tariffs to end-users. See “Item 4. Information on The Company –B. Business Overview – The Communications Market in Israel - Communications Groups – Structural Separation”, “Competition”, “Nevision - ISP Business - Competition” and “Nevision - Telephony Business – Competition”.

January 1, 2013, reduces further our contact points and therefore sale opportunities with our customers as well as reduces their connection to us. This, together with the increased handset purchases elsewhere, may result not only in decreased handset sales, revenues and profitability to us, but may also increase churn and adversely affect our cellular services results of operations. See "Item 4. Information on The Company –B. Business Overview – Competition" for additional details.

increased usage of competing technologies, applications and services, allowing usage of our network with or without an operator, such as VoC or voice over IP, or VoIP ~~(including applications such as Viber, WhatsApp and free SMS among iPhone holders)~~ or other technologies, such as WiFi, more so following the increased usage of smart phones, tablets and laptops. To date, VoC services are available under two trial licenses granted by the Ministry of Communications and using VoC based software on smart phones. The Ministry of Communications has published in December 2010, a hearing in relation to VoC license, under which cellular operators will be required to provide data only services, including at lower speed rates and price them by speed rate. Under an amendment to the ~~Communication~~Communications Law enacted in December 2010, any limitation or blocking of internet based services or applications is forbidden, including by differentiating pricing.

the expansion of the “Open Garden” content provision offerings, as it is transforming the cellular operator, previously the provider of content to its subscribers, into one of many content providers competing to provide content to the operator’s own subscribers; The Open Garden international trend is facilitated by technological changes allowing high speed internet surfing and supporting handsets and the entry of international media providers and handsets manufacturers into the cellular content provision market. Further, expansion of arrangements such as that introduced by Apple and Android, in which subscribers can purchase content only through their handset manufacturer’s store, has and is expected to continue to adversely affect our content revenues. ~~See “Item 4. Information on the Company – B. Business Overview” under “Competition”.~~

Pursuant ~~to an amendment~~ to the Israeli Restrictive Trade Practices Law, 1988, if the ~~Director General~~Anti Trust Commissionaire decides that the Israeli cellular market is oligopolistic, the Director General will have the authority to give instructions to all or some of the participants in our market, in order, among others, to maintain or increase the competition level among the participants, including the authority to issue orders to remove or to ease entry or transfer barriers, to cease a ~~participant’s~~participant's activity, or otherwise regulate the activities of the market.

We are facing substantial organizational and personnel changes

In light of the dramatic changes in our market during 2012 (see "-We face intense competition in all aspects of our business" above and "Item 4. Information on the Company - B. Business Overview –Competition", for additional details) which led to a decrease in our net income, operating profit and EBITDA by 35.6%, 30.7% and 19.1%, respectively, in comparison to 2011, we have made substantial changes in order to adjust our group's operations to the changing market conditions and mitigate the adverse effects. The changes implemented included aggressive reduction of head count, reduction and integration of units, adjustment of procedures, reduction of expenses and investments (see "Item 4. Information on the Company – A. History and Development of the Company – 2012: a year of radical adverse changes", for additional details). Additional substantial organizational and personnel changes are required in order for us to continue our efforts to mitigate the progressing adverse effects of the changing market conditions. Although to date, those measures did not have a negative effect on our operations, such major changes carry risks and may result in loss of the group's and specifically management's focus, loss of knowledge, dissatisfaction of our employees, and an adverse impact on our services and customer service quality, all of which may lead to damage to our reputation, increased churn by our customers and loss of market share, loss of revenues and reduced profitability for us.

We could be subject to legal claims due to the inability of our information systems to fully support our pricing plans.

In order to attract and retain the maximum number of subscribers in our highly competitive market, we design specific pricing plans to suit the various preferences of ~~various subscriber groups.~~our types of subscribers such as individuals, families or businesses. We require sophisticated information systems to accurately record subscriber usage pursuant to the particular terms of each subscriber’s plan as well as accurate database management and operation of a very large

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number of pricing plans. From time to time, we have detected some discrepancies between certain pricing plans and the information processed by our internal information systems, such as applying an incorrect rebate or applying an incorrect tariff to a service resulting in a higher charge. We have invested

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substantial resources to refine and improve our information and control systems and ensure that our new pricing plans are appropriately processed by our information systems; we have also taken steps to remedy the identified discrepancies and have established reserves where the discrepancies are quantifiable. Despite our substantial investments, we may experience discrepancies in the future due to the multiplicity of our plans, the frequent changes to our licenses and relevant legislation governing our pricing plans and the scope of the processing tasks. Following our merger with Netvision and the offering of bundles of services of both companies, billing our customers involves information systems of both companies and increases the possibility of errors. Further, while we invest substantial efforts in monitoring our employees and third-party distributors and dealers that market our services, it is possible that some of our employees, distributors or dealers may offer terms and make (or fail to make) representations to existing and prospective subscribers that do not fully conform to applicable law, our licenses or the terms of our pricing plans. As a result of these discrepancies, we may be subject to subscribers’ claims, including class action claims, and substantial sanctions for breach of our licenses or the applicable laws and regulations that may materially adversely affect our results of operations. Further, frequent and multiple changes to our general license and relevant legislation require ongoing changes to our operations, pricing plans and supporting information systems. Such changes increase the risk that our employees, distributors and dealers and our information systems will not fully support such changes. As of January 1, 2013, each discrepancy from the customer's pricing plan, remedied after the customer complained, shall award the customer with predefined damages in an insignificant amount, but may aggregate to substantial amounts if paid to numerous customers on multiple occasions.

We are exposed to, and currently are engaged in, a variety of legal proceedings, including class action lawsuits.

We provide services to millions of subscribers on a daily basis. As a result of the scope and magnitude of our operations we are subject to the risk of a large number of lawsuits, including class action suits by consumers and consumer organizations, with respect to billing and other practices, such as customer care practices, marketing, including mass media marketing as well as sending commercial messages to customers, ~~collecting and~~ data collection and usage practices, offering practices of products and services, including third ~~parties’~~parties' products and services. These actions are costly to defend and could result in significant judgments against us. Recent years were characterized by a substantial increase in the number of requests for certification of class actions filed and approved in Israel. In December 2011, a class action was decided against us (we appealed the decision to the Supreme Court in January 2012 and the execution of the judgment was stayed until the appeal is decided). The number of purported class actions filed against us in the last ~~two~~three years amounts to ~~approximately 45%~~over 50% of all purported class actions filed against us since our inception, thereby increasing our legal exposure and our legal costs in defending against such suits, which as a result may materially and adversely affect our financial results. This trend is expected to continue, encouraged also by amendments to the Consumer Protection Law, stricter policy by regulators, amendments to the Communications Law such as regulating ~~“spam”~~"spam" as well as the growing tendency of adopting comprehensive and burdensome regulation for the telecommunications market. Currently, we are engaged in dozens of purported class action suits as a defendant, many of which are for substantial amounts. Should these requests to certify lawsuits against us as

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class actions are approved and succeed, this may have a material adverse affect on our financial results. For a summary of certain material legal proceedings against us, see “Item 8 – Financial Information - A. Consolidated Statements and Other Financial Information –Legal Proceedings”.

We employ thousands of employees and are therefore subject to the risk of employee lawsuits, including class action suits by employees. Recent years were characterized by a substantial increase in the number of employment lawsuits, as well as purported class actions, filed against employers in Israel. We have also witnessed an increase in the number of lawsuits and amount claimed from us by former employees.

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We are subject to the risk of intellectual property rights claims against us, including in relation to music, music-related or other content services we purchase from third party content providers. These claims may require us to initiate or defend protracted and costly litigation, regardless of the merits of these claims. If any of these claims succeed, we may be forced to pay damages or may be required to obtain licenses for the infringing product or service. If we cannot obtain all necessary licenses on commercially reasonable terms, we may be forced to stop using or selling the products and services.

We rely on interconnecting telecommunications providers and could be adversely affected if these providers fail to provide these services without disruption and on a consistent basis.

Our ability to provide commercially viable telephone services depends upon our ability to interconnect with the telecommunications networks of landline, cellular telephone and international operators in Israel in order to complete calls between our subscribers and parties on a landline or other cellular telephone network, as well as third parties abroad. All landline, cellular telephone and international operators in Israel are required to provide interconnection to, and not to discriminate against, any other licensed telecommunications operator in Israel. We have no control over the quality and timing of the investment and maintenance activities that are necessary for these entities to provide us with interconnection to their respective telecommunications networks. The implementation of number portability requires us to rely further on other providers, since our ability to implement number portability, provide our services and our basic ability to port numbers between operators are dependent on the manner of number portability implementation by interconnecting local operators. The failure of these or other telecommunications providers to provide reliable interconnections to us on a consistent basis could have an adverse effect on our business, financial condition or results of operations.

Our operations are dependent on complex technology and information ~~systems~~systems.

Our operations are dependent on a number of complex technological systems. The offering of bundles of services by us and Netvision, following our merger, increased the number of complex technological systems involved in providing service to our customers. The occurrence of malfunctions in such complex and ever changing and expanding systems is inevitable. A malfunction in any of our systems which severely impacts our ability to provide products and services to our customers, may result in loss of revenues to us, may adversely impact our brand perception and expose us to legal claims, all of which may adversely affect our results of operations. In December 2010 we suffered a major network malfunction, following which we decided to grant our subscribers a substantial refund and were also sued for ~~damages in nine purported class actions for~~ substantial amounts ~~(eight~~ of ~~which were dismissed during 2011 and~~purported damages. For additional details regarding the ~~ninth is still pending).~~lawsuits filed against us in that regard see note 29 to our consolidated financial report for 2012 included elsewhere in this annual report.

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Our operations are dependant on various information systems. The unauthorized entry to or disruption of operation of these information systems, including due to cyber attacks, may result in damage to us and our ~~customers, including due to~~customers. Such damages could include our inability to provide certain services ~~or provide them with~~without disruptions, orif at all, our inability to bill for services rendered or loss of data to us and our customers, all of which may expose us to legal claims and liabilities.

There are certain restrictions in our ~~license~~licenses relating to the ownership of our shares.

Our cellular license restricts ownership of our ordinary shares and who can serve as our directors as follows:

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our founding shareholder, Discount Investment Corporation Ltd., or DIC (or its transferee or transferees, if approved in advance by the Ministry of Communications as “founding shareholders”), must own at least 26% of each of our means of control;

Israeli citizens and residents among our founding shareholders (or their approved transferees) must own at least 20% of our outstanding share capital and each of our other means of control (DIC has agreed to comply with this requirement);

a majority of our directors must be Israeli citizens and residents;

at least 20% of our directors must be appointed by Israeli citizens and residents among our founding shareholders; and

we are required to have a committee of our Board of Directors that deals with matters relating to state security, which must be comprised of at least four directors (including an external director) having the requisite security clearance by Israel’s General Security Service.

If these requirements are not complied with, we could be found to be in breach of our license and our license could be changed, suspended or revoked.

In addition, our license provides that, without the approval of the Ministry of Communications, no person may acquire or dispose of shares representing 10% or more of our outstanding share capital. Further, our directors and officers and any holder of ordinary shares representing 5% or more of our outstanding share capital may not own 5% or more of Bezeq or any of our competitors or serve as a director or officer of such a company, subject to certain exceptions which require the prior approval of the Ministry of Communications.

To ensure that an unauthorized acquisition of our shares would not jeopardize our license, our articles of association provide that any shares acquired without approval required under our license will not be entitled to voting rights.

If our service is to be determined by the Israeli Government to be an “essential service”, the Prime Minister and the Ministry of Communications could impose additional limitations including a heightened requirement of Israeli ownership of our ordinary shares.

Although our articles of association contain certain provisions that are aimed at reducing the risk that holdings or transfers of our ordinary shares will contravene our license,

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we cannot entirely control these and other matters required by our license, the violation of which could be a basis for suspending or revoking our license. Our other licenses and ~~Netvision’s~~Netvision's licenses contain similar ~~restrictions.~~restrictions, with the Ministry of Communications' approval required for the transfer of shares representing 5% or more of our (or Netvision, as the case may be) outstanding share capital. See also “~~Item~~“Item 4. Information on the Company – B. Business Overview – Government Regulations ― Our Principal ~~License~~”License” and “Other Licenses” and ~~“Item~~"Item 4. Information on The Company – B. Business Overview – ~~Netvision”~~Netvision".

We may be adversely affected by the significant technological and other changes in the cellular communications industry.

The telecommunications market is known for rapid and significant technological changes and requires ongoing investments in advanced technologies in order to remain

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competitive. In recent years we have witnessed a growing demand for Internet, content and data through advanced third generation cellular phones, smartphones, modems, tablets and other devices using cellular data that resulted in a rapid growth of data traffic on cellular networks and required cellular operators to upgrade their networks to accord such demand. Transfer of subscribers to Unlimited Packages of services, MVNO hosting services and national roaming on our network, have contributed to the substantially growing demand for data traffic on our network, as well as to voice and text messages. We estimate that data traffic will grow even faster in the future and some operators have taken steps aimed at reducing data usage by their subscribers, including by transferring traffic to free alternative networks. MVNO hosting services and national roaming on our network, when materialized, would further increase such demand. Our strategy to grow and develop our Internet, content and data services has proven to be successful and contributed positively to our results of operations. To answer the growing demand for cellular data traffic, we would be required, among others, to continue our investment in upgrading both our cellular and our transmission network as well as invest in advanced technologies such as 4G cellular technologies (Long Term Evolution, or LTE), which will allow larger capacity and higher data speed rates. Although we ~~have completed a substantial portion of~~are constantly upgrading our networks ~~upgrade~~ and have been building our LTE readiness, should we decide to build an LTE network, it would require additional substantial investments and the allocation of frequencies for an LTE network. Such allocation to us is not guaranteed, when required or at all (including in light of prior preference given by the Ministry of Communications to new and small competitors in the allocation of additional UMTS frequencies at the September 2010 tender and the limited amount of available frequencies as well as the uncertainties relating to the ~~government’s~~government's position with respect to the provision of 4G services in Israel), and there is no certainty as to the cost of frequencies, if and when allocated to us. Inability to receive additional frequencies in a timely manner to meet our needs or at all and specifically if LTE frequencies are allocated to our competitors and not to us or allocated to us under less favorable terms than to our competitors could impair our ability to compete and may require us to cease offering certain products and/or services we currently offer and/or change their terms and conditions and/or make substantial unplanned investments, which may have an adverse effect on our results of operations.

If we cannot obtain or maintain favorable roaming arrangements, our services may be less attractive or less profitable.

We rely on agreements to provide roaming ~~capability~~capabilities to our subscribers in many areas outside Israel. As of December 31, ~~2011,~~2012, we had roaming arrangements with 545 cellular providers in 179 countries around the world. However, we cannot control the quality of the service that they provide and it may be inferior to the quality of service that we provide. Equally, our subscribers may not be able to use some of the advanced features that they enjoy when making calls on our network. Some of our competitors may be able to obtain lower roaming rates than we do because they may have larger call volumes. ~~Competition is expected to intensify further, when new operators, including MVNOs or Mirs and Golan, begin providing roaming services as well.~~ If our

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competitors’ providers can deliver a higher quality or a more cost effective roaming service, then subscribers may migrate to those competitors and our results of operation could be adversely affected. Further, we may not be able to compel providers to participate in our technology migration and enhancement strategies. As a result, our ability to implement technological innovations could be adversely affected if these overseas providers are unable or unwilling to cooperate with the further development of our network or if they cease to provide services comparable to those we offer on our network.

Following European Union regulation of roaming tariffs, which reduced tariffs for calls made by members of the European Union among themselves, several European Union

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member operators have raised roaming tariffs for calls to and from non-European Union member operators, resulting in higher roaming tariffs, and in other roaming agreements roaming tariffs for our ~~subscribers.~~subscribers have decreased. In addition, in August 2008, the Israeli Government adopted a resolution to negotiate a reduction of inbound and outbound roaming tariffs with the European Union and/or members of the European Union or countries frequently visited by Israelis. In January 2012, the Ministry of Communications requested us to provide information in relation to our roaming ~~services.~~services and in January 2013, published a hearing proposing restrictions on roaming services provision. For further details see "We operate in a heavily regulated industry, which can harm our results of operations" above. If roaming tariffs ~~are reduced~~continue to decrease including as a result of the proposed negotiation or otherwise and/or if additional European Union member operators raise their tariffs and/or if we are not able to raise our tariffs or otherwise compensate for the higher roaming expenses, this could adversely affect our profitability and results of operations.

Our substantial debt increases our exposure to market risks, may limit our ability to incur additional debt that may be necessary to fund our operations and could adversely affect our financial stability; Regulatory change, market terms and our financial results may affect our possibilities to raise ~~debt from institutional investors.~~debt.

As of December 31, ~~2011,~~2012, our total indebtedness was approximately NIS ~~6,145~~6,507 million ($~~1,608~~1,743 million), with our net debt at approximately NIS 4,557 million ($1,221 million). For additional details see "Item 5. Operating and Financial Review and Prospects. – B. Liquidity and Capital resources – General". The indentures governing our debentures currently permit us to incur additional indebtedness. Our substantial debt could adversely affect our financial condition by, among other things:

increasing our vulnerability to adverse economic, industry or business conditions, including increases in the Israeli Consumer Prices Index, or CPI;

limiting our flexibility in planning for, or reacting to, changes in our industry and the economy in general;

requiring us to dedicate a substantial portion of our cash flow from operations to service our debt, thus reducing the funds available for operations and future business development; and

limiting our ability to obtain, or resulting in less favorable terms and pricing for, additional financing to operate, develop and expand our business or ~~to refinance~~for refinancing existing debt.

In October 2010, the Commissioner of Capital Markets, Insurance and Savings in the Ministry of Finance published a circular instructing institutional investors to follow certain

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procedures and requirements before investing in non-governmental debentures, including a requirement to verify that certain contractual provisions are included in the indentures of the invested debentures, and to establish a policy for investment in such debentures which will relate among other matters to repayment acceleration ~~rights~~.rights. These procedures and requirements may adversely affect our possibilities of raising debt from Israeli institutional investors as well as the terms and price of such debt raising. Following these procedures, in 2012 we amended our shelf prospectus to include new limitations and covenants, including a covenant not to issue additional debentures if it involves a rating downgrade, certain financial covenants, negative pledge, cross default, limitation on the distribution of dividends, obligation to pay additional interest in case of certain rating downgrade. These new limitations already apply to our series F and G debentures issued in March 2012 and may apply to any additional debt raising by us. For details regarding such limitations and ~~have already adversely affected the terms under which we plan to raise debt in the near future. See “Item~~covenants see "Item 5. Operating and Financial Review and Prospects. – B. B. Liquidity and Capital resources – Debt Service – Shelf ~~Prospectus” for~~Prospectus". These limitations and covenants limit our freedom to conduct our business, may impose additional ~~details.~~costs on us and may limit our ability to raise additional debt.

~~Table~~During 2011 and 2012, we suffered a significant decrease in our operating results, following certain regulatory changes, intensified competition and price erosion (For additional details see "Item 4. Information on the Company – B. Business Overview –Competition" and "-Government Regulations - Tariff supervision", "-Mobile Virtual Network Operators" and "-Additional UMTS Operators") whereas our net debt has increased substantially (from approximately NIS 3,334 million as of ~~Contents~~

December 31, 2010 to approximately NIS 4,557 million as of December 31, 2012). For additional details see "Item 5. Operating and Financial Review and Prospects. – B. Liquidity and Capital resources – Debt Service". In May 2012, the rating of our debentures was downgraded due to increased leverage and competitive pressure. In November 2012, the rating company reaffirmed that rating. This and any further downgrade in our rating, and any adverse change in our financial results, including any increase in our net leverage (defined in our amended shelf prospectus as the ratio of net debt to EBITDA during a period of 12 consecutive months, excluding onetime influences) may adversely affect the terms and price of debt raising, particularly through the issuance of debentures to institutional investors, which, given the limitation on the ability of Israeli banks to lend money to us pursuant to the “Guidelines for Sound Bank Administration” issued by the Israeli Supervisor of Banks (as we are a member of IDB’s group of borrowers), may limit our ability to obtain additional financing to operate, develop and expand our business or to refinance existing debt.

See also the ~~Centralization Committee’s~~Concentration Committee's recommendations under ~~“Risks~~"Risks Relating to Our Ordinary ~~Shares”~~Shares - Pending legislation in Israel affecting corporate conglomerates, if enacted, could adversely affect us" below, which if adopted and implemented, may adversely affect our possibilities of raising debt from Israeli institutional investors.

Our business results may be affected by currency fluctuations, by our currency hedging positions and by changes in the Israeli Consumer Price ~~Index.~~Index

A portion of our cash payments are incurred in, or linked to, foreign currencies, mainly U.S. dollars. In particular, in ~~2009,~~ 2010, 2011 and ~~2011,~~2012, payments in U.S. dollars or linked to the U.S. dollar represented approximately ~~36%~~33%, ~~33%~~39% and ~~39%~~36%, respectively, of total cash outflow (including payments of principal and interest on our debentures, but excluding one time payments associated with the acquisition of Netvision). These payments included capital expenditures, some of our operating lease payments and payments to equipment suppliers

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including handset suppliers. As almost all of our cash receipts are in NIS, any devaluation of the NIS against those foreign currencies in which we make payments, particularly the U.S. dollar, will increase the NIS cost of our foreign currency denominated or linked expenses and capital expenditures.

