 23,566 |   |
| Convertible debentures                   |   |   | (59,478 | )      |   |   | (47,101 | ) |
| Non-controlling interest                 |   |   | (15,628 | )      |   |   | (15,677 | ) |
|                                     |   |   |    |   |   |   |   |   |
| Total equity adjustments                 |   |   | 12,680  |   |   |   | 14,923 |   |

----

----

|   | A. | On April 14, 2010, B Communications completed the acquisition of 30.44% of Bezeq’s outstanding shares, for an aggregate cash purchase price of NIS 6.5 billion (approximately $1.72 billion), and became the controlling shareholder of Bezeq. The Transaction was made through B Communications’ wholly-owned subsidiary, B Communications (SP2) Ltd., or SP2. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (1) | On the closing date of the acquisition of the Bezeq interest, SP2, which holds the Bezeq interest, received a bank loan from certain banking and financial institutions led by Bank Hapoalim Ltd., or Bank Hapoalim, in a total principal amount of NIS 4.6 billion (approximately $1.24 billion). SP2 also issued to the lenders phantom stock option agreements, under which the lenders received option units, which reflect, in the aggregate, 2% of Bezeq’s share equity (subject to adjustments in certain instances). The “base price” of each unit is NIS 8.62.  However, the total amount that SP2 will pay the lenders under all the phantom stock options together is limited to NIS 125 million (NIS 2.3367 per option unit). The option units are exercisable by the lenders until May 30, 2017, but are due for payment in certain installments. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | On February 19, 2010, B Communications’ wholly-owned subsidiary, SP1, entered into a loan agreement with certain entities from the Migdal Insurance and Financial Holdings Ltd. group or Migdal. According to the Migdal loan agreement, on the closing date of the acquisition of the Bezeq interest, SP1 was provided a loan in an amount of NIS 500 million. The loan with bear annual interest at a rate of 6.81%, linked to the Israeli consumer price index.  In addition, a special interest payment is payable on the date of the final repayment of the loan in order to ensure a certain internal rate of return, or IRR, of the loan principal (without linkage to the Israeli consumer price index), which will be calculated according to a formula that takes into account amounts that SP1 will pay due to early repayment at Migdal’s demand and amounts with respect to which Migdal waived its right to demand their early repayment. However, in any event the abovementioned IRR will not exceed the IRR which derives from a fixed interest of 6.95%. The Migdal loan is secured by a first ranking pledge on SP1’s rights in the bank account (hereinafter - the Pledged Bank Account) into which all payments from SP2 are made, except for certain defined expenses. SP1 undertook to maintain minimum funds of NIS 22.5 million (linked to the Israeli consumer price index). |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | B. | On March 24, 2010, B Communications completed a private placement of 3,478,000 of its ordinary shares to Israeli institutional investors and to the Company. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | As a result of the sale of B Communications’ legacy telecommunications business to a wholly-owned subsidiary of Ampal-American Israel Corporation which resulted a change of control event, all of B Communications options became fully vested. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | INTERNET GOLD – GOLDEN LINES LTD. |                    |
|--------|-----------------------------------------|-------------------------|
|   |                                    |                    |   |
|   | By:                                     | /s/ Eli Holtzman   |   |
|   |                                    | Eli Holtzman            |   |
|   |                                    | Chief Executive Officer |   |

|   |   |                                                       |   |
|--------|--------|------------------------------------------------------------|--------|
|   | By:    | /s/ Doron Turgeman                                    |   |
|   |   | Doron Turgeman                                             |   |
|   |   | Deputy Chief Executive Officer and Chief Financial Officer |   |
|   |   |                                                       |   |

----

----