Furthermore, since the principal amount of and interest that we pay on our Series A, B, C, D and DF debentures, are linked to the Israeli CPI, any increase in the Israeli CPI will increase our financing expenses and could adversely affect our results of operations. See ~~“Item~~"Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Debt Service – Public ~~Debentures”~~Debentures" for details.

We purchase derivative financial instruments in order to hedge part of the foreign currency risks, CPI risks deriving from our operations and indebtedness. Derivatives are initially recognized at fair value. Changes in the fair value are accounted for such that: Changes in the fair value of derivative hedging instruments designated as a cash flow hedge are recognized directly as a component of our shareholders’ equity to the extent that the hedge is effective. To the extent that the hedge is ineffective, changes in fair value are recognized in our income statement as the hedged item affects earnings. The amount recognized in shareholders’ equity is transferred to our income statement in the same period that the hedged item affects our earnings. Notwithstanding the above, hedge accounting is not applied to derivative instruments that economically hedge monetary assets and liabilities denominated in foreign currencies. Changes in the fair value of such derivatives are recognized through our income statement upon occurrence. These differences in the derivative ~~instruments’~~instruments' designation could result in fluctuations in our reported net income on a quarterly basis.

We may not be able to fulfill our dividend policy in the future; implementation of our dividend policy will significantly reduce our future cash reserves.

In February 2006, we adopted a dividend policy targeting a payout ratio of at least 75% of our net income in each calendar year, subject to any applicable law, our license and contractual obligations and provided that such distribution would not be detrimental to our cash needs or to any plans approved by our Board of Directors. The 2012 amendment to our shelf prospectus, under which we have raised additional debt in March 2012, contains a covenant not to distribute more than 95% of the profits available for distribution according to the Israeli Companies Law (“Profits”). Moreover, under the 2012 amendment, if our net leverage (defined as the ratio of net debt to EBITDA during a period of 12 consecutive months, excluding certain one time effects) exceeds 3.5:1, we may not distribute more than 85% of our Profits and if our net leverage exceeds 4.0:1, we may not distribute more than 70% of our Profits. For additional details see "Item 5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Debt Service – Shelf Prospectus". In ~~2009,~~addition, our license requires that we and our 10% or more shareholders maintain at least $200 million of combined shareholders’ equity. Dividend payments are not guaranteed and our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to pay dividends or to pay dividends at a ratio to net income that is less than that paid in the past. In 2010 and 2011 our Board of Directors declared dividends constituting as much as 95% of our net income and in some cases, part of our retained earnings from earlier periods as ~~well, and may declare dividends as much as 95%~~well. In respect of 2012, a dividend was declared for the first quarter only, constituting 75% of our net income, whereas for the second, third and fourth quarters, our board of directors chose not to declare dividends, given the intensified competition and substantial changes in ~~the future.~~pricing and their adverse effect on our results of operations and in order to

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strengthen our balance sheet. See “Item 8. Financial Information - A. Consolidated Statements and Other Financial Information - Dividend Policy”. ~~Our license requires that we and our 10% or more shareholders maintain at least $200 million of combined shareholders’ equity. Dividend payments are not guaranteed and~~

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~~our Board of Directors may decide, in its absolute discretion, at any time and for any reason, not to pay dividends~~ ~~or to pay dividends at a ratio to net income that is less than that paid in the past.~~

Our dividend policy, to the extent implemented, will significantly reduce our future cash reserves and may adversely affect our ability to fund unexpected capital ~~expenditures as well as our ability to make interest and principal repayments on our debentures.~~expenditures. As a result, we may be required to borrow additional money or raise capital by issuing equity securities, which may not be possible on attractive terms or at all.

If we are unable to fulfill our dividend policy, or pay dividends at levels anticipated by investors in our shares, the market price of our shares may be negatively affected and the value of our investors’ investment may be reduced.

We rely on a limited number of suppliers for key equipment and services.

We depend upon a small number of suppliers to provide us with key equipment and services. For example, Nokia Siemens Israel provides our network system based on GSM/GPRS/EDGE technology, our UMTS/HSPA core system, part of our radio access network and related products and services, and our landline New Generation Network system, or NGN system; LM Ericsson Israel supplies part of our radio access network and related products and services based on UMTS/HSPA technology; Amdocs Israel provides us with services with respect to the operating of, and the implementation of developments to our billing system; Alcatel Lucent provides our Carrier Ethernet network and SDH equipment for our transmission network; and Be’eri Printers provides our printing supplies and invoices as well as the distribution, packaging and delivery of invoices and other mail to the postal service distribution centers. In addition, we lease a small portion of our transmission capacity from Bezeq, the incumbent landline operator. Should an effective landline wholesale market materialize, we may acquire services from Bezeq and Hot in order to provide internet infrastructure and IPTV to our customers at competitive prices, in which case we would be dependent on Bezeq and Hot for such services. Bezeq has experienced labor disputes, including stoppages, during the privatization process and liberalization of the landline market, and additional disruptions, stoppages and slowdowns may be experienced in the future. If these suppliers fail to provide equipment or services to us on the requisite standards of quality and on a timely basis, we may be unable to provide services to our subscribers in an optimal manner until an alternative source can be found, which may result in loss of customers by us and our license may be at risk of revocation for failure to satisfy the required service standards.

In addition, our handset sales have been dominated in recent years by Apple and Samsung products, representing over half of our handset sales. See "Item 4. Information on the Company - B. Business Overview - Handsets" for additional details. Should any of theses suppliers (Samsung through its official importer to Israel – Suny Communications (1994) Ltd., or Suny, an affiliate of Scailex Corporation Ltd., or Scailex, which is one of Partner's controlling shareholders) refuse to sell handsets to us or condition such sales on unfavorable terms and condition to us or provide our competitors more favorable terms and conditions, or if these suppliers fail to produce successful and desirable products and no equivalent alternatives will then be available, this could have a material adverse effect on our handset sales and results of operations.

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We are a member of the IDB group of companies, one of Israel’s largest and highly regulated business groups. This may limit our ability to expand our business, to acquire other businesses or raise debt.

We are an indirect subsidiary of IDB, one of Israel’s largest and highly regulated business groups. ~~An adverse~~IDB included in its financial statements for the second and third quarters of 2012 a note regarding the existence of significant doubts as to its ability to continue as a going concern due to its liquidity condition. IDB and its debentures holders are currently negotiating proposed outlines for strengthening the financial base of IDB through, among other things, a debt restructuring. As a result of IDB's agreements with its debenture holders, certain events or actions in the IDB group would require IDB either to obtain the approval of the trustees of the debenture holders, or in certain circumstances (including material events or actions in us) to provide advance notice to the trustees. IDB Development included in its financial statements for the second and third quarters of 2012 a note calling attention to its financial condition and to certain restrictions and covenants that, among other things, limit its ability to raise capital. IDB Development's debenture holders are currently considering to take measures against IDB Development, including the possibility to propose a debt restructuring without the cooperation and participation of the current controlling shareholders of IDB. These negotiations and other events that relate to IDB and IDB Development may lead to a change of control of the IDB group. We are unable to predict the outcome of such negotiations, measures and events or the effect on us from any debt restructure that may be implemented. As such, IDB's financial condition could have an adverse effect on our debentures rating and our ability to raise additional debt or the terms of ~~such~~any debt ~~raise.~~ offering that we may effect.

In addition, pursuant to the “Guidelines for Sound Bank Administration” issued by the Israeli Supervisor of Banks, the amount that an Israeli bank may lend to one group of borrowers and to each of the six largest borrowers of such banking corporation is limited. Since we are a member of IDB’s group of borrowers, these guidelines may limit the ability of Israeli banks to lend money to us.

Due to the limited size of the Israeli market and due to the high level of regulation of the Israeli market, in particular in the communications market, our being a member of the IDB group of companies may limit our ability to expand our business in the future, to form joint ventures and strategic alliances and conduct other strategic transactions with other participants in the Israeli communications market. See also the ~~Centralization Committee’s~~Concentration Committee's recommendations under “"Risks Relating to Our Ordinary ~~Shares”~~Shares - Pending legislation in Israel affecting corporate conglomerates, if enacted, could adversely affect us" below, which if adopted and implemented, may have an adverse effect on our business.

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We are controlled by a single shareholder who can significantly influence matters requiring shareholders’ approval.

As of ~~December 31, 2011,~~February 15, 2013, DIC held, directly and indirectly, approximately ~~43.61%~~41.91% of our outstanding share capital. Pursuant to shareholders agreements among DIC and certain of our minority shareholders, who in the aggregate own approximately 3.43% of our ordinary shares, DIC has been granted the voting rights in respect of those shares. In addition to DIC’s shareholdings and such additional voting rights, it has the right to appoint the 20% of our directors that we are required by our license and articles of association to have appointed by Israeli citizens and residents among our founding shareholders. Accordingly, subject to legal limitations, DIC has control (as the term ~~“control”~~"control" is defined in the Israeli Securities Law; namely the ability to direct a ~~company’s~~company's activities) over all matters requiring shareholder approval, including the election and removal of our directors and the approval of significant corporate transactions. This concentration of ownership could delay or prevent proxy contests, mergers, tender offers, open-market purchase programs or other purchases of our ordinary shares that might otherwise give our shareholders the opportunity to realize a premium over the then-prevailing market price for our ordinary shares.

Further, as a foreign private issuer, we are exempt from the application of the NYSE rules requiring the majority of the members of our Board of Directors to be ~~independent and requiring our Board~~independent.

Table of ~~Directors to establish independent nomination and compensation committees.~~ Contents

Accordingly, our minority shareholders and debenture holders are denied the protection intended to be afforded by ~~these~~such corporate governance standards.

Risks Related to our wholly owned subsidiary Netvision

~~Integration of Netvision’s business may cause us operating difficulties and expenditures.~~

The process of integrating Netvision’s business into our operations may result in unforeseen operating difficulties and large expenditures and may require significant management attention that would otherwise be available for our ongoing business. These risks may be further intensified due to a number of potential factors, including, among others: changes in the regulatory environment in the Israeli telecommunications market, unanticipated costs or liabilities, multiplicity of information and engineering systems, some of which we may have to replace, loss of key employees of Netvision and unrealistic goals or projections for the Netvision business or the merged group, whether due to regulatory changes or otherwise. In addition, changes in the financial condition, business or operations of Netvision may significantly affect our financial condition and results of operations.

Changes in the regulatory environment could adversely affect ~~Netvision’s~~Netvision's business.

Netvision is subject to regulation of its ongoing operations and could therefore be significantly impacted by decisions of regulators, changes in laws, regulations or government policy affecting its business activities. The uncertainties and risks surrounding the regulatory framework of the Israeli telecommunications market, some of which we are currently unable to foresee or assess, could negatively affect ~~Netvision’s~~Netvision's business and prospects. ~~Netvision’s~~

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Netvision's operations in ISP services, landline telephony and international calling services are highly regulated. A change in the competitive structure of the market or a change in the regulation on structural separation of different types of services may adversely affect ~~Netvision’s~~Netvision's results of operations and its ability to compete with other large players in the market, such as Bezeq and Hot. The annulment of Early Termination Fees in the ~~other communications~~landline and ISP markets in November 2011 has increased competition as it has eliminated transfer ~~barriers. This~~barriers and resulted in increased churn rate and gross recruitment of subscribers and price ~~erosion and is expected to continue to affect Netvision’s results of operations.~~erosion.

~~The current~~

A policy paper in relation to the wholesale market of landline services in Israel, published by the ~~Ministry~~Minister of Communications ~~is to encourage new entrants into~~in May 2012, called for the ~~telecommunications~~annulment of certain structural limitations currently imposed on the Bezeq and Hot groups (and the consideration of annulling or relaxing others), following the execution of a wholesale agreement with another operator which has a significant market share. We are negotiating the terms of such wholesale agreement with Bezeq. Partner has already reached some understandings with Bezeq and in ~~order to increase competition and reduce fees and prices paid by consumers.~~February 2013, Xfone Communications, an ILD operator, that does not have a significant market share, announced entering a wholesale agreement with Bezeq. See ~~“Item 3. Key Information – D. Risk Factors – Risks related to our Business – We face intense competition in all aspects of our business” as well as under “Item~~"Item 4. Information on the Company - Competition” regarding the recommendations of a public committee appointed by the Ministry of Communications to examine Bezeq’s tariffs structure, tariffs for wireline wholesale services and review the possible annulment of the structural limitations currently imposed on Bezeq and its subsidiaries, published in October 2011.Competition".

~~Opening the market to additional competition, permitting~~Permitting telecommunications companies to offer bundled services, ~~the recommendations regarding the~~annulment of structural separation and ~~Bezeq’s~~Bezeq's tariffs supervision may have a material adverse effect on ~~Netvision’s~~Netvision's results of operation by enabling increased competition in the markets in which Netvision ~~operates.~~operates, specifically by approaching Netvision's customers in the ISP and landline markets which are Bezeq or Hot's customers in the internet infrastructure market. Moreover, it could specifically give a competitive edge to Bezeq and Hot, whose existing infrastructure and ability to offer bundled services may significantly harm ~~Netvision’s~~Netvision's competitive position to provide its customers with landline telephony, ISP services and international telephony. Bezeq and Hot have the advantage of owning their own infrastructure and the ability to offer landline, international telephony and ISP services, as well as multichannel television independently of any third party ~~support. If they are allowed to bundle~~support, unlike Netvision. Bezeq and Hot offer bundles of services under certain conditions. Annulment of these ~~services, they will have~~conditions and the structural separation, would provide Bezeq and Hot with an advantage over other service providers such as Netvision that do not own their own infrastructure. Further, the offering of services by the Bezeq and Hot groups at tariffs significantly lower than prevailing market tariffs or at prices even lower than our costs for these services, such as by cross subsidizing with other services in which they have the capacity to monopolize the market, could also significantly harm ~~Netvision’s~~Netvision's competitive position as it could decrease demand for ~~Netvision’s~~Netvision's services or lead Netvision to offer its services at a loss. Further, as Netvision is dependant on Bezeq and ~~Hot’s~~Hot's infrastructure to provide its services on the one hand, and is competing with them on the provision of ISP, ILD and landline services to end-users, on the other hand, price erosion of ISP services would lead to increased demand for greater bandwidth and would require Netvision to significantly increase the capacity it purchases, significantly increasing its

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expenses in purchasing capacity from Bezeq and Hot, while its revenues would be decreasing. This could also have a material adverse effect on ~~Netvision’s~~Netvision's results of operations. In February 2012, Hot began offering ISP services and has done so at tariffs significantly lower than prevailing market prices ~~or at prices which would be lower than our costs~~ and Bezeq also significantly lowered its internet infrastructure services tariffs to end-users. This has led to a significant decrease of ISP tariffs. Netvision believes there is cause for regulatory intervention and has appealed to the regulators to intervene, but cannot predict the outcome of such appeals. See ~~“Item~~"Item 4. Information on The Company –B. Business Overview – The Communications Market in Israel - Communications Groups – Structural ~~Separation”~~Separation", ~~“Competition”~~"Competition" and ~~“Nevision~~"Nevision - ISP Business - ~~Competition”~~Competition" and ~~“Nevision~~"Nevision - Telephony Business – ~~Competition”~~Competition".

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Hot Mobile and Golan into the ILD market in the second half of 2012 and the beginning of 2013, respectively, could also have an adverse effect on Netvision's results of operations, as customers (specifically their cellular customers) may choose their ILD services over Netvision's. For further details see "We face intense competition in all aspects of our business” above.

In addition, the Ministry of ~~Communication has~~Communications published in November 2011 a hearing ~~on November 2011 in relation to~~about proposed regulation of the underwater international telecommunications connection from Israel, proposing certain limitations on the agreements with Mediterranean Nautilus Ltd. and Mediterranean Nautilus (Israel) Ltd., or collectively Med Nautilus, ~~, Netvision’s~~Netvision's provider, which would, among others, limit the discounts and capacity Med Nautilus may provide. Further, Bezeq International, one of ~~Netvision’s~~Netvision's main competitors in the ILD and ISP markets, has ~~recently~~ deployed an underwater ~~cable.~~cable in December 2011. Adoption of such changes and the deployment of such cable by a Netvision competitor may harm ~~Netvision’s~~Netvision's results of operations and competitive position as it would force Netvision to purchase capacity at less favorable prices, and more so in comparison to its competitor which is a Bezeq ~~affiliate competitor.~~affiliate.

Netvision is exposed to risks relating to network infrastructure and information systems and is dependent on services it receives from its external ~~suppliers.~~suppliers; Integration of Netvision's information systems may cause us operating difficulties and expenditures.

Netvision does not own an independent network for providing the services it offers to its customers. Therefore, Netvision is dependent on its infrastructure providers, such as Med Nautilus, which provides underwater international telecom connections, and Bezeq and Hot, which provide broadband connectivity and wireline infrastructure. In some cases, these providers are virtually the sole providers of such infrastructure and cannot be replaced. Should a landline wholesale market materialize, Netvision's dependency on Bezeq and Hot would increase, as Netvision would need to acquire additional services from them for the provision of internet infrastructure, as well as for the provision of IPTV services at competitive prices to its customers. Netvision is also dependent on foreign telecommunications operators for its international ISP and telephony communications. Therefore, termination or amendment of terms of an agreement with any of the infrastructure providers or with some of the foreign operators at once, disruption in or refusal to provide such infrastructure services, as well as regulatory changes affecting the terms of infrastructure services that Netvision receives, may have a material adverse affect on ~~Netvision’s~~Netvision's ability to provide its services to customers or the profitability of providing such services.

~~Netvision’s~~Netvision's operations are dependant on various information systems. The unauthorized entry to or disruption of operation of these information systems, including due

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to cyber attacks, may result in damage to Netvision and its customers, including due to inability to provide certain services or provide them with disruptions or inability to bill for services rendered, loss of data of Netvision or that of its customers stored with Netvision, all of which may expose Netvision to legal claims and liabilities. Further, any successful attacks on ~~Netvisions’ customers’~~Netvisions' customers' information systems, protected by ~~Netvision’s~~Netvision's data security products, may also expose Netvision to legal claims and liability.

Our merger with Netvision and the offering of bundles of services provided by both companies, increased the number of information systems involved in the billing process of our customers as well as the duplication of other information systems used by the companies, resulting in some cases in cumbersome procedures, inefficient usage of resources and lack of uniformity. The process of integrating Netvision's information systems into our information systems may result in unforeseen operating difficulties and large expenditures and may require significant management attention that would otherwise be available for our ongoing business. Further, the replacement of systems or change of processes may result in substantial malfunctions in our sales and retention activities, errors in billings or other processes, which may lead to loss of revenues, legal claims and regulatory sanctions.

Alternate technology may cause a decline in ~~Netvision’s~~Netvision's international calling services.

In recent years there has been a decline in use of international calling services through international operators such as Netvision. This is due to, among other things, the development of alternate technologies, such as VoIP, which enable international calls without the services of an international operators. These technologies also pose an alternative to landline communications. If this trend continues and alternate technologies improve or if new ones are developed, the competition in the market will increase, which may have a material adverse effect on ~~Netvision’s~~Netvision's results of operations.

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Risks Relating to Operating in Israel

We conduct our operations in Israel and therefore our results may be adversely affected by political, economic and military instability in Israel.

Our operations, our network and some of our suppliers are located in Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. Any hostilities involving Israel or the interruption or curtailment of trade within Israel or between Israel and its trading partners could adversely affect our operations and could make it more difficult for us to raise capital. Since September 2000, there has been a high level of violence between Israel and the Palestinians. Hamas, an Islamist movement responsible for many attacks, including missile strikes, against Israelis, won the majority of the seats in the Parliament of the Palestinian Authority in January 2006 and took control of the entire Gaza Strip by force in June 2007. Hamas has launched hundreds of missiles from the Gaza Strip against Israeli population centers, disrupting day-to-day civilian life in southern Israel. This led to an armed conflict between Israel and the Hamas during December 2008 and January 2009 and a continued sporadic missile launching from the Gaza strip to Israel. thereafter, In November 2012 there was another armed conflict, involving attacks by hundreds of missiles fired from the Gaza Strip against the Israeli population centers throughout the southern half of Israel ~~thereafter.~~and up to and including Tel-Aviv. A substantial part of our network and information systems is located within range of missile strikes from the Gaza Strip and Lebanon. Any damage to our network

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and/or information systems would damage our ability to provide service, in whole or in part, in the southern or northern part of Israel or otherwise damage our operation and could have an adverse effect on our business, financial condition or results of operations.

More generally, any armed conflicts, terrorist activities or political instability in the region would likely negatively affect business conditions and could harm our results of operations, including following termination of such conflicts, due to a decrease in the number of tourists visiting Israel. At the end of 2010 and during 2011 and 2012 several countries in the region, including Egypt and Syria, have been experiencing increased political instability, which led to change in government in some of these countries (including Egypt), the effects of which are currently difficult to assess. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in areas that neighbor Israel, such as Hamas in Gaza and Hezbollah in Lebanon. This situation may potentially escalate in the future to violent events which may affect Israel and us.

In addition, in the event that the State of Israel relinquishes control over certain territories currently held by it to the Palestinian Authority, we will not be able to provide service from our cell sites located in Israeli populated areas and on connecting roads in these territories. This may result in the loss of subscribers and revenues and in a decrease in our market share.

Our freedom and ability to conduct our operations may be limited during periods of national emergency.

The Communications Law grants the Prime Minister of Israel the authority, for reasons of state security or public welfare, to order a telecommunications license holder to provide services to security forces, to perform ~~telecommunication~~telecommunications activities or to establish a telecommunications facility as may be required for the security forces to carry out their duties. Further, the Israeli Equipment Registration and IDF Mobilization Law, 1987, also permits the registration of engineering equipment and facilities and the taking thereof for the use of the Israel Defense Forces. This law further sets the payment for use and compensation for damages caused to the operator as a result of such taking. Our general license also permits the Israeli Government, during national emergencies or for reasons of national security, to

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take all necessary actions in order to ensure state security, including taking control of our network, and requires us to cooperate with such actions. If national emergency situations arise in the future and if we are to be subject during such time to any of the foregoing actions, this could adversely affect our ability to operate our business and provide services during such national emergencies and adversely affect our business operations. Our other licenses and ~~Netvision’s~~Netvision's licenses (excluding ~~its~~our ISP ~~license)~~licenses) contain similar restrictions. See also “~~Item~~“Item 4. Information on the Company – B. Business ~~Overview~~Overview – Government Regulations ― Our Principal ~~License~~”License” and “Other Licenses” ~~“Item~~"Item 4. Information on The Company – B. Business Overview – ~~Netvision”~~Netvision".

Provisions of Israeli law and our license may delay, prevent or impede an acquisition of us, which could prevent a change of control.

Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions. For example, a merger may not be completed unless at least 50

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days have passed from the date that a merger proposal was filed by each merging company with the Israel Registrar of Companies and at least 30 days from the date that the shareholders of both merging companies approved the merger. In addition, a majority of each class of securities of the target company is required to approve a merger. Further, the provisions of our license require the prior approval of the Ministry of Communications for changes of control in our Company.

Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to our shareholders whose country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of numerous conditions, including a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are restricted. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when the time expires, tax then becomes payable even if no actual disposition of the shares has occurred.

These provisions could delay, prevent or impede an acquisition of us, even if such an acquisition would be considered beneficial by some of our shareholders.

Risks Relating to Our Ordinary Shares

A substantial number of our ordinary shares could be sold into the public market, which could depress our share ~~price.Our~~price.

Our largest shareholder, DIC, holds approximately ~~43.61%~~41.91% of our outstanding ordinary shares, as of ~~December 31, 2011.~~February 15, 2013. The market price of our ordinary shares could decline as a result of future sales by DIC or other existing shareholders or the perception that these sales could occur. DIC sold ~~16,385,870 ordinary~~approximately 5% of our outstanding shares oroutside the United States in 2011 and approximately ~~16.47%~~1.7% of our outstanding shares in ~~a number of transactions outside the United States in 2007, 2008 and 2011.~~February 2013. Sales may be made pursuant to a registration statement, filed with the U.S. Securities and Exchange Commission, or the SEC pursuant to the terms of a registration rights agreement or otherwise, or in reliance on an exemption from the registration requirements of the Securities Act, including the exemptions

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provided by Rule 144 or Regulation S. Any decline in our share price could also make it difficult for us to raise additional capital by selling shares.

In addition, in February 2012, a public committee for the enhancement of competition and the maintenance of the financial stability of the Israeli economy, or Centralization Committee, nominated by the Israeli Prime Minister, published its final recommendations, including recommendations to: (1) impose limitations on the control or holding of a substantial real corporation and its controlling entities over a financial corporation; (2) impose limitations on the control over public corporations through a pyramid structure by imposing a limitation on the number of layers in such pyramid to three for existing corporations and two for new corporations; (3) strengthen the corporate governance applicable to public companies in Israel, and in particular strengthen the independence of board of directors of public companies held through pyramid structure; (4) limit the exposure of institutional bodies to issuers, borrowers groups and the largest borrowers and issuers groups; and (5) require the entities responsible for the allocation of rights and public assets in certain cases to consider competitive and control centralization considerations regarding essential infrastructure. In relation to certain recommendations the committee recommended transition periods of between one and four years from their adoption. The adoption of such recommendations, if implemented, could have a material effect on us, given our being held as a fourth layer company in the IDB group.

In addition, under our option plan, options are subject to vesting schedules but vesting will be accelerated upon certain events including any sale or other disposition, of all or substantially all, of the outstanding shares of us. As of December 31, ~~2011~~2012 we ~~have 1,056,896~~had 3,019,152 shares reserved for issuance upon the exercise of options. In March 2013, our board of directors resolved to grant an additional 75,000 options. See ~~“Item~~"Item 6. Directors, Senior Management and Employment – E. Share Ownership – 2006 Share Incentive ~~Plan”~~Plan".

Our estimated market share based on number of subscribers was approximately ~~33.6%~~31.9% as of December 31, ~~2011.~~2012. Estimated market shares at such time of Partner, Pelephone, Hot Mobile and ~~MIRS~~Golan were approximately ~~31.9%~~29.5%, ~~29.6%~~28%, 7.6% and ~~4.8%~~1.8%, respectively and ~~Rami levy’s~~the MVNOs' market share is estimated to be ~~less than 1%~~1.2%.

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The competition in the cellular communications market increased following the launch of Pelephone's UMTS/HSPA network in 2009 and regulatory and other changes in our market. The competition has ~~further~~ intensified following the compulsory reduction of cellular Early Termination Fees to a negligible amount in February 2011 and expectations of entry of additional operators in 2011 and 2012, including the entry of Rami Levy. Competition is expected to intensify further as a result of the occurrence of any of the following events:

the entry into the market of additional competitors and specifically the entry of additional MVNOs and UMTS operators, more so if hosting services to MVNOs and national roaming services for UMTS operators will be at unfavorable terms for us. Mirs is expected to commence its UMTS operations (using national roaming on Pelephone's network) in the first half of 2012 and Golan is expected to commence operating (using national roaming on our network) in the second half of 2012. An additional three MVNO operators are also expected to commence operations in the first half of 2012;

the sale of bundles of communications services, including cellular services, as it is expected to entail further price erosion, more so if offered by either the Bezeq or Hot groups; the formation of three additional communications groups in the Israeli communications market in 2011, together with the regulatory changes relaxing the structural separation imposed on each of the Bezeq and Hot groups, will allow each of the groups to offer a bundle of services, in some cases quadruple and even quintuple service bundles to existing customers in each of their previously separated platforms, as well as to new customers. Bundles offerings are expected to blur boundaries among services and lead to price erosion, with each of the groups having an interest not to erode the prices of its core business, but rather of the core services of its competitors. Both Bezeq and Hot currently offer bundles of services, excluding cellular services. Bundle offerings by Hot and Bezeq, including cellular services, are expected to accelerate price erosion in the cellular market. See “Item 3. Key Information – D. Risk Factors – Risks related to our Business – We face intense competition in all aspects of our business” and "~~Item 4. Information on The Company - Business Overview - The Telecommunications Industry in Israel – Communications Groups – Structural Seperation~~" ~~for additional details;~~

·	increased usage of competing technologies, applications and services, allowing usage of our network, such as VoC or VoIP and applications such as Viber, WhatsApp and free SMS among iPhone holders, or other services, such WiFi, more so following the increased usage of smart phones; and

~~As of February 1, 2011, the compulsory reduction of Early Termination Fees to a negligible amount in the cellular market,~~(and their subsequent annulment), which eliminated the transfer barrier between operators and the formation of communications groups. The intensified competition led to the offering of packages at lower average ~~revenue~~prices per minute, ~~and has resulted~~resulting in accelerated price erosion, ~~and~~ a materially increased churn rate, and increased subscriber acquisition and retention costs due to a materially increased rate of gross recruitment of subscribers. In ~~August 2011,~~May 2012, the ~~Communications Law was amended~~competition further drastically intensified following the entry of additional cellular operators to ~~annul Early Termination Fees~~the market, specifically the launch of two new UMTS operations by Hot Mobile and Golan, without having to first invest in building their own network and using national roaming on Pelephone's and our networks (respectively) and aiming to win market share in the private sector as quickly as possible by introducing significantly lower tariffs than market level at that time (as their respective commitments to pay the license fee which amounts to approximately NIS 705 and 360 million, respectively, would be reduced to an immaterial amount, and the bank guarantees of their commitments would be returned to them, if they respectively gain a 7% market share in the private sector (taking into consideration subscribers, revenues and minutes of use market shares) within 5 years. This has caused a substantial decrease of prices made by all competitors, including us. As a result, and in an attempt to increase customers acquisition rate and gain market share, Golan and Hot Mobile have offered even lower tariffs, including free of charge Unlimited Packages for a limited period of time (up to four months), which were matched by other operators in the fourth quarter of 2012 and the beginning of 2013. This has led to a material increase in the churn rate, price erosion (due in part to substantial transfer of prepaid customers to postpaid pricing plans) and a material decrease in revenues and profitability for us.

Competition may intensify further as a result of the occurrence of any of the events described under “Item 3. Key Information – D. Risk Factors – Risks related to our Business – We face intense competition in all ~~other communication markets and a bill, expected to be enacted during the first half~~aspects of ~~2012, is proposing such annulment for certain new customers in the cellular market.~~our business”.

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In the handsets market, we are competing with numerous vendors, chain stores and importers' stores. Recent regulatory decisions, alleviating the regulatory requirements on the import to and the sale of handsets in Israel, coupled with regulatory decisions preventing cellular operators from making any linkage between handsets sale and cellular services, led to the entry of additional competitors into the market, to significantly increased competition and decreased sales for us. See "Item 4. Information on The Company - Government Regulations – Tariff Supervision" for additional details.

We believe that full and comprehensive mobile and wireline solutions would benefit our competitive standing, ~~mainly for our business customers.~~and are therefore focusing extensive marketing and sales efforts on bundles of cellular and wireline services. The principal competitive factors in the cellular market include general brand perception, perceived price, customer service and handset selection. In addition, mobile data and other value-added services constitute a potential growth engine for increasing revenues from subscribers and are also an important factor in selecting a cellular provider.

In the content provision market, we compete also with international media providers and handsets manufacturers, such as Apple, Google and Nokia, who have opened their own content enabling stores and ~~are changing~~have changed the traditional role of the cellular operator from the content provider into one of many content providers, competing to provide content to the operator's subscribers. The "Open Garden" international trend iswas facilitated by technological changes allowing high speed internet surfing and supporting handsets and ~~is rapidly changing~~has changed customers' consumption habits from surfing and downloading content mainly through the cellular operator's portal, to an off-portal surfing and content downloading as well as growing demand for internet surfing and content in general. ~~Expansion of this trend, known as~~In addition, the ~~"Open Garden", will enlarge the~~regulatory changes which requires us to block by default content ~~market but will further increase competition~~purchasing by our subscribers and allow it only upon a customer's request, resulted in ~~the~~a substantial decrease in our revenues from content ~~provision arena. Expansion of arrangements introduced by Apple,~~ in ~~which subscribers using an Apple handset can only purchase content through the Apple store, could adversely affect our content revenues.~~2012.

In the wireline communications market, ~~– In October 2011,~~in May 2012, the Israeli Minister of Communications published a policy document adopting the main recommendations of a public committee previously appointed by the Ministry ~~of Communications in March 2010~~ to examine Bezeq's tariffs structure and tariffs for wireline wholesale services and to review the possible annulment of the structural limitations currently imposed on Bezeq and its ~~subsidiaries, published its recommendations.~~subsidiaries. The ~~recommendations include:~~policy includes mainly the following: (1) ~~The creation of an~~An effective wholesale telecommunications access markets in ~~Israel-~~Israel will be created, as Bezeq and Hot will allow other operators ~~which~~that do not own an infrastructure, to use their infrastructure in order to provide services to end users. (2) The ~~terms~~structural separation between an owner of wireline infrastructure and its international landline operator and internet service provider affiliates shall be annulled within nine months from the date of execution of an agreement between such ~~services will~~owner of wireline infrastructure and another operator which has a significant market share and shall be ~~agreed~~replaced by an accounting separation, unless the ~~operators,~~Minister of Communications finds that such annulment may considerably harm the competition or by the ~~regulator, if no~~public. The Minister of Communications shall consider providing leniencies in relation to or annulment of the structural separation between an owner of wireline infrastructure and its cellular operator affiliate according to the pace of development of a wholesale market ~~has evolved~~and the state of competition in the market. In case an effective wholesale market does not develop within twenty four months from the date of the policy document, the Ministry of Communications shall act to impose a ~~certain period. (2) Annulment of~~ structural separation in the communication market - Structural separation imposed on the holders of landline general licenses, would be annulled, other than as to multichannel television (which will be annulled only after internet based TV market is available), within 6 months from the earlierowners of the ~~execution of a wholesale agreement or~~wireline infrastructure between the ~~provision of wholesale~~infrastructure and the services ~~or upon the setting of wholesale tariffs by~~provided through this infrastructure. (3) The ~~Ministry~~Minister of Communications ~~and replaced by accounting separation and restrictions on information transfer between~~shall annul the ~~retail and wholesale divisions of the landline general license holders. If no wholesale market is established within 2 years, the regulator will resume~~ structural separation ~~between infrastructure~~in relation to

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television broadcasting services if there is a reasonable possibility to provide a basic package of television services through the internet by providers without a national landline infrastructure. The Minister of Communications shall consider imposing a requirement to provide television broadcasting services for the same price within a package of telecommunications services and ~~end-user services of landline general license holders. (3)~~separately. (4) Change of the supervision on Bezeq retail tariffs to setting maximum tariffs rather than the current setting of fixed ~~tariffs. (4) Wholesale~~ tariffs within six months from the date of execution of an agreement between Bezeq and another operator. (5) The wholesale market's tariffs and terms of agreement shall be agreed through negotiations between the owners of the wireline infrastructure (Bezeq and Hot) and the other operators. An infrastructure owner that reaches an agreement with such other operator shall be obligated to beoffer the same terms, without discrimination, to all operators, including its affiliates. The Ministry of Communications shall intervene in the negotiations or in the terms of the agreement between the parties in case an agreement has not been reached within six months from the date of the policy document or in case the agreement between the parties includes terms that may harm the competition or the public or other operator's affairs. In addition, the Ministry of Communications may intervene in a retail tariff that was set by the ~~regulators would be maximum tariffs, based on a cost plus basis in order to induce investments in~~owner of wireline infrastructure or its affiliate that may harm the competition, through changing of the wholesale ~~wireline~~tariff. We are negotiating with Bezeq the terms of such wholesale agreement. Partner has already reached some understandings with Bezeq and in February 2013, Xfone Communications, an ILD operator that does not have a significant market and shall be reviewed by the regulator every 3 years. Until such tariffs have been be set, the tariff shall be fixed, regardless of customer's traits and amount to 75% of Bezeq's average retail price for private customers, during July to September 2011. This tariff will be in place for 6 months, with a maximum extension of additional 6 months (5) Landline operators who hold general licenses (such as Bezeq and Hot) will deposit autonomous bank guarantees in substantial amounts to guarantee the existence ofshare, announced entering a wholesale ~~market. (6) The provision of broadband access by Israel Electric Corporation, or IEC, should be promoted in order to increase competition and should be regulated in the same manner as~~agreement with Bezeq ~~and Hot. The implementation of the~~.

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Communications published a hearing regarding interconnect tariffs payable to land line operators in which the Ministry of Communications recommends its reduction by approximately 70% (to NIS 0.0104). The Ministry of Communications noted that the cost model created for that purpose will be used to examine wholesale services costs as well.

~~recommendations, in whole or in part, is subject to the adoption thereof by the Minister of Communications and further legislative proceedings.~~

In February 2010, the Ministry of Communications provided a trial license to the IEC, allowing it to use its fiber optic infrastructure to provide transmission services to other operators. In January 2013, the IEC was formally allowed to engage in communication activity by the Ministry of Finance and in February 2013, received the approvals of the Israeli Ministry of Energy and Water to do so. In March 2011, the Israeli government approved the establishment of a new communications company that will be granted the exclusive right to use the IEC's optic fibers infrastructure for the provision of broadband services to operators only, but the Ministry of Communications may allow it to offer its services directly to certain large business customers. The new company will be controlled by a private investor, ~~(51%),~~ which may not hold any means of control in another communications company, and IEC will own the ~~IEC (49%).~~minority stake in this new company. This initiative would increase our and our competitors capabilities to compete in the wireline market with Bezeq and Hot, and would increase competition in the wireline market. The IEC is expected to begin deployment of its network at the end of 2013.

While an effective wholesale wireline market will enhance our ability (including through Netvision) to compete and extend our service offering, the recommendations regarding the structural separation and Bezeq's tariffs supervision, which were liaised together by the Ministry of communications' policy, may have a material adverse effect on ~~Netvision's~~our competitive capabilities and results of operation. For further details see below in this Item 4. B. under the "NETVISION". See also "Item 3. Risk Factors – Risks related to our wholly owned subsidiary Netvision – Changes in regulatory environment could adversely affect Netvision's business" for risks relating to our landline operations and our ability to grow in that market.

In response to the enhanced competition in our market and in the Israeli telecommunications market in general, we have implemented various steps and strategies, ~~including~~including:

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acquiring Netvision to create a competitive ~~communication group; we believe that our acquisition~~communications group and offering comprehensive bundles of ~~Netvision in 2011 strengthens our competitive position vis-à-vis other communications groups in the Israeli market, as it allows us to offer our customers a comprehensive~~ mobile and wireline ~~solutions.~~solutions, such as the very successful "Cellcom Total" price plan.

·	marketing and branding campaigns aimed at enhancing market leadership, perceived value, perception of the fairness and value of our pricing, brand recognition and loyalty among our existing and potential subscriber base;

·	investing significant resources in ~~improving~~ customer service and retention, as well as supporting information technology systems;

·	introducing innovative value-added services and ~~identifying popular niches among various subscriber groups;~~ data products;

·	taking aggressive efficiency measures through adjustments to the existing head count, a reduction in overhead expenses and improvement of work processes, in order to reduce costs and improve our agility;

·	investing in ~~improving~~ our network technology to ensure our ability to offer quality services and advanced services, both cellular and wireline services;

·	~~using innovative sales campaigns for attracting new subscribers by offering loyalty rebates;~~

·	offering attractive pricing plans to subscribers, ~~adapted to their needs and preferences and innovative pricing models,~~ including cross sale and up sale of our and Netvision's services; and

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identifying new opportunities to maximize our advantages as ana cellular operator, such as the offering of NFC based cellular credit card services which we intend to offer in ~~order~~2013 and maximizing our advantages as a communications group, such as by providing television services over the internet, a solution we have been developing and may decide to ~~expand our share in the "Open Garden" market place and the recent launch of certain financial services.~~

launch.

Our ability to compete successfully will depend, in part, on our ability to anticipate and respond to trends and events affecting the industry, including: the introduction of new services and technologies, changes in consumer preferences, demographic trends, economic conditions, pricing strategies of competitors and changes to the legal and regulatory environment. We believe that we are well positioned for the competition in our market.

Intellectual Property

We are a member of the GSM Association, together with other worldwide operators that use GSM technology. As a member of the association, we are entitled to use its intellectual property rights, including the GSM logo and trademark.

We have registered approximately 30 domain names and approximately 120 trademarks, the most important of which are the star design, “Cellcom”, “Talkman” and “Cellcom Volume”. Netvision has registered approximately ~~105~~90 domain names and approximately 9065 trademarks, the most important of which are "Netvision" and "013 Netvision". We are also the proprietor of a few registered ~~patents and patent applications.~~patents.

Government Regulations

The following is a description of various regulatory matters which are material to our operations, including certain future legislative initiatives which are in the process of being enacted. There is no certainty that the future legislation described here will be enacted or whether it will be subject to further change before its final enactment.

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General

A significant part of our operations is regulated by the Israeli Communications Law, 1982, the regulations promulgated under the Communications Law and the provisions of our licenses, which were granted by the Israeli Ministry of Communications pursuant to the Communications Law. We are required by law to have a general license in order to provide cellular communications services in Israel. The Ministry of Communications has broad supervisory powers in connection with the operations of license holders and is authorized, among other things, to impose financial penalties for violations of the Communications Law, the regulations and our licenses. For a description of the principal licenses held by Netvision see below in this Item 4.B under the caption "NETVISION".

Our Principal License

The establishment and operation of a cellular communications network requires a license pursuant to the Communications Law for telecommunications operations and services and pursuant to the Israeli Wireless Telegraph Ordinance (New Version), 1972, for the allocation of spectrum and installation and operation of a cellular network.

We provide our cellular services under a non-exclusive general license granted to us by the Ministry of Communications in June 1994, which requires us to provide cellular services in the State of Israel to anyone wishing to subscribe. The license expires on January

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31, 2022, but may be extended by the Ministry of Communications for successive periods of six years, provided that we have complied with the license and applicable law, have continuously invested in the improvement of our service and network and have demonstrated the ability to continue to do so in the future. The main provisions of the license are as follows:

The license may be modified, cancelled, conditioned or restricted by the Ministry of Communications in certain instances, including: if required to ensure the level of services we provide; if a breach of a material term of the license occurs; if DIC (or a transferee or transferees, if approved by the Ministry of Communications), in its capacity as our founding shareholder, holds, directly or indirectly, less than 26% of our means of control; if our founding shareholders who are Israeli citizens and residents hold, directly or indirectly, less than 20% of our means of control (DIC, as founding shareholder, has undertaken to comply with this condition); if at least 20% of our directors are not appointed by Israeli citizens and residents from among our founding shareholders or if less than a majority of our directors are Israeli citizens and residents; if any of our managers or directors is convicted of a crime of moral turpitude and continues to serve; if we commit an act or omission that adversely affects or limits competition in the cellular communications market; or if we and our 10% or greater shareholders fail to maintain combined shareholders’ equity of at least $200 million. For the purpose of the license, “means of control” is defined as voting rights, the right to appoint a director or general manager, the right to participate in distributions, or the right to participate in distributions upon liquidation;

It is prohibited to acquire (alone or together with relatives or with other parties who collaborate on a regular basis) or transfer our shares, directly or indirectly (including by way of creating a pledge which if foreclosed, will result in the transfer of shares), in one transaction or a series of transactions, if such acquisition or transfer will result in a holding or transfer of 10% or more of any of our means of control, or to transfer any of our means of control if as a result of such transfer, control over our company will be transferred from one party to another, without the prior approval of the Ministry of Communications. For the purpose of the license, “control” is defined as the direct or indirect ability to direct our operations whether this ability arises from our articles of association, from written or oral agreement or from holding any means of control or otherwise, other than from holding the position of director or officer;

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the transfer of shares), in one transaction or a series of transactions, if such acquisition or transfer will result in a holding or transfer of 10% or more of any of our means of control, or to transfer any of our means of control if as a result of such transfer, control over our company will be transferred from one party to another, without the prior approval of the Ministry of Communications. For the purpose of the license, “control” is defined as the direct or indirect ability to direct our operations whether this ability arises from our articles of association, from written or oral agreement or from holding any means of control or otherwise, other than from holding the position of director or officer;

It is prohibited for any of our office holders or anyone holding more than 5% of our means of control, to hold, directly or indirectly, more than 5% of the means of control in Bezeq or another cellular operator in Israel, or, for any of the foregoing to serve as an office holder of one of our competitors, subject to certain exceptions requiring the prior approval of the Ministry of Communications;

We, our office holders orand our interested parties may not be parties to any arrangement whatsoever with Bezeq or another cellular operator that is intended or is likely to restrict or harm competition in the field of cellular services, cellular handsets or other cellular services. For the purpose of the

license, an “interested party” is defined as a 5% or greater holder of any means of control;

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~~license, an “interested party” is defined as a 5% or greater holder of any means of control;~~

We are subject to the guidelines of Israel’s General Security Services, which may include requirements that certain office holders and holders of certain other positions be Israeli citizens and residents with security clearance. For example, our Board of Directors is required to appoint a committee to deal with matters concerning state security. Only directors who have the requisite security clearance by Israel’s General Security Services may be members of this committee. In addition, the Minister of Communications is entitled under our license to appoint a state employee with security clearance to act as an observer in all meetings of our Board of Directors and its committees;

Prior to operating a network, we are required to have agreements with a manufacturer of cellular network equipment for the duration of its intended operating period, which must include, among other things, a know-how agreement and an agreement guaranteeing the supply of spare parts for our network equipment for a period of at least seven years; –

We are required to interconnect our network to other public telecommunications networks in Israel, on equal terms and without discrimination, in order to enable subscribers of all operators to communicate with one another; we are also required to provide national roaming services to new UMTS operators;

We may not give preference in providing infrastructure services to a license holder that is an affiliated company over other license holders, whether in payment for services, conditions or availability of services or in any other ~~manner, other than in specific circumstances and subject to the approval of the Ministry of Communications;~~

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manner, other than in specific circumstances and subject to the approval of the Ministry of Communications;

The license sets forth the general types of payments that we may collect from our subscribers, the general mechanisms for setting tariffs, providing cellular services related benefits, limitations on raising tariffs (for non-business subscribers under obligation to purchase our services for a predefined period, during such period), and on the duration of a non-business subscriber's obligation to purchase our services, the reports that we must submit to the Ministry of Communications and the obligation to provide notice to our customers and the Ministry of Communications prior to changing tariffs. The Ministry of Communications is authorized to intervene in setting tariffs in certain instances;

The license requires us to maintain a minimum standard of customer service, including, among other things, establishing call centers ~~and service centers,~~, maintaining a certain service level of our network, collecting payments pursuant to a certain procedure, protecting the privacy of subscribers; using a specific format for our agreement with our customers; ~~obtaining~~to obtain an explicit request from our subscribers to purchase services, whether by us or by third parties, as a precondition to providing and charging for such services, including specific requirements as to format and a default blockage of the customer's ability to purchase certain services; ~~maintaining~~to maintain a specific form of

evidence of customers' request to purchase our services as a precondition to charging our customers for those services, notifications we must provide them regarding the services ordered and the procedures for handling subscribers' objections as to billing and repayment of overcharged sums;

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·	The license or any part thereof may not be transferred, pledged or encumbered without the prior approval of the Ministry of Communications. The license also sets forth restrictions on the sale, lease or pledge of any assets used for implementing the license;

We are required to obtain insurance coverage for our cellular activities. ~~See “Item 8 – Financial Information - Legal Proceedings” for details of~~In March 2010 a purported class action was filed against us in that regard ~~in March 2010.~~and subsequently dismissed. In addition, the license imposes statutory liability for any loss or damage caused to a third party as a result of establishing, sustaining, maintaining or operating our cellular network. We have further undertaken to indemnify the State of Israel for any monetary obligation imposed on the State of Israel in the event of such loss or damage. For the purpose of guaranteeing our obligations under the license, we have deposited a bank guarantee in the amount of $10 million with the Ministry of Communications, which may be forfeited in the event that we violate the terms of our license.

In the event that we violate the terms of our license, we may be subject to substantial penalties, including monetary sanctions. In ~~2007,~~August 2012, the Communications Law was amended to include an increase in the financial sanctions that may be imposed on us by the Ministry of Communications for a breach of our licenses. Following the increase, the maximum amount per violation that may be imposed is approximately NIS 1.6 million plus 0.25% of our annual revenue for the preceding year. An additional sanction amounting to 2% of the original sanction may be imposed for each day that the violation continues. In addition, the Ministry of Communications may determine certain service-related terms in our licenseso as “service terms”; the maximum monetary sanctions per violation of a “service term” shall be double the amount of any other monetary sanction set in our license for such a violation per each period of 30 days or portion thereof during which the violation continues. In January 2012, a bill proposing to set gradual financial sanctions on communication operators, for breach of their licenses, the sum of which shall be calculated as a percentage of the operator's income and based on the gravity of the ~~breach, has passed~~breach. The maximum amount per violation that may be imposed is approximately NIS 1.6 million plus 0.225% of our annual revenue for the ~~preliminary stage~~

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preceding year. The Ministry of Communications published criteria to be used for determining the ~~Israeli Parliament. The adoption~~sum of the ~~bill, if adopted,~~imposed sanctions. Those include the impact on the competition, the duration of the violation, the number of subscribers affected, the benefit to the operator from the violation and prior violations. This amendment is expected to substantially increase the Ministry of Communications' usage of such sanctions. Substantial sanctions will harm our results of operations. In the event that we materially violate the terms of our licenses, the Ministry of Communications has the authority to revoke them.

Other Licenses

Special general license for the provision of landline ~~communication~~communications services

In April 2006, Cellcom Fixed Line Communications L.P., or Cellcom Fixed Line, a limited partnership wholly-owned by us, was granted a non-exclusive special general license for the provision of landline telephone ~~communication~~communications services. The license expires in 2026 but may be extended by the Ministry of Communications for successive periods of 10 years. We began providing landline telephone services in July 2006, concentrating on offering landline telephone services to selected businesses. The partnership deposited a bank

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guarantee in the amount of NIS 10 million with the Ministry of Communications upon receiving the license. The provisions of our general license described above, including as to its extension, generally apply to this license, subject to certain modifications. It should be noted that in addition to any 10% share transfer requiring the prior approval of the Ministry of Communications as noted in our general license, the special general license additionally requires prior approval for acquiring the ability to effect a significant influence over us. In this context, holding 25% of our means of control is presumed to confer significant influence.

Data and ~~transmission license~~Transmission License

In 2000, we were granted a non-exclusive special license for the provision of local data ~~communication~~communications services and high-speed transmission services, which is effective until December ~~2012.~~2017. Following the grant of a special general license for the provision of landline telephone ~~communication~~communications services to Cellcom Fixed Line, which also includes the services previously provided through our data and transmission license, our data and transmission license was amended in June 2006 to permit only Cellcom Fixed Line to be our customer of these services (and these services are now being provided to our customers through Cellcom Fixed Line). The provisions of our general and general specific licenses described above, including as to their extension, generally apply to this license, subject to certain modifications.

~~Cellular services~~Services in Judea and Samaria

The Israeli Civil Administration in Judea and Samaria granted us a non-exclusive ~~license~~licenses for the provision of cellular and landline services to the Israeli-populated areas in Judea and Samaria. ~~This license is~~Those licenses are effective until December 31, 2013. We expect we will be able to renew this license without undue burden. The provisions of the ~~general license~~cellular and landline licenses described above, including as to its extension, generally apply to ~~this license, subject to certain modifications.~~

~~Landline communication services in Judea and Samaria~~

The Israeli Civil Administration in Judea and Samaria granted us a non-exclusive license for the provision of landline communications services to the Israeli-populated areas in Judea and Samaria. This license is effective until December 31, 2013. The provisions of the general license described above, including as to its extension, generally apply to this license,those licenses, subject to certain modifications.

Internet Service Provider license

In December 2001, we were granted a non-exclusive special internet services provider, or ISP, license for the provision of internet access services. The license expires in

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2013 but may be extended by the Ministry of Communications for successive periods of five years. We expect we will be able to renew this license without undue burden. The provisions regarding the transfer of our shares which are included in the special ~~general~~ license for the provision of ~~landline communication~~data and transmission services described above, generally apply to this license.

Possible unified license

In February 2013, the Ministry of Communications announced its intention to replace the current special general license for the provision of landline communications services, the general license for the provision of international telecommunication services and the MVNO license, with a unified license, which will allow its holder to provide any of those services as well as ISP services (currently provided under an internet service provider license)and installation and maintenance of telecommunication equipment at a customer's or the licensee's premises (currently provided under a 'network end point' license).

Tariff Supervision

Under the Israeli Communications Regulations (Telecommunications and Broadcasting) (Payment for Interconnecting), 2000, interconnect tariffs among landline operators, international call operators and cellular operators are subject to regulation and have been gradually decreased, leading to a material decrease in our revenues.

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In September 2010, the regulations were amended as follows:

the maximum interconnect tariff payable by a landline operator or a cellular operator for the completion of a call on another Israeli cellular network was reduced from the previous tariff of NIS 0.251 per minute to NIS 0.0687 per minute from January 1, 2011; to 0.0634 per minute from January 1, 2012; to NIS 0.0591 per minute from January 1, 2013; and to NIS 0.0555 from January 1, 2014;

the maximum interconnect tariff payable by a cellular operator for sending an SMS message to another Israeli cellular network was reduced from the previous tariff of NIS 0.0285 to NIS 0.0016 from January 1, 2011; to NIS 0.0015 from January 1, 2012; to NIS 0.0014 from January 1, 2013; and to NIS 0.0013 from January 1, 2014;

the tariffs do not include VAT and will be updated annually from January 1, 2011, based on the change in the Israeli CPI published in November of the year preceding the update date from the average annual Israeli CPI for 2009. The tariffs will also be increased by the percentage of royalties payable to the Ministry of Communications by the operator.

As a result of these updates, ~~including the increase of the royalties we pay to the Ministry of Communications,~~ the current maximum interconnect tariffs are NIS ~~0.0728~~0.0643 per minute for the completion of a call on another cellular network and NIS ~~0.0017~~0.0015 for a completion of an SMS message to another cellular network.

This reduction had a material adverse effect on our results of operation in 2011 and 2012 which is expected to continue. We have taken and intend to continue to take measures in order to reduce the adverse effects of such reduction, through revenue enhancement as well as cost reduction measures, but cannot offer any assurance that these measures will be successful. For details on the effects of the reduction see Item 5. Operating and Financial Review and Prospects. – A. Operating Results – Overview –General.

In ~~addition, in 2011,~~February 2013, the Ministry of Communications ~~retained an international consulting company in order to provide the Ministry with recommendations~~published a hearing regarding interconnect tariffs payable to land line operators in which ~~is expected to publish~~the Ministry of Communications recommends its ~~recommendations during the first half of 2012.~~reduction by approximately 70% (to NIS 0.0104).

Under these regulations and our license, commencing January 1, 2009, our basic airtime charging units, including for interconnect purposes, were changed from twelve-second units to one-second units. Our general license also prevents us from offering our subscribers pricing plans using airtime charging units other than the basic airtime charging unit.

In October 2008, the Ministry of Communications amended our license in a manner that obligates us, commencing December 31, 2008, to set a fixed tariff for non-business subscribers under obligation to purchase our services for a predefined period, during that period, thus limiting our ability to raise tariffs to such subscribers.

~~In 2008, the Consumer Protection Law was amended in a manner that obligates us, commencing January 2009, to terminate certain services (excluding voice services) we~~

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provide to our subscribers during a predefined period, at the end of that period, unless the price for the services to be provided after the end of the predefined period has been set in advance or we have received the subscriber’s affirmative consent to continue and provide these services.

In July 2009, the Ministry of Communications amended our license, effective November 1, 2009, in a manner that prohibits any linkage between a cellular services transaction and a handset purchase transaction, thus requiring us to offer any cellular services-related benefits offered to a customer purchasing a handset from us to any customer who purchased the handset elsewhere. In March 2012, the Communications Law was amended so as to prohibit cellular operators to make any linkage between a cellular services transaction and a handset purchase transaction, including by way of offering airtime rebates or refunds for handsets, as of January 1, 2013. This may result in further decreased sales of handsets by us and increased churn.

In June 2007, the European Union adopted a resolution to reduce and regulate roaming tariffs. In August 2008, the Israeli Government adopted a resolution to negotiate a reduction of inbound and outbound roaming tariffs with the European Union and/or members of the European Union or countries frequently visited by Israelis. In November 2008 and again in January 2012 the Ministry of Communications issued a supplemental request for information, following its request in 2007, requesting us to provide information in relation to our roaming services. The requests for information were made in order to evaluate the need for intervention in roaming tariffs. In January 2013, the Ministry of Communications published a hearing proposing restrictions on roaming services provision. For further details see "We operate in a heavily regulated industry, which can harm our results of operations" above. If the Ministry of Communications decides to intervene in the pricing of roaming services, this could reduce the revenues we derive from our roaming services.

In December 2010, the Communications Law was amended to reduce the Early Termination Fees in the cellular market. In accordance with the amendment, as of February 1, 2011, Early Termination Fees ~~are~~were calculated based on the subscriber's average monthly bill, resulting in a negligible fee. The reduced Early Termination Fees apply to customers with less than a certain amount of phone lines. The reduction ~~applies~~applied to existing as well as new pricing plans. An additional amendment prohibits the collection of the handset's remaining installments in one payment pursuant to early termination. As of January 2011, we changed our new pricing plans so that the majority of which do not include a commitment to a predefined period nor an Early Termination Fee. In August 2011, the Communications Law was amended to annul Early Termination Fees in all other communications markets. In ~~addition, a bill proposing~~March 2012 the Communication Law was amended so as to completely annul Early Termination Fees in relation to new cellular customers with less than a certain number of phone lines ~~has passed preliminary enactment procedures in the Israeli parliament and is expected to be enacted during the first half~~(applying retroactively as of ~~2012.~~November 2011). The reduction of Early Termination Fees has led to the offering of packages at lower average revenue per minute and resulted in accelerated price erosion, materially increased churn rate and increased subscriber acquisition and retention costs due to materially increased rate of gross recruitment of subscribers.

In December 2010, the ~~Communication~~Communications Law was amended to allow national roaming for new operators and ~~Mirs.~~Hot Mobile. For additional details see "Additional UMTS operators" below. Following the amendment, if a new operator or ~~Mirs~~Hot Mobile and the hosting operator have not reached an agreement as to the terms of the service (including the consideration), for any reason, until the service is to commence (after certain criteria is met) the service will be provided for the then prevailing interconnect tariff (in case of a call and for data services - 65% of the interconnect tariff per 1 mega) and subsequently (but no later than February 1, 2012) shall be determined by the Ministry of Communications with the consent of the Minster of Finance and applied retroactively. Unfavorable terms and consideration for the

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service, ~~(such as equal or based on the interconnect tariff),~~ may result in material adverse effect on our results of operations. In October 2011, we entered a national roaming agreement

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with Golan and in September 2011, ~~Mirs~~Hot Mobile entered a national roaming agreement with Pelephone.

Under the Communications Law, in the event that a MVNO and the cellular operator, will not have reached an agreement as to the provision of service by way of MVNO within six months from the date the MVNO has approached the cellular operator, and if the Ministry of Communications together with the Ministry of Finance determine that the failure to reach an agreement is due to unreasonable conditions imposed by the cellular operator, the Ministry of Communications may intervene in the terms of the agreement, including by setting the price of the service. Unfavorable terms and consideration for the service, ~~(such as equal or based on the interconnect tariff),~~ may result in material adverse effect on our results of operations. For additional details see "Mobile Virtual Network Operators" below. In 2011 five ~~MVNO's~~MVNOs have entered into hosting agreements, one of which (Home Cellular) has entered into an agreement with us. To date, three MVNOs commenced operations and one of them is hosted by us.

In December 2010, the ~~Communication~~Communications Law was amended to prevent any limitation on the usage of any internet service or application, including though differentiating pricing, (network neutrality).

In ~~addition,~~August 2012, the Consumer Protection Law was amended, effective January 1, 2013, in a manner that obligates us to pay our customers predetermined damages for each discrepancy from the customer's pricing plan, remedied after the customer complained. The damages are in an insignificant amount, but may aggregate to substantial amounts if paid to numerous customers on multiple occasions.

In January 2012, the Ministry of Communications published a hearing ~~regarding VoC license, which among others, notes~~proposing restrictions on the ~~Ministry~~provision of ~~Communications' intention~~roaming services, including default blockage of the data roaming service to ~~require cellular operators~~be opened only upon the customer's request and automatic blockage of all roaming services to ~~offer "data only" service, at~~be reopened again upon such request each time the customer reaches a ~~price not exceeding current data only subscription (such as for modem), including at lower speed rates. Such requirements~~certain usage threshold. The hearing further proposed applying certain notification procedures. The adoption of the proposed changes may ~~adversely affect~~have an adverse effect on our results of ~~operations~~operations.

Permits for Cell Site Construction

General

In order to provide and improve network coverage to our subscribers, we depend on cell sites located throughout Israel. The regulation of cell site construction and operation are primarily set forth in the Israeli National Zoning Plan 36 for Communications, which was published in May 2002. The construction of radio access devices, which are cell sites of smaller dimensions, is further regulated in the Communications Law.

The construction and operation of cell sites are subject to permits from various government entities and related bodies, including:

·	building permits from the local planning and building committee or the local licensing authority (if no exemption is available);

·	approvals for construction and operation from the Commissioner of Environmental Radiation of the Ministry of Environmental Protection;

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·	permits from the Civil Aviation Authority (in most cases);

·	permits from the Israel Defense Forces (in certain cases); and

·	other specific permits necessary where applicable, such as for cell sites on water towers or agricultural land.

In March 2010, a new Planning and Building bill, intended to replace the existing Planning and Building law passed the first stage of enactment at the Israeli parliament. If the bill would be enacted, it may have an effect, among others, on current permits for our cell sites, the procedures to receive building permits for our cell

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sites, the exemption for radio access devices set out in the Communications Law (which the bill proposed to annul), the scope of our indemnification obligations and the obligation to pay amelioration charge. In this preliminary stage of enactment, we cannot estimate what are the chances of its enactment and what would be its effects, if so enacted, on our network and network build-out.

See ~~“Item 8 – Financial Information - Legal Proceedings” below~~note 29 to our consolidated financial report for 2012 included elsewhere in this annual report for details regarding a purported class actions filed against us in connection with cell sites construction and ~~operation.~~operation (a second purported class action was dismissed without prejudice).

National Zoning Plan 36

National Zoning Plan 36 includes guidelines for constructing cell sites in order to provide cellular broadcasting and reception communications coverage throughout Israel, while preventing radiation hazards and minimizing damage to the environment and landscape. The purpose of these guidelines is to simplify and streamline the process of cell site construction by creating a uniform framework for handling building permits.

National Zoning Plan 36 sets forth the considerations that the planning and building authorities should take into account when issuing building permits for cell sites. These considerations include the satisfaction of safety standards meant to protect the public’s health from non-ionizing radiation emitting from cell sites, minimizing damage to the landscape and examining the effects of cell sites on their physical surroundings. National Zoning Plan 36 also determines instances in which building and planning committees are obligated to inform the public of requests for building permits prior to their issuance, so that they may submit objections to the construction of a site in accordance with the provisions of the Planning and Building Law. Many local authorities have argued that a building permit issued in reliance on the Plan requires the payment of amelioration charge. The matter was not yet decided by a court of law. Should the matter be decided against us, the costs of constructing a site will substantially increase.

See “Site licensing” below for arguments against the application of National Zoning Plan 36 to certain cell sites.

However, National Zoning Plan 36 is in the process of being revised. Current proposed changes will impose additional restrictions and requirements on the construction and operation of cell sites. In June 2010, the proposed changes were approved by the National Council for Planning and Building and submitted for the approval of the Government of Israel. If the proposed changes are approved by the Israeli Government they will harm our ability to construct new cell sites, make the process of obtaining building permits for the construction and operation of cell sites more cumbersome and costly, could adversely affect our existing network and may delay the future deployment of our network.

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Site licensing

We have experienced difficulties in obtaining some of the permits and consents required for the construction of cell sites, especially from local planning and building authorities. The construction of a cell site without a building permit (or applicable exemption) constitutes a violation of the Planning and Building Law. Violations of the Planning and Building Law are criminal in nature. The Planning and Building Law contains enforcement provisions to ensure the removal of unlawful sites. There have been instances in which we

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received demolition orders or in which we and certain of our directors, officers and employees faced criminal charges in connection with cell sites constructed and/or used without the relevant permits or not in accordance with the permits. In most of these cases, we were successful in preventing or delaying the demolition of these sites, through arrangements with the local municipalities or planning and building authorities for obtaining the permit, or in other cases, by relocating to alternate sites. As of December 31, ~~2011,~~2012, we were subject to 1810 criminal and administrative legal proceedings alleging that some of our cell sites were built and have been used without the relevant permits or not in accordance with the permits. As of the same date, a small portion of our cell sites operated without building permits or applicable exemptions. Although we are in the process of seeking to obtain building permits ~~or modify our cell sites in order to satisfy applicable exemptions for a portion~~ of these sites, we may not be able to obtain ~~or modify~~ them and in several instances we may be required to relocate these sites to alternative locations or to demolish them without any suitable alternative. In addition, we may be operating a significant number of our cell sites, in a manner which is not fully compatible with the building permits issued for them, although they are covered by permits from the Ministry of Environmental Protection in respect of their radiation level. In some cases we will be required to relocate these cell sites to alternative locations, to reduce capacity coverage or to demolish them without any suitable alternative.

Based on advice received from our legal advisors and consistent with most Court rulings on the matter and the Israeli Attorney General opinion on the matter (given in May 2008) that the exemption from obtaining a building permit applies to cellular radio access devices, we have not requested building permits under the Planning and Building Law for rooftop radio access devices.

Notwithstanding the Attorney General's opinion, in May 2008 the District Court of Tel-Aviv-Jaffa, in its capacity as court of appeals, ruled that our and other cellular operators’ devices do not meet the exemption’s requirements and therefore the exemption may not be relied upon by us and other cellular operators. We and other cellular operators appealed against this ruling to the Supreme Court and the State notified the Supreme Court it concurs with our and another cellular operator’s appeals against the District Court ruling. The State requested that a third operator’s appeal be returned to the District Court for further deliberation on specific questions regarding the interpretation of "rooftop" and the requirement to obtain an extraordinary usage permit in the circumstances of that case in the context of the exemption. Furthermore, in July 2008, a petition seeking to annul the Attorney General's opinion and apply the District Court ruling was filed with the Supreme Court by the Union of Local Authorities in Israel and certain local planning and building authorities which also requested to join our appeal and argue against the position of the State. In June 2009, another petition seeking similar remedies, was also filed with the Supreme Court. The Supreme Court decided to hear both petitions and our appeal together.

In July 2009, the inter-ministry committee established to examine the appropriateness of future application of the exemption according to the Attorney General opinion, published its recommendations for future application of the exemption. While the Ministry of

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Communications recommended that, given the difficulties in obtaining permits for the construction of cell sites, the exemption should be reviewed after the lapse of one to two years from the approval of the new National Zoning Plan 36, to verify that it provides an adequate solution that allows the cellular operators to provide required ~~communication~~communications services, the Ministries of Interior Affairs and Environmental Protection recommended that the exemption be annulled within 6 months from the date of the recommendations, based,

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among others, on the following arguments: (1) current cellular infrastructure is sufficient, given it is currently used to provide advanced services such as internet, radio and television broadcasting, while such services may be provided by a landline network; and (2) with respect to radiation safety, cell sites constructed pursuant to a building permit are preferable to radio access devices, and utilizing a cellular network to provide advanced services which can be provided through a landline network, is unjustified in light of the preventive care principle set in the Israeli Non-Ionizing Radiation Law.

In September 2009, following publication of ~~the~~such recommendations, ~~of an inter-ministry committee established to examine the appropriateness of future application of the exemption,~~ the Attorney General concluded that the application of the exemption does not balance properly the different interests involved and therefore cannot continue. In March 2010 the Israeli Ministry of Interior Affairs submitted draft regulations setting conditions for the application of the exemption for the approval of the Economy Committee of the Israeli Parliament. The regulations draft includes significant limitations on the ability to construct radio access devices based on such exemption, including a limitation of the number of such radio access devices to 5% of the total number of cell sites constructed or to be constructed with a building permit in a certain area during a certain period (which will render the construction of radio access devices based on the exemption practically impossible), and circumstances in which a request for a building permit for the radio access device was filed and no resolution has been granted within the timeframe set in the regulations.

In September 2010, the Israeli Supreme Court issued an interim order prohibiting further construction of radio access devices in cellular networks in reliance on the exemption. The interim order, that was issued pursuant to the Israeli Attorney General's request, will be in effect until the enactment of the proposed regulations or other decision by the court. A further decision of the Supreme Court in February 2011, states that the order will not apply to the replacement of existing radio access devices under certain conditions. In September 2011, the Supreme Court allowed ~~Mirs~~Hot Mobile and Golan to construct radio access devices in reliance on the exemption, under certain limitations, until July 31, 2012 ~~and in December 2011 the Supreme Court~~which was thereafter extended ~~this period with regard to Golan~~several times until ~~November 6, 2012.~~September 30, 2013. Our application to relax the interim order against us was denied.

Additionally, in November 2008, the District Court of Central Region, in its capacity as court of appeals, ruled that the exemption does not apply to radio access devices, if the rooftop on which those devices are located is at the same level as a place of residence or other building that is regularly frequented by people. Other appeals relating to the exemption, including as to the requirement to obtain an extraordinary usage permit, are still under consideration, ~~in the District Court and other similar challenges,~~ as well as other claims asserting that those cell sites and other facilities do not meet other legal requirements continue.

An annulment of, or inability to rely on, or substantial limitation of, the exemption could adversely affect our existing network and network build-out, particularly given the objection of some local planning and building authorities to grant due permits where required, could have a negative impact on our ability to obtain environmental permits for these sites, could negatively affect the extent, quality, capacity and coverage of our network,

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and our ability to continue to market our products and services effectively. This may have a material adverse effect on our results of operations and financial condition.

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Radio access devices do receive the required permits from the Ministry of Environmental Protection. Since October 2007, the Commissioner of Environmental Radiation at the Ministry of Environmental Protection took the position that he will not grant and/or renew operating permits to radio access devices, where the local planning and building committee’s engineer objected to the Company's reliance upon this exemption for radio access devices. We believe that in taking this position, the Commissioner is acting beyond his powers.

For reasons not related to radiation hazards, ~~we have not received environmental permits for a few of our cell sites, primarily~~ due to building and planning issues ~~such as objections by local planning and building committee's engineers to our reliance on the exemption from obtaining building~~we have received partial environmental permits for ~~radio access devices.~~single cell sites.

Several local planning and building authorities argue that Israeli cellular operators may not receive building permits in reliance on the current National Zoning Plan 36, or the Plan, for cell sites operating in frequencies not specifically detailed in the frequencies charts attached to the Plan. In a number of cases, these authorities have refused to issue a building permit for such new cell sites, arguing that the Plan does not apply to such cell sites and that building permits for such cell sites should be sought through other processes (which are longer and cumbersome), such as an application for an extraordinary usage or under existing local specific zoning plans. Since June 2002, following the approval of the Plan, building permits for the Company's cell sites (where required) have been issued in reliance on the Plan. The current proposed draft amendment to the Plan covers all new cell sites requiring a building permit, independently of the frequencies in which they operate. Most of our cell sites and many cell sites operated by other operators, also operate in frequencies not specifically detailed in the Plan. The frequencies allocated in the 2011 UMTS tender are also not detailed in the Plan. We believe that the Plan applies to all cell sites, whether or not they operate in specific frequencies, consistent with the practice developed since 2002 and intend to defend our position vigorously. However, we are currently unable to assess the chances of success of the above argument.

If this approach continues, it would have a negative impact on our ability to deploy additional cell sites (until such time as the Plan is amended to include all cellular cell sites), which could negatively affect the extent, quality and capacity of our network coverage and our ability to continue to market our products and services effectively.

In addition to cell sites, we provide repeaters (also known as bi-directional amplifiers) to subscribers seeking a solution to weak signal reception within specific indoor locations. Based on advice received from our legal advisors, we have not requested building permits under the Planning and Building Law for outdoor rooftop repeaters, which are a small part of the repeaters that have been installed. It is unclear whether other types of repeaters require building permits. Some repeaters require specific permits and others require a general permit from the Ministry of Environmental Protection in respect of their radiation level, and we ensure that each repeater functions within the parameters of the applicable general permit. Should it be established that the installation of repeaters (including those already installed) requires a building permit, we will perform cost-benefit analyses to determine whether to apply for permits for existing repeaters or to remove them and whether to apply for permits for new repeaters.

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In addition, we construct and operate microwave sites as part of our transmission network. The various types of microwave sites receive permits from the Ministry of

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Environmental Protection in respect of their radiation level. Based on advice received from our legal advisors, we believe that building permits are not required for the installation of these microwave facilities on rooftops. If the courts determine that building permits are necessary for the installation of these sites, it could have a negative impact on our ability to obtain environmental permits for these sites and to deploy additional microwave sites and could hinder the extent, quality and capacity of our transmission network coverage and our ability to continue to market our landline services effectively.

Operating a cell site or a facility without the requisite permits or not in accordance with permits granted could subject us and our officers and directors to criminal, administrative and civil liability. Should any of our officers or directors be found guilty of an offence, although this has not occurred to date, they may face monetary penalties and a term of imprisonment. In addition, our sites or other facilities may be the subject of demolition orders and claims of breach of contract and we may be required to relocate cell sites to less favorable locations or stop operation of cell sites. This could negatively affect the extent, quality and capacity of our network coverage and adversely affect our results of operations.

In July 2011, an inter ministry team of the Ministries of Communications, Finance, Interior, Environmental Protection and the Anti-Trust Commissionaire, published its recommendations regarding cell site sharing. The recommendations include compulsory cell sites sharing in the construction of new cell sites or modification to existing cell sites which require a building permit (the Ministry of Communications may exempt from the obligation to share cell sites where such obligation poses technological and engineering difficulties), while providing preference and leniencies to the new UMTS operators, as well as the reduction of existing non shared cell sites quantity. These recommendations or similar recommendations, if enacted, would further burden the construction of new cell sites and modifications to existing cell sites, and may adversely effect our existing cellular network, the network build-out and our results of operations.

In May 2012, the positions of the Ministries of Communications, Health and Environmental Protection in relation to the various aspects of the provision of 4G services in Israel were published, in response to a petition to hold a public debate regarding 4G service in Israel and prevent 4G spectrum allocation until such debate is held. The Ministries held the position that 4G services would involve some increase in the level of non-ionizing radiation the public will be exposed to and that in order to minimize such increase 4G deployment should be based on current cell sites, additional outdoor and indoor small cell sites and, whenever possible, use wireline infrastructure so that data traffic shall be carried mostly through wirelines and not cellular infrastructure. The adoption of the inter-ministry team's recommendations regarding cell site sharing is a precondition for the deployment of 4G infrastructure. Under such guidelines, the public's exposure to non-ionizing radiation level should not increase substantially. The Ministry of Health further opined that in light of the preventive precaution principle and, in order to reduce as much as possible the alleged health risks, 4G fields of usage and specific usage should be predefined and additional usage, where a landline alternative is available, should be conditioned on further discussion. The Ministry of Environmental Protection stated that full deployment of 4G infrastructure, under the guidelines set by the ministries shall decrease the level of exposure from handsets and create a more balanced level of exposure from cell sites, lower than current level in some areas where cellular

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infrastructure is sufficient and somewhat higher in areas where cellular infrastructure is sufficient and in any case much lower than the maximum exposure levels recommended by the international health organization and required under the environmental permits for cell sites in Israel. See "Construction and operating permits from the commissioner of environmental radiation" below for additional details.

Indemnification obligations

In January 2006, the Planning and Building Law was amended to provide that as a condition for issuing a building permit for a cell site, local building and planning committees shall require letters of indemnification from cellular operators indemnifying the committees for possible depreciation claims under Section 197 of the Planning and Building Law, in accordance with the directives of the National Council for Planning and Building. Section 197 establishes that a property owner whose property value has been depreciated as a result of the approval of a building plan that applies to his property or neighboring properties may be entitled to compensation from the local building and planning committee. In February 2007, the Israeli Minister of Interior Affairs extended the limitation period within which depreciation claims may be brought under the Planning and Building Law from three years from approval of the building plan to the later of one year from receiving a building permit under National Zoning Plan 36 for a cell site and six months from the construction of a cell site. The Minister retains the general authority to extend such period further. This extension of the limitation period increases our potential exposure to depreciation claims.

The National Council’s guidelines issued in January 2006 provide for an undertaking for full indemnification of the planning and building committees by the cellular companies, in the form published by the council. The form allows the indemnifying party to control the defense of the claim. These guidelines will remain in effect until replaced by an amendment to National Zoning Plan 36.

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Since January 2006, we have provided approximately ~~340~~349 indemnification letters in order to receive building permits. In addition, prior to January 2006, we provided three undertakings to provide an indemnification letter to local planning and building committees. Local planning and building committees have sought to join cellular operators, including us, as defendants in depreciation claims made against them even though indemnification letters were not provided. We were joined as defendants in a small number of cases, but are not, as of December 31, ~~2011,~~2012, a party to any such depreciation claim. We expect that we will be required to continue to provide indemnification letters as the process of deploying our cell sites continues. As a result of the requirement to provide indemnification letters, we may decide to construct new cell sites in alternative, less suitable locations, to reduce capacity coverage or not to construct them at all, should we determine that the risks associated with providing such indemnification letters outweigh the benefits derived from constructing such cell sites, which could impair the quality of our service in the affected areas.

Construction and operating permits from the commissioner of environmental radiation

Under the Non-Ionizing Radiation Law (and previously under the Israeli Pharmacists Regulations (Radioactive Elements and their Products), 1980), it is prohibited to construct and operate cell sites without a permit from the Ministry of Environmental Protection. The Commissioner of Environmental Radiation ~~or Commissioner,~~ is authorized to issue two types of permits: construction permits, for cell site construction; and operating permits, for cell site operation.

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These permits contain various conditions that regulate the construction and/or operating of cell sites, as the case may be. Our cell sites routinely receive both construction and operating permits from the Commissioner within the applicable time frames. Some repeaters require specific permits and others require general permits from the Commissioner in respect of their radiation level, and we ensure that each repeater functions within the parameters of its applicable general permit.

The Pharmacists Regulations provide that each of the two kinds of permits is valid for one year from the date of its issuance, or for a shorter period of time as determined by the Commissioner. We submitted annual reports regarding radiation surveys conducted on our cell sites, which, according to the Commissioner, automatically renews the permits for additional one-year terms. Under the Pharmacists Regulations, the Commissioner may issue orders to take appropriate action should he believe a cell site or other facility poses a threat to the health or welfare of individuals, the public or the environment. Failure to comply with the Pharmacists Regulations, the terms of a permit or the instructions of the Commissioner can lead to sanctions, including the revocation or suspension of the permit.

Pursuant to the Non-Ionizing Radiation Law, the construction and operation of cell sites and other facilities requires the prior approval of the Ministry of Environmental Protection. The validity of a construction permit will be for a period not exceeding three months, unless otherwise extended by the Commissioner, and the validity of an operating permit will be for a period of five years and we are required to submit to the Commissioner annual reports regarding radiation surveys conducted on our cell sites and other facilities by third parties that were authorized to conduct such surveys by the Commissioner. Permits that were issued under the Pharmacists Regulations were deemed, for the remainder of their term, as permits issued under the Non-Ionizing Radiation Law. An applicant must first receive a construction permit from the Commissioner and only then may the applicant receive a building permit from the planning and building committee. In order to receive an operating

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permit from the Commissioner, certain conditions must be met, such as presenting a building permit or an exemption and means taken (including technological means) to limit exposure levels from each cell site or facility (relevant also for the receipt of a construction permit). In April 2010, the Commissioner amended all existing operating permits to include an obligation to provide the Commissioner with online, ongoing data regarding the radiation level on each of the cell sites and other facilities operated by each cellular operator, satisfied by a monitoring system supplied by the Commissioner and installed at the operator's premises. We provide the Commissioner with the requested data. See “Site licensing“ above for additional details in regards to obtaining a building permit or relying on an exemption.

The Non-Ionizing Radiation Law also regulates permitted exposure levels, documentation and reporting requirements, and provisions for supervision of cell site and other facility operation. The Non-Ionizing Radiation Law grants the Commissioner authority to issue eviction orders if a cell site or other facility operates in conflict with its permit, and it imposes criminal sanctions on a company and its directors and officers for violations of the law. Failure to comply with the Non-Ionizing Radiation Law or the terms of a permit can lead to revocation or suspension of the permit, as well as to withholding the grant of permits to additional cell sites of that operator.

In December 2008, the Minister of Environmental Protection signed the Non-Ionizing Radiation Regulations, which did not include a section setting additional restrictions in relation to the operation of cell sites and other facilities, which was included in a previous draft of the regulations. This section is pending approval by the Internal Affairs Committee of

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the Israeli Parliament. Further, in February 2010, the Minister of Environmental Protection published a proposed amendment to the Non-Ionizing Radiation Law, aiming to cancel the requirement to obtain the Minister of Communications' approval to the Non-Ionizing Radiation Regulations, where such regulations may have a substantial and direct effect on the monetary burden imposed on the ~~communication~~communications market, as is required under the current law.

In October 2010, a bill amending the Non-Ionizing Radiation Law so as to prohibit the grant of permits under such law for the construction and operation of cell sites situated within 75 meters from certain institutions, passed a preliminary phase of enactment in the Israeli Parliament. According to the bill, such permits granted prior to the enactment of the bill shall expire within 6 months from its effective date. If restrictions similar to those included in the previous draft of the Non-Ionizing Radiation Regulations (which included additional restrictions on the operation of cell sites and other facilities) or the proposed change to the Non Ionizing Radiation Law are subsequently adopted, they will, among other things, limit our ability to construct new sites (and if applied to existing cell sites, they will also limit our ability to renew operating permits for many of our existing sites), will adversely affect our existing networks and networks build out, specifically in urban areas, and could adversely affect our results of operations.

See note 29 to our consolidated financial reports for 2012 included elsewhere in this annual report for details regarding purported class actions filed against us, in respect of non-ionizing radiation.

Handsets

The Israeli Consumer Protection Regulations (Information Regarding Non-Ionizing Radiation from Cellular Telephones), 2002, regulate the maximum permitted level of non-ionizing radiation from ~~end-user cellular phones~~handset that emit non-ionizing radiation, according to the European standard, for testing GSM devices, and the American standard, for testing TDMA and CDMA devices. They also require cellular operators to attach an information leaflet to each ~~cellular phone~~handset package that includes explanations regarding non-ionizing radiation, the maximum permitted level of non-ionizing radiation and the level of radiation of

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that specific model of equipment. The Radiation Regulations further require that such information also be displayed at points-of-sale, service centers and on the Internet sites of cellular operators.

Pursuant to procedures published by the Ministry of Communications at the end of 2005, ~~end-user cellular equipment~~handsets must comply with all relevant standards, including specific absorption rate, or SAR, level standards. We ~~obtain~~obtained type-approval from the Ministry of Communications for each handset model ~~imported or sold by us. We include information published by~~we started to import prior to November 2012. As of November 2012, we inform the ~~manufacturer regarding SAR levels with all~~MOC of ~~our handsets.~~new models that we start to import and receive the MOC's approval. SAR levels are a measurement of non-ionizing radiation that is emitted by a hand-held cellular ~~telephone~~handset at its specific rate of absorption by living tissue. SAR tests are performed by ~~handsets~~the manufacturers on prototypes of each model of handset, not for each and every ~~handset.~~item. We include the information published by the manufacturer regarding SAR levels as we do not perform independent SAR tests for equipment and rely for this purpose on information provided by the manufacturers. As the manufacturers’ approvals refer to a prototype handset, we have no information as to the actual SAR level of each specific ~~handset~~item and throughout its lifecycle, including in the case of equipment repair.

~~According to these procedures, in the event of equipment repair, SAR levels must be tested again and if they are not tested, the repairing entity is required to~~ We inform the customer that there may be changes in the SAR levels by affixing a label to the equipment. The Ministry of Communications has appointed a consultant to create guidelines in that regard, but to date, the Ministry has not issued them. We have awaited the publication of these guidelines before implementing these requirements, but given the continued delay, are informing our customers that there may be changes in the SAR ~~levels.~~levels in the event of equipment repair.

~~Obtaining a license for importing or trading in spare parts that are likely to affect the level~~

Table of non-ionizing radiation requires receipt of compliance approvals from the manufacturer of the parts or from a laboratory authorized by the Ministry of Communications. To the best of our knowledge, to date no spare parts manufacturer has provided any cellular operator with such an approval and no laboratory has been authorized by the Ministry of Communications to issue such approvals.Contents

We are required to provide a warranty for ~~handsets and other~~certain end user equipment purchased from us, for certain malfunctions during the first year, and are required to provide repair services for two years and in certain cases, for three years. We are also required to annul equipment sale in certain circumstances, at the request of the customer. See ~~“Item 8 – Financial Information - Legal Proceedings”~~note 29 to our consolidated financial reports for 2012 included elsewhere in this annual report for details regarding purported class actions filed against us, in respect of handsets.

Royalties

Under the Communications Law, the Israeli Communications Regulations (Royalties), 2001, and the terms of our general license from the Ministry of Communications, in ~~2011~~2012 we were required to pay the State of Israel royalties equal to ~~1.75%~~1.3% of our revenues generated from telecommunications services, less payments transferred to other license holders for interconnect fees or roaming services ~~sale of handsets~~ and losses from bad debt. No royalties are due for sale of handsets. The rate of these royalties has decreased in recent years, from 4.5% in 2002, to ~~4% in 2003, to 3.5% in 2004 and 2005, to 3% in 2006, to 2.5% in 2007, to 2% in 2008, to 1.5% in 2009 and~~ 1% in 2010 and thereafter. A public committee appointed by the Ministry of Communications to review various issues in the Israeli communications market published its recommendations in March 2008, including a recommendation that our obligation to pay royalties be annulled no

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~~later than 2012 (subject to Israeli corporate income tax reduction between 2008 and 2012).~~2010. However, in January 2011, these regulations were amended to increase the royalties payable regarding cellular operations only, for the year 2011 and 2012, commencing January 19, 2011, from 1% in 2010, to 1.75% in 2011 and 2.5% in 2012, unless the Ministry of Communications has notified that an additional UMTS operator has commenced providing service through national roaming services or that ~~MVNO operators~~MVNOs have gained 5% market share. This change ~~will~~was not ~~apply~~applied to MVNOs and holders of a special general license for the provision of landline services. In March 2011, we, Pelephone and Partner have filed a petition with the Israeli Supreme Court against the Ministries of Finance and Communications in that regard. ~~In July 2011~~Following the ~~State announced it accepts~~petition and the ~~Supreme Court's suggestion to set~~launch of UMTS services, using national roaming, by Golan and Hot Mobile in May 2012, the ~~royalties'~~Communications Regulations were amended on August 12, 2012 so that for cellular operators, the 2012 average annual rate ~~to 1.75% in 2011~~would be 1.3% and ~~2012 (subject to~~as of January 1, 2013, would be 0%; and for landline and long distance services (for which the ~~above conditions) and to~~Company paid 1% for 2012), as of January 1, 2013, would be 0% ~~starting 2013. The state reserved its right to charge royalties or other payments by primary legislation. An amendment to the regulations requires the approval of the Israeli Parliament.~~.

Frequency Fees

Frequency allocations for our cellular services are governed by the Wireless Telegraph Ordinance. We pay frequency fees to the State of Israel in accordance with the Israeli Wireless Telegraph Regulations (Licenses, Certificates and Fees), 1987. In December 2008, we returned the TDD spectrum allocated to us in 2004, to the Ministry of Communications, after not being able to use that spectrum since it was awarded to us, due to unavailability of supporting equipment, and in ~~December 2010,~~May 2012, we ~~filed~~were rewarded the sum of NIS 5.3 million following a mediation agreement approved by the court in a lawsuit we filed against the Ministry of Communications for the return of the frequencies fees we paid for the TDD ~~spectrum, in the amount of approximately NIS 15 million.~~spectrum.

Mobile Virtual Network Operator

A mobile virtual network operator, or MVNO, is a cellular operator that does not own its own spectrum and usually does not have its own radio network infrastructure. Instead, MVNOs have business arrangements with existing cellular operators to use their infrastructure and network for the MVNO’s own customers. The operation of MVNOs in the Israeli cellular market ~~could increase competition and may materially adversely affect~~has contributed to the increased competition. If our ~~revenues, and more so, if such~~ service to a MVNO is to be provided under unfavorable terms and consideration ~~(such as equal to or based on the interconnect tariff).~~for us, it may adversely affect our revenues.

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The Communications Law was amended in July 2009 to include an MVNO license. In January 2010, the regulations necessary for the granting of an MVNO license were promulgated. The regulations regulate the operation of an MVNO pursuant to an agreement to be reached and entered between a cellular operator and an MVNO and sets, among others, the conditions for receiving an MVNO license, including a requirement to operate a mobile phone switch, a restriction on a cellular operator and landline operator to receive an MVNO license and limitations on parties related to an existing cellular operator and on other ~~communication~~communications licensees, to receive an MVNO license. Although the regulations deal with an agreement based MVNO, the Communications Law, as amended, instructs further that in the event that a MVNO and the cellular operator will not have reached an agreement as to the provision of service by way of MVNO within six months from the date the MVNO has approached the cellular operator, and if the Ministry of Communications together with the Ministry of Commerce determine that the failure to reach an agreement is due to unreasonable conditions imposed by the cellular operator, the Ministry Ofof Communications

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will use its authority to provide instructions. Such instructions may include intervening in the terms of the agreement, including by setting the price of the service.

To date the Ministry of Communications granted ~~nine~~twelve MVNO licenses (of which one was returned to ~~Free Telecom, Ituran, Rami Levy, Bynet, Home Cellular, T2T~~the Ministry of Communications) and ~~Alon Cellular. A ninth licensee has returned its license. Five~~five MVNOs entered hosting agreements with cellular ~~operators:~~operators, without the Ministry of Communications' intervention: Free Telecom with Pelephone, Rami Levy with Pelephone, Ituran with Pelephone and Partner, Home Cellular with us and Alon Cellular with Partner. Rami Levy, Home Cellular and Alon Cellular Ltd. commenced operations during December 2011, April and May 2012, respectively, and it is unknown if and when the ~~other four are expected to~~others will commence ~~operations in the first half of 2012.~~operations. For additional details see "Item 4. B. – Business Overview – The Telecommunications Industry in Israel – Cellular services".

Additional UMTS Operators

In September 2010, the Ministry of Communications published a UMTS spectrum tender for two additional UMTS operators (the general principles of which were published in October 2009). Participation in this tender was allowed only to new operators and ~~Mirs. Mirs~~Hot Mobile. Hot Mobile (in ~~April~~September 2011) and Golan (In ~~December 2011)~~January 2012) were awarded the new UMTS frequencies. Golan was awarded a general license for the provision of cellular services and ~~Mirs' current~~Hot Mobile's existing license was amended. ~~Mirs~~Hot Mobile and Golan committed to pay license fees in the amount of approximately NIS ~~700~~705 million and NIS 360 ~~millions,~~million, respectively, after the lapse of 5five years from the grant date of the UMTS license which may be reduced upby one seventh of the sum, down to a minimal license fee of NIS 10 million ~~by one seventh of the sum,~~, for each 1one percent of market share gained by each in the private sector (taking into consideration subscribers, revenues and minutes of use market shares)during such 5 year period, with market share to be assessed after the lapse of two and five years, ~~period. Mirs~~from the date in which each received its UMTS license. In February 2013, the Ministry of Communications announced that market shares will be calculated using these operators' figures, when applicable, out of the cellular market figures as of September 2011, before they began their UMTS operation. Hot Mobile and Golan were awarded certain additional benefits and leniencies, such as a prolonged timetable for network coverage completion and the right to use national roaming through cellular operators' networks. ~~The expected entrance of additional UMTS operators is expected to further increase competition in the market and could materially adversely affect our results of operations.~~

In December 2010, the Communications Law was amended to require existing operators (other than ~~Mirs)~~Hot Mobile) to provide new UMTS operators and ~~Mirs~~Hot Mobile national roaming services, for a period of 7 - 10 years (subject to certain conditions). If the new operator or ~~Mirs~~Hot Mobile and the hosting operator have not reached an agreement, as to the terms of this service (including the consideration), for any reason, by the time that the service is to commence (after certain criteria are met) the service will be provided for the then prevailing interconnect tariff and subsequently (but no later than February 1, 2012) shall be determined by the Ministry of Communications with the consent of the Minster of Finance

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and applied retroactively. ~~Unfavorable terms and consideration for the service (such as equal to or based on the interconnect tariff) may result in material adverse effect on our results of operations.~~

In October 2011, we entered a national roaming agreement with Golan, under which we will provide Golan national roaming services and cell site sharing ~~privileges.~~privileges and Hot Mobile entered an agreement with Pelephone. As a result, the Ministry of Communications did not determine the terms for the service. Unfavorable terms and consideration for the service may result in material adverse effect on our results of operations.

In May 2012, Golan and Hot Mobile launched their UMTS services, which significantly increased competition in the market, increased churn and accelerated price erosion, and has materially adversely affected our results of operations.

See "Site Licensing" above for the recommendations of an inter-ministry team regarding compulsory cell site sharing, including providing preference and leniencies to the new UMTS ~~operators.~~operators, as well as in relation to their exclusive ability to build new radio access devices.

Long Distance Services

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influence over an international landline, or ILD, operator were amended to allow cellular operators to provide long distance services or have significant influence over an ILD operator upon the earlier of the date in which an MVNO operator begins providing services (and with regards to an ILD which requested an MVNO license before September 1, 2010 and was granted a license – when the Ministry of Communications intervened or decided not to intervene in the terms of it's hosting agreement with the cellular operator) or after December 31, 2012. In addition, the Ministry of Communications ~~may allow a~~allowed cellular ~~operator~~operators to have significant influence over an ILD before those conditions are met, under structural separation of the long distance operation from the cellular operator's operation.

As a result of this change, in February 2011, the Ministry of Communications approved the acquisition of Smile Telecom by Partner, subject to the structural separation of the long distance operation until the aforementioned conditions are met, and the acquisition was completed in March 2011. Similary, in July 2011, the Ministry of Communications approved our acquisition of Netvision subject to the same conditions, and the acquisition was completed in August 2011.

In December 2011, a formal notification was published in the Israeli Official Gazette announcing that Rami Levy, an MVNO operator, commenced its operations in December 2011. Following such announcement, the structural separation required by the Ministry of Communications was lifted.

In August 2012, the Ministry of Communications imposed restrictions on the cooperation between cellular and ILD operators in relation to prepaid calling cards.

The Ministry of Communications also noted that a revised examination of the ILD market structure and its independence is required.

Emergency Situations

We may be subject to certain restrictions and instructions regarding our activities or provision of services during national emergencies or for reasons of national security or public

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welfare, including taking control of our cellular or land line networks. Further, the Prime Minister and the Ministry of Communications may determine that our services are deemed essential services, in which case we may be subject to further additional limitations on our business operations.

Reporting Requirements

We are subject to extensive reporting requirements. We are required to report to the Ministry of Communications the transfer of means of control from certain thresholds. We are required to submit to the Ministry of Communications detailed annual reports with information concerning subscribers, revenues by service, the number of new subscribers and churn, annual financial statements and prior notice of tariff increases. In addition, under our license we may be required by the Ministry of Communications to file additional reports, such as reports on complaints, pricing, specific costs and revenues, network problems and the development of the network. We are required to provide the Commissioner of Environmental Radiation under the Non-Ionizing Radiation Law and regulations with periodic and online, ongoing data of all cell sites operated by us.

Securities Administrative Enforcement

An amendment to the Israeli Securities laws, which came into force in January 2011, established administrative enforcement measures for the handling of certain violations of certain securities and securities-related laws supervised by the Israeli Securities Authority, or ISA. This amendment allows the ISA to impose various civil enforcement measures, including financial sanctions, payment to the injured party, prohibition of the violator from serving as an executive officer for a certain period of time, annulment or suspension of licenses, approvals and permits granted under such laws and agreed settlement mechanism as

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alternative for a criminal or administrative proceeding. In case of a violation by a corporation, the amendment provides for additional responsibility of the chief executive officer in some cases, unless certain conditions have been met, including the existence and implementation of procedures for the prevention of the violation. ~~The Company is in the process of examining its~~We adopted such procedures for the prevention of ~~such~~ violations.

Contributing to the Community and Protecting the Environment

We and our employees have been contributing to the community since our inception and are proud to be among the leaders of community responsibility. ~~Like other companies in the IDB group, we~~We consider contribution to the community in Israel, and specifically to the communities residing next to the Israeli northern and southern borders, an important component of our business vision and believe we have a responsibility towards the Israeli community, as we acknowledge that business leadership goes hand in hand with social leadership.

In 2011 we continued to contribute to the community with a specific focus on our "Cellcom Volume" youth centers initiative. In addition to promoting Israeli music and artists and providing our customers with Israeli music through a variety of musical content, we have contributed to the creation of "Cellcom Volume" youth centers in various locations throughout Israel, in which we provide young people resources related to music, including music classes, facilities to bands and choirs for rehearsals and recording studios. ~~During 2011 we opened an additional center in Israel, as we~~We believe music is a language which connects and bonds different people together. As of December 31, ~~2011,~~2012, we had eleven "Volume Centers" and five “mini Volume Centers” active throughout

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the country. Our employees volunteer regularly in these centers as well as with other community projects.

In addition to our contribution to the build-up and strengthening of the community, through activities such as our "Cellcom Volume" youth centers, we make financial donations to other worthy causes and entities. In August 2006, our Board of Directors determined our donation policy to be at an amount equal to up to one percent of our annual net income. In ~~2011~~2012 we donated a total sum of approximately NIS ~~6.2~~4.2 million, including our contribution to the community.

We are aware of the importance of environmental protection. Accordingly, while providing quality products and services to our subscribers, we seek to operate responsibly to continuously reduce negative impacts on the environment and the landscape, aiming at a better environmental performance than required by local law. We dedicate personnel, funds and technologies to improve our performance, strive to achieve an efficient deployment of infrastructure subject to the applicable standards, and cooperate with the local authorities. We constantly monitor our environmental performance and aim to reduce our ecological footprint, through activities such as recycling, reduction of paper usage by managed printing, reduction of pollutants' emissions and energy usage as well as activities aimed at allowing our subscribers to better protect the environment, such as collecting used batteries, sending subscribers their monthly bill for our services and other correspondence from us via e-mail in lieu of regular mail, transfer to usage of environment friendly raw materials and separation between different types of waste in our repair services. In 2010, we entered into an agreement for the future purchase of electricity to be produced by a private natural gas based power station.

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NETVISION

General

On August 31, 2011, we completed the acquisition of 100% of the share capital of Netvision through a merger transaction. Netvision was founded as an Israeli company in 1994 and became a public company following its initial public offering on the TASE in 2005. In our description of Netvision's business, the term "Netvision" refers to Netvision and its subsidiaries.

Netvision is a leading company in the Israeli communications market and is engaged in two primary businesses through its wholly owned subsidiary 013 Netvision Ltd., or 013 Netvision: provision of internet connectivity and related services (ISP); and provision of telephony services consisting mainly of international calling services, operator services, teleconferencing services and landline telephony services. In addition, Netvision is engaged isin additional activities such as internet ~~content~~applications, cloud services and ~~custom internet applications.~~data security products.

ISP Business

General - The provision of internet connectivity services is one of Netvision's primary businesses. Netvision is a leading provider of internet connectivity services. The Israeli internet market is characterized by a separation between the internet infrastructure providers and the internet connectivity service providers. Consequently, the internet customer is required to enter into a contractual arrangement with both of these providers. The infrastructure provider is responsible for the connection of the customer from his computer or other device to the infrastructure provider's operator. The internet service provider (such as

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Netvision) is responsible for providing access to the customer from the infrastructure provider's operator, through its own operator, to the local and global internet network. Currently, there are two main internet infrastructure providers having landline infrastructure for the private sector in Israel: Bezeq and Hot. Netvision's internet infrastructure is currently comprised of connectivity sites in two locations in Israel (Haifa and Petah-Tikvah), which provide Netvision's customers, through overseas connectivity points in New York City, London and Frankfurt, with connectivity to the global internet network. This internet infrastructure contains backup capability in order to ensure continuity of service.

Services and Products – Netvision's main service provided to its internet subscribers is internet connectivity service and related services and products, as well as bundles of its services, including bundling with other companies' products or services. In 2012, Netvision offered ISP services bundled with cellular services offered by Cellcom. For additional details see “Item 4. Information on the Company - B. Business Overview” under “The Telecommunications Industry in Israel” and “Competition”.

In addition, Netvision offers its internet subscribers value added services, such as data protection services to its private subscribers and connectivity integration solutions and global communications solutions to its business customers, including firewalls, anti-virus and anti-spam software, overseas internet connectivity services and server hosting services. In addition, Netvision provides through one of its controlled subsidiaries, ISP services which also offers the ability to filter the content viewed by the internet user; this service is targeted mainly to the orthodox religious sectors in Israel.

Netvision is constantly considering and evaluating the possibility of introducing additional products and services to its customers.

The Israeli ISP market is characterized by rapid technological changes, both in terms of the bandwidth offered to customers, as well as terms of expansion of the list of products and services offered. For developments in the Israeli internet infrastructure sector such as the entrance of new players into this sector, ~~including our Company,~~ see this Item 4.B above

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under "The Telecommunications Industry in Israel – Wireline Services - Broadband and Internet Services". and under "Competition" below.

Suppliers – In the course of engaging in its ISP business, Netvision has entered into agreements with various suppliers, the ~~principal~~principals of which are the following:

Netvision entered into a number of agreements with Mediterranean Nautilus Ltd. and Mediterranean Nautilus (Israel) Ltd., or collectively Med Nautilus, during the years 2003 through 2011. Med Nautilus is the owner of the principal ~~communication~~communications infrastructure which connects the Israeli internet network to the "entry points" of the global internet network via an underwater communications cable (two additional cables were ~~recently~~ laid in 2011, one of them by one of Netvision's competitors – Bezeq International). Pursuant to its agreements with Med Nautilus, Netvision purchased rights of use, ~~or IRU,~~ of certain telecommunications capacities on Med Nautilus' ~~communication~~communications cables, as well as maintenance and operation services relating to these cables. The agreements include options pursuant to which Netvision may expand the purchased capacity. The terms of these agreements may be subject to regulatory intervention. See additional details under "Item 3. Key Information - Risk Factors – Risk Factors Related to our wholly owned subsidiary Netvision - Netvision is exposed to risks relating to network infrastructure and is dependent on services it receives from its external suppliers". and under "Competition" below. The term of the agreement with respect to part of the capacity purchased from ~~MedNautilus~~Med Nautilus is until

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May 2027. Netvision has the option to terminate agreements with respect to parts of the capacity in 2017, 2022 and ~~2022. See "Competition" below for possible regulatory intervention is these agreements.~~2024.

Netvision entered into agreements with Bezeq and Hot, the primary internet infrastructure providers in the Israeli market. Netvision is dependent upon these suppliers since without their infrastructure Netvision would be unable to provide its ISP services to its customers. Due to the increase in customer demand for broadband width in recent years, Netvision is required from time to time to increase the capacity it purchases from Bezeq and Hot. During 2010, Netvision applied to the Ministry of Communications' intervention in the prices charged by Bezeq and Hot in consideration for connectivity services to their infrastructure. Following that petition, in 2010 Netvision and Bezeq entered into a new agreement that regulates the provision of the internet infrastructure services by Bezeq to Netvision, which was updated in 2011. Under ~~this~~its agreement with Bezeq (valid until 2014), Netvision is required to purchase minimum bandwidth capacities ~~in consideration to a price that reflects a considerable decrease in comparison~~from Bezeq. In June 2012, following our application to the ~~previous~~Ministry of Communications to intervene with these prices the Ministry has published a hearing in relation to these connectivity services and in 2013, both Bezeq and Hot reduced the price ~~per giga-byte unit. The 2010 agreement with Bezeq, as updated in 2011, is valid until 2014.~~they demand for connectivity services to their infrastructure.

In 2011 Netvision entered into an agreement with Cisco Systems, Inc., or Cisco, effective until ~~2013.~~2014. Cisco provides Netvision maintenance and advanced services for its IP network equipment; in addition, Netvision sells various Cisco products to its customers.

Netvision uses several supporting systems for the provision of service to its customers, including communications infrastructure by Nortel (see additional details under "Telephony Business – Suppliers" below), customer relations management system by PeopleSoft supported by Matrix for Oracle, inventory and suppliers management system by Priority/Eshbel, billing system by CBP supported internally and by Intec, financial system by Coda and infrastructure integrations system by Microsoft BizTalk.

Sales and Marketing and Customer Care – Netvision conducts its sales and marketing activities in the ISP business through various channels, including media advertising in newspapers, internet and television, concentrated sales campaigns, telemarketing to potential

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customers, as well as targeting existing customers by offering them upgrades to existing subscription programs and value added products and services. In addition, Netvision regularly collaborates with other ~~telecommunication~~telecommunications providers (including Bezeq and Hot) in order to offer service packages to existing and potential customers. and its services are also marketed by Cellcom, including in bundles of services.

Netvision's sales and customer care center is located in Haifa, providing sales services, technical and support services, billing and general information, by specializing representatives as well as installation services provided by technicians teams at the landline customers' premises.

Competition - The Israeli ISP market is highly competitive and saturated and ~~ischaracterized~~is characterized by relatively low entry barriers. Competition among the various players concentrates mainly on the ability to offer high-speeds of internet connection and on pricing. Although the provision of ISP services requires obtaining a license from the Ministry of ~~Communication,~~Communications, the Ministry's policy is liberal in granting ISP licenses. As a result, as of the date of this report, there are a few dozen holders of ISP licenses in Israel, though most of them do not hold significant market shares. Entry into the ISP market requires, however, incurring substantial penetration costs associated with the formation of ISP infrastructure, support systems, customer care systems and marketing channels. Due to such penetration and the other ongoing costs of operating ISP service, profitability in the ISP market usually requires creation of a broad customer base.

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The key success factors in the ISP market are brand recognition and reputation, advanced and updated technological capabilities, available bandwidth, high levels of customer care service, the ability to constantly develop innovative products and services and complementary products and services, competitive pricing, achieving and maintaining customer loyalty, and strategic cooperation with strong local and international corporations.

Netvision's main competitors in the ISP market are Partner (through its wholly-owned ~~recently-acquired~~ subsidiary Smile Telecom), Bezeq (through its wholly owned-subsidiary Bezeq International) and Hot (through its wholly ~~owned-subsidiary~~owned subsidiary Hotnet).

In 2010, the Ministry of Communications amended Bezeq's and its subsidiaries licenses to allow them to offer bundles of services to private customers, under certain limitations, including that each of the services in the Bezeq bundle would be available for sale separately under the same terms as in the bundle, and the requirement that Bezeq allows its competitors to participate in a similar bundle - if includes ISP, VOB or ILD services - under the same terms and equally markets such bundles as its own bundle (the second requirement does not apply to the sale of the bundle by a subsidiary of Bezeq). In 2010 Bezeq began offering bundles of ISP services, internet infrastructure services and landline telephony services. This led to a decrease in the prices of the ISP services sold in the bundle. In ~~February 2011,~~July 2012, the Ministry of Communications ~~published a hearing regarding the amendment of~~amended Bezeq's and its subsidiaries licenses to allow the offering of such bundles to business customers as well. At the end of 2010, Hotnet, a subsidiary of Hot, received an ISP license under structural limitation from the other Hot group entities (similar to the structural limitation in the Bezeq group) and Hot was also allowed to offer bundles of services including ISP services, under similar limitations as Bezeq, with respect to the ISP service component of the bundle. In February 2012 Hot began offering ISP services and has done so at tariffs significantly lower than market prices ~~or at prices which would be lower than our costs~~ and Bezeq also significantly lowered its internet infrastructure services tariffs to end-users. Netvision believes there is cause for regulatory intervention and has appealed to the regulators to intervene, but cannot predict the outcome of such appeals. This ~~is expected to~~

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~~result~~resulted in a further decrease in ISP service prices and ~~lead~~led to increased demand for greater bandwidth and ~~would require~~required Netvision to significantly increase the capacity it purchases, ~~significantly~~ increasing its expenses in purchasing capacity from Bezeq and Hot ~~while~~and decreasing its ~~revenues could decrease. This could~~profitability. Should internet connectivity service prices remain as high as they currently are and the regulatory environment remains unchanged, this trend is expected to continue to have a material adverse effect on Netvision's results of operations. Also, ~~in recent years, cellular operators started providing ISP services via wireline and wireless networks. The~~the offering of bundles of services and entry into the ISP market of ~~these players, who have a broad customer base and a wide offering of communication services,~~cellular operators, could further intensify the competition in this market and adversely affect Netvision's results of operations. In addition, the ~~reduction~~annulment of the early termination fees by the Ministry of ~~Communication~~Communications that was implemented in the ISP market during 2011 has increased ~~and is expected to continue to increase~~ the competition in the market. See also “Item 3. Key Information – D. Risk Factors - Risks Related to our wholly owned subsidiary Netvision - Changes in the regulatory environment could adversely affect Netvision's business”.

In late 2011 and early 2012, two additional underwater cables that could serve as an alternative to Med Nautilus were deployed. In addition, proposed regulation published for public comments by the Ministry of ~~Communication~~Communications on November 2011, proposes certain limitations on the terms of agreements with Med Nautilus, which will, among others, limit the discounts and capacity Med Nautilus may provide. While the deployment of additional underwater cables ~~could improve~~improved the competition in the ISP market, as ISP providers ~~will be~~were able to find alternatives to Med Nautilus, which ~~could lead~~led to a decrease in the pricing of the global internet connectivity services provided to Israeli ISP ~~providers,~~providers. Bezeq International's deployment of ~~one of them~~another underwater cable and adoption of the proposed regulatory changes might harm

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Netvision's results of operations and competitive position as it could force ISP providers other than Bezeq International to purchase capacity on less favorable terms and prices, and more so in comparison to Bezeq International. In addition, the Electric Company's initiative, intended to enable use its optic fiber infrastructure for the provision of broadband transmission services, would improve Netvision's competitiveness in the ISP market as this is likely to reduce its dependency on Bezeq and Hot as internet infrastructure providers. For additional details see this Item 4.B above under "- The Telecommunications Industry in Israel – Wireline Services - Broadband and Internet Services" and "– Government Regulations – Competition".

Regulation and Licenses – A major part of Netvision's ISP operations is subject to regulation by the Israeli Ministry of Communications pursuant to the Communications Law, including through its ISP license.

The provision of ISP and related services requires a license. Netvision was granted three ISP licenses, one to its wholly owned subsidiary 013 Netvision, , one to its controlled subsidiary Internet Rimon, and third was granted to 013 Netvision by the Israeli Civil Administration in Judea and Samaria in respect of this territory. The licenses are valid through April ~~2012, May 2012~~2017, November 2017 and ~~August 2012~~July 2016, respectively. ~~Netvision estimates that it will be able to renew these licenses without undue burden.~~

Under its ISP licenses, Netvision is required to maintain a minimum standard of customer service, is prohibited to condition the use of its services by the customer on the customer's having to be connected to a portal designated by it, and is generally prohibited from discriminating among subscribers in terms of service packages offered and pricing. Netvision is also required to inform its customers regarding the main features of the service provided, including commencement date of service, the consideration paid by the customer,

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quality standards, and maintenance details, and details about the possibility of email address portability. In 2012 the ISP licenses were updated to include a specific format for Netvision's agreement with its customers; obtaining an explicit request from its subscribers to purchase services as a precondition to providing and charging for such services; maintaining a specific form of evidence of customers' request to purchase its services as a precondition to charging its customers for those services, notifications it must provide them regarding the services ordered and the procedures for handling subscribers' objections as to billing and repayment of overcharged sums.

Under its ISP licenses, Netvision may not transfer any means of control or ~~encumber~~ any of its licenses' related assets, without the prior written approval of the Ministry of ~~Communication.~~Communications. The license may be terminated in case that Netvision fails to provide information or provides false information or in case it is engaged in anticompetitive practices in the communications market, subject to certain terms. The licensee is required to provide the Ministry of Communications with certain reports and is required to cooperate with the supervisory bodies of the Ministry of ~~Communication.~~Communications.

For a possible change to the license formation see "-Government Regulations - Possible unified license" above.

In August 2011, the Communications Law was amended pursuant to which the Early Termination Fees in the ISP market were annulled, which led to an increase in competition, churn rates and rate of gross recruitment of subscribers and price erosion. Further intervention by the Ministry of ~~Communication~~Communications in the ISP market, including by means of granting additional ISP licenses and setting their terms and conditions, change or annulment of the structural separation currently in place for the Bezeq and Hot groups, permitting the bundling of certain services without restrictions and intervening in the purchasing of global internet connectivity, could have a material adverse effect on Netvision's ISP business.

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Telephony Business

General - The provision of telephony services is one of Netvision's primary businesses. Netvision's services in its telephony business consist mainly of the following:

·	Provision of international calling services, or ILD services;

·	Provision of landline telephony services, including teleconferencing services; and

Sales of ~~telephony equipment (including switchboards, telephones and communication switches),~~IP switchboard services and operation and management of ~~voice communication systems and data communications systems, including maintenance and support of telecommunication~~business telecommunications systems.

ILD services enable an end user (whether in ~~Israeli~~Israel or overseas) to conduct a telephone conversation with an end user located elsewhere in the world. These include calls (including cellular calls) from Israel to various destinations abroad as well as call (including cellular call) completion services to overseas operators transferring a call to Israel; transferring international calls between operators and signaling services to local and foreign cellular operators to allow roaming.

Netvision is a ~~major~~leading player in the Israeli ILD market. As a result of a regulatory change that was adopted by the Israeli Ministry of ~~Communication~~Communications in February 2011, pursuant to which cellular operators were permitted, under certain conditions, to have significant influence over an ILD operator, we were permitted to acquire Netvision in 2011. This regulatory change also enabled the acquisition of Smile by Partner. For further details, see this Item 4.B above under "- Government Regulation – Long Distance Services". In recent years, the ILD market has witnessed a development of and an increase in the use of technologies that can serve as substitute to the traditional ILD services, including voice over IP technologies offered by companies such as Skype. This trend has resulted in a continual decline in the overall use of traditional ILD services. Further developments and penetration of

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such technologies into the Israeli ILD market could have a material adverse effect on the financial results of Netvision's ILD business.

The entry of Hot Mobile and Golan into the ILD market in the second half of 2012 and beginning of 2013, respectively could also have an adverse effect on Netvision's results of operations, as customers (specifically their cellular customers) may choose their ILD services over Netvision's.

Landline telephony service enables an end user to conduct a telephone conversation with another end user who uses either another landline or a cellular telephone or computer, either in Israel or overseas.

Services and Products – Netvision's principal service in the ILD market is the provision of outgoing and incoming telephone calls to and from substantially worldwide coverage. Netvision provides these services mostly to post-paid customers, but also to pre-paid customers mainly through the sale of calling cards. Most of the customers of the pre-paid services are foreign workers who work in Israel. In addition, Netvision provides "hubbing" services to non-Israeli international operators. Hubbing services are bridging services between two non-Israeli international operators. Such services are provided by Netvision where there is no direct connection between two non-Israeli international operators or where pricing differences in different locations make such bridging service desirable. The hubbing service market has been growing in the past few years because of the development of the

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international dialing market and because of the development of the corresponding arbitrage market on which various international operators trade international dialing capacities. In addition, Netvision provides "signaling" services to cellular operators who use roaming services. A cellular handset located out of its home network needs to "signal" its location to the hosting network in order to enable the cellular subscriber to get roaming services. Netvision provides these services to ~~the~~certain cellular operators in Israel (including us), as well as to foreign cellular operators with respect to their customers when they visit Israel.

Netvision's principal service in the wireline market is the provision of basic landline telephony services (usually by VOB ~~technology, but also by other traditional technologies, including time-division multiplexing, or TDM)~~technology). Netvision offers these services to both business and private customers. In addition, Netvision offers IP switchboard ~~equipment sales~~ services ~~voice and data systems' sales~~ and operation and management of business telecommunications systems. In 2012, Netvision has offered ILD and landline services, also bundled with cellular services offered by Cellcom. For additional details see “Item 4. Information on the Company - B. Business Overview” under “The Telecommunications Industry in Israel” and ~~teleconferencing services and communications solutions to business customers.~~“Competition”.

Suppliers – Netvision's principal suppliers in the telephony market are the following:

Bezeq, Hot and cellular operators: Under the ~~Communication~~Communications Law and licenses, all operators are required to interconnect their network to other public communications networks in Israel, on equal terms and without discrimination in respect of other operators. Netvision has entered into interconnect agreements with Bezeq, Hot and the cellular operators, for facilitating international traffic between Netvision's network and the other networks, as well as for billing and collection services for Netvision services, for certain customers. Substantially all of Netvision's traffic requires interconnections with these operators, as substantially all such traffic requires interconnection with them and is dependant on its availability and quality.

Most of the international dialing traffic between Israel and the rest of the world is conducted through the underwater communications cable of Med Nautilus. For further details on the agreements between Netvision and Med Nautilus, see above in the description of Netvision's ISP business under "Netvision - ISP Business - Suppliers".

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Netvision has also entered into agreements with more than 100 foreign carriers. These agreements regulate and facilitate the ILD services of Netvision, as well as its international voice hubbing services.

Netvision entered into an agreement with Nortel Networks Israel (Sales and Marketing) Ltd., or Nortel in this section, in June 2004, for the provision of Netvision's international ~~communication~~communications switch, on which Netvision bases its ability to provide international calling service, as well as related equipment and services. From 2010, Geneband Inc. (which acquired Nortel's relevant business) provides Netvision with support and maintenance services for the equipment provided under this agreement.

Netvision has entered into an agreement with ECI Telecom Ltd. for the provision of transmission switches by ECI Telecom among the various location sites of Netvision in Israel and overseas, used for its ISP operations. ~~Netvision is obligated to purchase maintenance services from ECI until 2012.~~ Under the maintenance agreement, ECI's liability is generally limited to direct damages and the lesser of the total consideration paid or $200,000.

Sales and Marketing and Customer Care – The sale and marketing of Netvision's telephony products and services is conducted mainly through media advertising, primarily

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radio and television, but also through direct means such as telemarketing, mail and email campaigns. In addition, Netvision offers its telephony products and services on a non-exclusive basis through our "Cellocm Total" pricing plan, various retailers, through outsourced telemarketing centers and through distributors. Marketing to business customers is conducted also by approaching potential customers (including developers of large commercial real estate projects), participation in tenders (especially for maintenance and support services), through labor unions and targeted marketing campaigns and sponsorships.

Netvision's customer care centers provide its telephony services customers the same range of services provided to its ISP customers.

Competition –The Israeli ILD market is highly competitive, and the competition in the market is based mainly on the operator's ability to offer attractive pricing. The price of the international call is influenced also from the call completion tariff paid to the operator in the call's destination country, increased competition in the destination country leads to a decrease in tariffs for calls to those destinations and influence an increase of the quantity of minutes made to those destinations. ~~The Israeli landline market is currently dominated by Bezeq (which is a monopoly in this market~~) and by Hot, currently the only two landline carriers with full scale landline infrastructure, but certain technological and possible regulatory changes could increase competition in this market. Recent regulatory changes in the telephony market such as the annulment of Early Termination Fees, which applies to existing as well as new pricing plans in November 2011 as well as the regulatory change that enabled cellular operators to have a significant influence over ILD operators have increased and are likely to intensify competition even further as transfer barriers between service providers have been significantly eased and the various communication groups in the market are competing for the opportunity to offer potential and existing customers a "one stop shop" of communication services.

The Israeli landline market has been dominated for many years by Bezeq, a monopoly which held as of ~~December~~March 31, ~~2011~~2012 (according to the Ministry of Communications report) a market share of ~~69%~~68.7% in the private landline sector and a market share of ~~79%~~76.3% in the business landline sector. In recent years, Hot, entered this market and was allowed to bundle its landline service together with its internet infrastructure

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service and its multi-television service. See Netvision – ISP business – Competition" above for details regarding service bundles. Bezeq and Hot are currently the only landline carriers having full scale landline infrastructure. Recent technological and regulatory developments have enabled landline carriers which do not have a landline infrastructure, including Netvision, to enter the landline market. Netvision commenced its landline telephony services in 2008 using Voice Over Broadband, or VOB, technology, and expanded this business during 2009 through 2011. Netvision is investing substantial efforts and resources in increasing its reach into the Israeli landline market, and ~~predicts~~believes that in the long-run its landline business will contribute to ~~its~~our results of operations, to ~~its~~our brand recognition and to enhancing customers' loyalty. ~~We believe that~~ Netvision's penetration into the landline business ~~could be~~is an important element in our ability to offer comprehensive service packages to its and our subscribers.

Regulatory changes in the telephony market such as the annulment of Early Termination Fees, which applies to existing as well as new pricing plans in November 2011, as well as the regulatory change that enabled cellular operators to have a significant influence over ILD operators, have increased competition even further as transfer barriers between service providers have been significantly eased and the various communications groups in the market are competing for the opportunity to offer potential and existing customers a one stop shop of communications services.

The key success factors in the telephony market are competitive pricing, which are updated constantly, brand recognition and reputation, advanced and updated technological capabilities, reliable network and high levels of maintenance, high quality of human resources including customer care services, and the ability to develop comprehensive products and services packages, to build a substantial customer base, to enhance customers' loyalty and the ability to face competition. In addition, the ability to develop strong strategic relations with foreign international dialing carriers and continuous agreements with them are also key elements in the ILD market.

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In recent years, the use of alternative ~~telecommunication~~telecommunications technologies such as voice-over-IP has resulted in downsizing of the telephony market, especially the ILD market. This trend is expected to continue in the future.

Netvision is a leading service provider in the Israeli ILD market. As of the date of this report, there are several ILD operators in the Israeli market. Netvision's main competitors in this market are Bezeq (through its wholly owned subsidiary Bezeq International), and Partner (through its wholly owned subsidiary Smile Telecom) and additional competitors include Xfone, Telzar, ~~(commenced operation in 2011)~~ and ~~Hilat (commenced operations in 2012).~~more recently also Rami Levy, Golan and Hot, through wholly owned subsidiaries or affiliates.

Netvision estimates that its current market share in the Israeli landline market is not ~~material.~~material with approximately 112,000 subscribers. Netvision's main competitors in the landline market are Bezeq and Hot, as well as Partner (through Smile Telecom) and Bezeq International. To our knowledge, Bezeq remains a monopoly in the landline market. The cancellation of the 'ADSL only' service in April 2012, which required Bezeq to set a unified tariff for ADSL services, whether the customer purchases another service from Bezeq or not, such tariff to include the relative cost of the access service, facilitated Netvision's competitive standing in the landline market as it reduced access service costs.

The development of a wholesale wireline services ~~recommended in October 2011 by the public committee appointed~~as decided by the Ministry of Communications ~~if and~~in May 2012, when made available, will enhance Netvision's ability to compete and allow us and Netvision (as well as our competitors) to provide a wider selection of services at ~~low cost,~~competitive prices, specifically in relation to residential landline services which is currently ~~non-material and generating negative net-income. The proposed~~non-material. Any changes to the structural separation limitations in the Bezeq group and the supervision on Bezeq tariffs, or anti-competitive behavior if not prevented by the regulators, however, could adversely affect Netvision's ability to compete with Bezeq and Hot in general, and in the landline market in particular and may have a material adverse effect on Netvision's results of operation. For details see also “Item 3. Key Information – D. Risk Factors - Risks Related to our wholly owned subsidiary Netvision - Changes in the regulatory environment could adversely affect Netvision's business” and "Item 4. Information on the Company – Government Regulations – Competition".

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Regulation and Licenses – Netvision's operations in the telephony business are subject to regulation, mostly pursuant to the provisions of the Communications Law and the regulations promulgated thereafter, the Communications Regulations ~~(Telecommunication~~(Telecommunications and Broadcasting) (Procedures and Conditions for the Receipt of General License for the Provision of the International ~~Telecommunication~~Telecommunications Services) – 2004, or the ILD Regulations, with respect to its ILD business, and to the provisions of its ILD licenses, and the Communications Regulations ~~(Telecommunication~~(Telecommunications and Broadcasting) (Procedures and Conditions for the Receipt of General unique License) – 2004 with respect to its VOB services and the provisions its landline licenses and its 'network ~~ending~~end point' license.

Netvision's main ILD license is held by its wholly owned subsidiary 013 Netvision and expires on May 2025, and its main landline license is held by another wholly owned limited partnership Veidan Teleconferencing Solutions LP, or Veidan, and expires on March 2026. Each of the licenses may be extended by the Ministry of Communications for successive periods of ten years, provided that Netvision has complied with each such license and applicable law, respectively, has continually invested in the improvement of its services and network pursuant to such license and has demonstrated the ability to continue to do so in the future.

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The main provisions of Netvision's principal ILD and landline licenses are the following:

·	The license holder is required to interconnect its network to other public telecommunications networks in Israel, on equal terms and without discrimination, in order to enable subscribers of all operators to communicate with one another;

·	The license holder may not take any action or be party to any arrangement which might adversely affect competition in the market;

The license holder is required to, among other things, maintain a minimum standard of customer service, including, among other things, establishing call centers ~~and service centers,~~, maintaining a certain service level of its network, tariffs setting and updating and protecting the privacy of subscribers;

·	The licenses or any part thereof may not be transferred, pledged or encumbered without the prior approval of the Ministry of Communications. The licenses also set forth restrictions on the sale, lease or pledge of any assets used for implementing the licenses;

Pursuant to ~~theses~~these licenses and the Israeli Communications Regulations (Royalties), 2001, the license holders ~~are~~were required to pay the State of Israel royalties equal to 1% of their eligible ~~revenues;~~

revenues, until December 31,2012. No royalties are to be paid for 2013 and thereafter;

The license holders are required to obtain insurance coverage for their activities pursuant to ~~theses~~these licenses. In addition, the licenses impose statutory liability for any loss or damage caused to a third party as a result of establishing, sustaining, maintaining or operating the license holder's network. The license holders have further undertaken to indemnify the State of Israel for any monetary obligation imposed on the State of Israel in the event of such loss or damage. For the purpose of guaranteeing our obligations under theses license, Netvision deposited bank guarantees for this liability under the ILD and landline licenses in the amounts of $9

million and $11 million, respectively, with the Ministry of Communications, which may be forfeited in the event that the license holder violates the terms of its license.

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~~million and $11 million, respectively, with the Ministry of Communications, which may be forfeited in the event that the license holder violates the terms of its license.~~

The transfer or pledge of means of control in the license holder is prohibited without the prior written consent of the Ministry of Communications, if, as a result of such transfer, a person (1) becomes a 5% holder or more in the license ~~holder.~~holder; or (2) acquires the ability to effect a significant influence over us (in this context, holding 25% of our means of control is presumed to confer significant influence); or (3) becomes a controlling shareholder.

In addition, the ILD Regulations impose certain restrictions on cross-ownership in ILD operators, such as the prohibition on landline operators or holders of material international transmission infrastructure or on persons in which an ILD operator holds 5% or more from holding an ILD license. There are additional restrictions on cross-ownership in ILD operators under the ILD Regulations, which may be waived by the Ministry of ~~Communication~~Communications on grounds of public welfare or encouragement of competition in the communications market. For a regulatory change that was adopted by the Israeli Ministry of ~~Communication~~Communications in February 2011, pursuant to which cellular operators were permitted, under certain conditions, to have significant influence over an ILD operator, and pursuant to

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which we were permitted to acquire Netvision in 2011 (and also enabled the acquisition of Smile by Partner), see this Item 4.B above under "- Government Regulation – Long Distance Services".

For a possible change to the license formation see "-Government Regulations - Possible unified license" above.

In August 2012, the Ministry of Communications imposed restrictions regarding cooperation between cellular and ILD operators in relation to prepaid calling cards.

In addition to its principal landline and ILD telephony ~~license,~~licenses, Netvision (through its wholly owned limited partnership ~~Veidan)~~Veidan and wholly owned subsidiary 013 Netvision, respectively) received from the Israeli Civil Administration in Judea and Samaria a license for the provision of landline ~~services to the Israeli-populated areas in Judea~~ and Samaria. This license is effective until October 2017 and Netvision estimates that it will be able to renew these licenses without undue burden. The provisions of the principal landline license described above, generally apply to this license, as well, subject to certain modifications.

In addition to its principal ILD license, Netvision (through its wholly owned subsidiary 013 Netvision) received from the Israeli Civil Administration in Judea and Samaria a license for the provision of ILD services to the Israeli-populated areas in Judea and ~~Samaria. This license is~~Samaria, effective until October 2017 and August 2018, ~~and Netvision estimates that it will be able to renew these licenses without undue burden.~~respectively. The provisions of the principal ~~ILD license~~licenses described above, generally apply to ~~this license,~~those licenses, as well, subject to certain ~~modifications~~.modifications.

In addition to its ISP, ILD and landline licenses, Netvision holds (through its wholly owned subsidiary 013 Netvision) a 'network ~~ending~~end point' license to mainly install and maintain ~~telecommunication~~telecommunications equipment at a customer's premises or the licensee's premises, which include telephones, switchboards, telephony cables and related equipment as well as enables Netvision to connect a customer premises ,through other license holders, to the public landline network. The license is valid until July ~~2012~~2017 and can be renewed subject to certain conditions, including the license holder's compliance with the terms of the license. A second 'network end point' license was received from the Israeli Civil Administration in Judea and Samaria and is effective until July 2017.

In addition, as a service provider, Netvision is subject, like us, to the general legislation governing relations between vendors and consumers, including the Consumer Protection Law, 1981.

In August 2011, the Communications Law was amended pursuant to which the Early Termination Fees in the ILD and in the landline telephony market were annulled, which led ~~and is expected to continue to lead~~ to an increase in competition, churn rates and rate of gross recruitment of subscribers and price erosion.

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In December 2011, the Ministry of Communications ~~published a hearing regarding a proposed cancellation of~~cancelled the 'ADSL only' service and ~~requiring~~required Bezeq to set a unified tariff for ADSL services, whether the customer purchases another service form Bezeq or not, such tariff to include the relative cost of the access service. ~~If such~~This change ~~was adopted, it would facilitate~~has facilitated Netvision's competitive standing in the landline market as it ~~would allow the reduction~~reduced of the access service costs.

C. ORGANIZATIONAL STRUCTURE

The IDB Group

Our largest shareholder, DIC, is a majority-owned subsidiary of IDB Development Corporation Ltd., or IDB Development, which in turn is a wholly-owned subsidiary of IDB Holding Corporation Ltd., or IDB, one of Israel’s largest business groups. IDB and DIC are public Israeli companies traded on the Tel Aviv Stock Exchange. IDB Development ceased being a public company in 2009 following the acquisitions of all its shares that were held by the public, but its debentures continue to be traded on the TASE. See the footnote to the table under “Item 7.A – Major Shareholders” for information on the holdings in IDB.

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Netvision and 013 Netvision, our wholly owned subsidiary and wholly owned indirect company, respectively, incorporated in Israel, are our only significant subsidiaries.

D. PROPERTY, PLANT AND EQUIPMENT

Headquarters

In August 2003, we entered into a long-term agreement for the lease of our headquarters in Netanya, Israel. The leased property covers approximately 57,800 square meters, of which approximately 26,000 square meters consist of underground parking lots. The lease is in effect until December 31, 2019 and is renewable for two additional periods of five years each, upon our notice.

Central Laboratory

In October 2010, we entered into a long-term agreement for the enlargement of our ~~current~~ techno-logistic center, including our new central laboratory, in Netanya, Israel, and the lease thereof. The leased property covers approximately 11,000 square meters. The lease is for a term of ten years from August 2011 and is renewable for an additional period of 5 years, at our option. In case we do not exercise the option we shall be required to pay approximately NIS 11 million.

Netvision Properties

Netvision leases two main properties in Israel: one in Haifa and the other in Rosh-Ha'ayin. Netvision uses these properties for its offices, for its call centers, and for its network servers, as well as for equipment storage and until December 2011, has used them as headquarters as well. The Haifa lease covers approximately 8,900 square meters, is in effect until April 2017, and may be terminated by Netvision in April 2015 subject to prior notice. The Rosh-Ha'ayin lease covers approximately 8,400 square meters, is in effect until

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December 2019, may be terminated by Netvision as of May 2013 by written notice and a certain compensation. Netvision intends to sublease part of the property in Rosh-Ha'ayin and is considering its steps regarding the property in Haifa.

Electricity

In December 2010, we entered into an agreement with Ashdod Energy Ltd. (subsequently assigned to Ramat Negev Energy Ltd.), expected to construct a private power plant fueled by natural gas in Israel, by the end of ~~2013.~~2014. Under the agreement as amended in July 2012, we committed to purchase electricity for the earlier of a period of 15 years from commencement of operations of the power plant or until January 2028, subject to our right to terminate the agreement after 86 years from the commencement of operations of the power plant under certain conditions.

Service centers, points of sale and cell sites

As of December 31, ~~2011,~~2012, we leased approximately 7580 service centers, points of sale and other facilities (including those operated by our wholly owned dealer), which are used for marketing, sales and customer service. Lease agreements for our retail stores and service centers are generally for periods of two to three years, with extension options that vary by location.

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In addition, we lease from various parties, including the Israeli Land Authority, or ILA, municipalities and private entities sites for the establishment, maintenance and operation of cell sites for our cellular network. The duration of these lease agreements varies and ranges, in most cases, from two to five years, with an option to extend the lease for successive similar periods. The lease agreements also differ from each other in aspects such as payment terms and exit windows that enable us to terminate the agreement prior to its scheduled expiration. In some of the agreements, the lessor is entitled to terminate the agreement at any time without cause, subject to prior notice. Based on our past experience, we encounter difficulties in extending the term of approximately 7% of the lease agreements for cell sites, which at times results in our having to pay substantially higher rent in order to remain in the same locations or to find alternative sites.

In addition, Netvision leases a number of points of presence in Israel that are used for equipment and servers storage and storage of operators and other communications equipment for the provision of landline telephony services, and leases storage space for its servers and equipment in New York City, London and Frankfurt.

Authorization agreement with land regulatory authorities

In October 2005, we entered into an authorization agreement with the ILA (which manages the lands of the Development Authority and the Jewish National Fund) that authorizes us to use lands managed by the ILA for the establishment and operation of cell sites. The authorization agreement is effective until December 31, 2009 and the parties have agreed to extend it until December 31, 2010. We ~~are currently~~have been negotiating the renewal of the agreement with the ILA, in light of the ILA's demand for increased consideration and we estimate that the agreement will be renewed. Any delay in the renewal of the agreement may cause a delay in the construction of new cell sites on the lands managed by the ILA.

The authorization agreement provides that subject to the receipt of approval from the ILA, we will be entitled to establish and operate cell sites on the lands leased to third parties throughout the agreement’s term. In connection with the authorization agreement we

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undertook to vacate at the end of the agreement’s term all facilities installed in the authorized area unless the authorization period is extended.

Under the authorization agreement, the ILA is entitled to revoke authorizations granted to us in the event of changes in the designation of the land on which a cell site was erected, in the event that we violate a fundamental condition of the authorization agreement, in the event that the holders of rights in the properties on which we erected cell sites breach the agreements between them and the ILA and in the event that the land on which a cell site was erected is required for public use.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 2.5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following operating and financial review and prospects should be read in conjunction with “Item 3. Key Information – A- Selected Financial Data” and our consolidated financial statements and accompanying notes appearing elsewhere in this annual report. Our financial statements have been prepared in accordance with International

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Financial Reporting Standards, or IFRS, which differ in certain respects from U.S. Generally Accepted Accounting Principles, or U.S. GAAP. Following our adoption of IFRS, as issued by the IASB, we are no longer required to reconcile our financial statements prepared in accordance with IFRS to U.S. GAAP.

In accordance with the instructions of the Israeli Accounting Standard No. 29, “Adoption of International Financial Reporting Standards (IFRS)”, which was published in July 2006, we have adopted IFRS as issued by the IASB, with effect from January 1, 2008, based upon the guidance in IFRS 1, "First-time adoption of IFRSs", and have prepared our financial statements according to IFRS.

This discussion contains forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many important factors, including those set forth under “Item 3. Key Information – D. Risk Factors” and elsewhere in this annual report.

A. OPERATING RESULTS

Overview

General

We are the largest provider of cellular communications services in Israel with approximately ~~3.349~~3.199 million cellular subscribers as of December 31, ~~2011,~~2012, with an estimated market share of ~~33.6%~~31.9%.

~~Table~~2012 and more specifically the second half of ~~Contents~~2012, was characterized by additional radical changes in market conditions, which, in turn, resulted in radical adverse effects to our results of operations following the negative changes we encountered in 2010-2011 due to regulatory pressures, leading to a reduction in our net income, operating profit and EBITDA by 35.6%, 30.7% and 19.1%, respectively, in comparison to 2011. These trends have continued into 2013 and are expected to continue to further adversely affect our results of operations. See Item 3. Risk Factors - We face intense competition in all aspects of our business" and "We are facing substantial organizational and personnel changes" and "Item 4. Information on the Company - B. Business Overview – Competition", for additional details. During 2012 we have continually implemented aggressive efficiency measures in order to mitigate those adverse effects. Those measures led to an annual saving run rate of approximately NIS 550 million (when comparing fourth quarter 2012 expenses with fourth quarter 2011 expenses). We intend to continue to implement substantial organizational and personnel changes in order to continue our efforts to mitigate the progressing adverse effects of the changing market conditions. We cannot guarantee the success of these measures. Although to date, those measures did not have a negative effect on our operations, further cutbacks and changes may have an adverse effect on our service and customer service quality.

We earn revenues and generate our primary sources of cash by offering a broad range of communications services, including cellular, ISP, ILD and landline services. Our cellular services include basic and advanced cellular telephone services, text and multimedia messaging services and advanced cellular content and data services, which we provide through our network covering substantially all of the populated territory of Israel. We also provide international roaming services to our subscribers in 179 countries as of December 31, ~~2011~~2012 as well as to subscribers of foreign networks visiting Israel. We offer our subscribers a wide selection of handsets of various leading global manufacturers as well as extended warranty services. We have an advanced fiber-optic transmission infrastructure of approximately 1,600 kilometers. Together with our complementary microwave-based infrastructure, our fiber-optic infrastructure connects the majority of our cell sites with the

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remainder connected using supplemental transmission capacity leased from Bezeq, the incumbent landline operator. Having our own transmission network enables us to save substantial operating cash lease costs that would be associated with complete reliance on Bezeq’s infrastructure, although these savings are partially offset by maintenance costs and microwave spectrum fees. It also allows us to sell transmission and data services to business customers and telecommunications operators. ~~Following the receipt of our license to~~We provide ~~landline telephone services in Israel in 2006, we began to offer these services and as of February 2008, additional~~ advanced landline services, through our NGN system, to selected landline business customers. ~~Following~~In addition, following the acquisition of Netvision in 2011, we ~~are providing~~provide internet connectivity and related services (ISP) and landline telephony services consisting mainly of international calling services, operator services, teleconferencing services and landline telephony services. As of mid 2012, we offer bundles of services including cellular, ISP, ILD and landline services to our customers.

Our management evaluates our performance through focusing on our key performance indicators, which include among others: number of cellular, landline and ISP subscribers, ~~cellular~~ILD minutes of usage, subscribers churn rate, average minutes of usage per cellular, ~~subscriber,~~landline and ISP subscribers, or MOU, average revenue per cellular, ~~subscriber,~~landline and ISP subscribers, or ARPU, EBITDA (as defined in “Results of Operations”), operating income and net income. These key performance indicators are primarily affected by the competitive and regulatory landscape in which we operate and our ability to adapt to the challenges posed.

Our competitive landscape is characterized primarily by a highly penetrated cellular market. Competition is intense and attracting new subscribers and retaining existing subscribers has become increasingly difficult and costly. The competition in our market has further ~~increased~~intensified in 2012 following the entry into the market of additional competitors, specifically the launch of two new UMTS operators in May 2012 - Hot Mobile and Golan, using national roaming on Pelephone's ~~UMTS/HSPA network~~and our networks (respectively) and aiming to win market share by introducing significantly lower tariffs than market level at that time, leading to substantially accelerated price erosion, a materially increased churn rate, increased subscriber acquisition and retention costs and a material decrease in ~~2009~~revenues and profitability for us. This was preceded by regulatory and other changes, inwhich contributed to the ~~market~~intensified competition and ~~has~~ increased ~~further following~~price erosion during 2011 including the compulsory reduction of Early Termination Fees in February 1, ~~2011. We expect competition~~2011 and the formation of communications groups, which led to the offering of bundles of services and Unlimited Packages, at lower average revenue per minute, or ARPU. Competition may intensify further ~~with~~if current trends continue and following annulment or further relaxation of the ~~expected entry~~structural separation imposed on each of ~~additional competitors, including additional UMTS operators~~the Bezeq and MVNOs, and technologies and regulatory changes that would facilitate the entry of such competitors such as the reduction of interconnect tariffs, the reduction of Early Termination Fees and national roaming.Hot groups. Following our acquisition of Netvision, we compete in additional markets, including ISP and ILD services. ~~We expect competition to~~Competition in these markets increased and may intensify further following the ~~formation~~annulment or further relaxation of ~~communications~~the structural separation imposed on each of the Bezeq and Hot groups ~~in Israel, that are expected to offer~~and the offering of bundles of services, which are expected to ~~entail~~involve further price ~~erosion, more so if the Bezeq and Hot groups' bundle will include cellular services.~~erosion. Also, the offering of services by the Bezeq and Hot groups at tariffs significantly lower than prevailing market tariffs or at prices which would be, in some cases, below our costs for such services, by cross subsidizing with other services in which they have the capacity to monopolize the market, is expected to increase competition in those markets and lead to further price erosion and possible loss of market share by us. These trends are expected to further adversely affect our results of operations. We will continue to implement efficiency measures in an effort to mitigate such effects. See “Item 3. Key Information – D. Risk Factors - We face intense

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competition in all aspects of our business” and "Risks Related to our wholly owned subsidiary Netvision - Changes in the regulatory environment could adversely affect

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Netvision's business" and “Item 4. Information on the Company – B. Business Overview – Competition” and "Netvision – ISP Business - Competition".

We intend to drive revenue ~~growth~~ primarily by: ~~forming~~maximizing the benefits of our position as a leading Israeli telecommunications group, offering our customers full and comprehensive mobile and wireline solutions ~~maintaining~~ and enhancing our ~~strong brand;~~competitive capabilities, retaining our existing subscribers; ~~increasing our ARPU by~~ offering new services that will complete our offering as a telecommunications group and ~~provide growth engines that~~services which are synergetic to our core businesses, as well as growing and developing our mobile data and value added services and wireline services revenues; and attracting new subscribers. ~~In particular, in addition~~We intend to ~~being an important factor in selecting a cellular provider, we believe that mobile data~~continue our efforts to optimize our costs by implementing further aggressive efficiency measures, reducing our expenses and ~~other value-added services are a potential growth engine for increasing revenues.~~investments and adjusting our operations to the changing market conditions, but cannot guarantee the success of these measures.

The communications market and specifically the cellular industry are primarily regulated by the Ministry of Communications. See “Item 4. Information on the Company – B. Business Overview - Government Regulations.” While our pricing is not generally regulated, certain of our rates and pricing mechanisms are subject to regulation. The annual reduction of interconnect tariffs by the Ministry of Communications between March 2005 and 2008, adversely affected our results and required us to find alternative sources of revenues to compensate for these reductions. The additional reduction of interconnect tariffs, beginning January 1, 2011 (for details see “Item 4. Information on the Company – B. Business Overview – Government Regulations – Tariff Supervision”) had a material adverse effect on our results in 2011 and 2012 and is expected to continue to adversely affect our results in the future. We have taken and intend to continue taking measures to reduce for the expected adverse effects of this tariff reduction, through revenue enhancement as well as cost reduction measures, but cannot assure that these will be successful.

~~Commencing January 1, 2009, our license prevents us from raising tariffs to non-business customers having an obligation to purchase our services for a predefined period during such period and as~~As of February 2011, we were required to reduce Early Termination Fees to a negligible amount in the cellular market, and asit was thereafter annulled completely. As of November 2011, ~~cannot~~we may not charge any Early Termination Fees for other communications services, under an amendment to the ~~Communication~~Communications Law, which applies to existing as well as new pricing plans. The reduction of Early Termination Fees in the cellular market and the expected entry of additional competitors due to materially increased gross recruitment of subscribers have led to the offering of packages at lower average revenue per minute and resulted in accelerated price erosion, materially increased churn rate and increased acquisition and retention costs due to materially increased gross recruitment rate . Furthermore, these adverse changes were accompanied by materially increased sales of handsets, which caused a decrease in our free cash flow, due to an increase in the immediate payment to vendors for handset purchases, as opposed to spreading the consideration when these handsets are sold to our subscribers (usually in installments over a period of thirty six months). We expect further price erosion following the expected entry of additional competitors, services bundle offering, more so if the Bezeq and Hot groups' bundle will include cellular services and by the offering of services by the Bezeq and Hot groups at tariffs significantly lower than market tariffs, as they have begun offering in February 2012. See additional details under “Item 3. Key Information – D. Risk Factors - We face intense competition in all aspects of our business” and "Risks Related to our wholly owned subsidiary Netvision - Changes in the regulatory environment

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~~could adversely affect Netvision's business" and~~ "Item 4. Information on the Company – B. Business Overview – Government Regulations – Tariff Supervision." ~~We took steps to address the effects of these amendments through revenue enhancement as well as cost reduction measures, but cannot assure that these will be successful.~~

The construction and operation of our cell sites and other transmission facilities are highly regulated and require us to obtain various consents and permits. See “Item 4. Information on the Company – B. Business Overview - Government Regulations—Permits for Cell Site Construction.” We have experienced difficulties in obtaining some of these consents and permits, particularly in obtaining building permits for cell sites from local planning and building authorities and as of September 2010, cannot rely on the exemption from obtaining a building permit due to an interim order issued by the Israeli Supreme Court to that effect, except for the replacement of existing radio access devices under certain conditions. Also, we may be operating a significant number of our cell sites in a manner not fully compatible with the building permits issued for them. However, even though 1810 criminal and administrative proceedings (with ~~three~~four cell sites subject to a demolition order) are outstanding as of December 31, ~~2011,~~2012, we do not expect that the demolition of these facilities would have a material impact on our results of operations and financial condition. Additional restrictions on the construction and operation of cell sites and other facilities may be enacted by amendment to the Non-Ionizing Radiation Law and Regulations. If such restrictions are subsequently adopted, they will, among other things, limit our ability to construct new sites and renew operating permits for many of our existing sites, especially in residential areas, will adversely affect our existing networks and networks build out, specifically in urban areas, and could adversely affect our results of operations. National Zoning Plan 36 is in the process of being revised. If proposed changes are approved, they will harm our ability to construct new cell sites, make the process of obtaining building permits

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for the construction and operation of cell sites more cumbersome and costly, could adversely affect our existing network, and may delay the future deployment of our network. Moreover, if we are unable to obtain or renew consents and permits or rely on exemptions from obtaining permits for our existing sites or other facilities, we will be required to demolish or relocate these cell sites and facilities. Our inability to relocate cell sites or other facilities in a timely manner and/or our inability to obtain the permits and consents for new cell sites, or rely on exemptions, could adversely affect our existing network resulting in the loss of subscribers, prevent us from meeting the networks coverage and quality requirements contained in our license and adversely impact our networks build-out, all of which may have a material adverse result on our results of operations and financial condition.

Our profitability is also affected by other factors, including changes in our cost of revenues and selling, marketing, general and administrative expenses, including depreciation and ~~finance expenses.~~financing expenses, which are also affected by changes in the CPI.

Our results are also impacted by currency fluctuations. While substantially all of our revenues are denominated in NIS, for ~~2011,~~2012, approximately ~~39%~~36% of cash outflow was denominated in, or linked to, other currencies, mainly U.S. dollars. These payments included capital expenditures, some cell site rental fees and payments for equipment including handset suppliers. Changes to the Israeli CPI, may also impact our results as our debentures (excluding Series E)E and G) and some of our expenses are linked to the Israeli CPI. Any devaluation of the NIS against the U.S. dollar or other foreign currencies will therefore increase the NIS cost of our expenses that are not denominated in NIS or are linked to those currencies and any increase in the Israeli CPI will increase the financial expenses associated with our

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debentures. We enter into derivative instruments to mitigate the effect of the various market risks associated with these expenses. See “Item 11 - Quantitative and Qualitative Disclosures About Market Risk.”

Further, ~~from late 2005~~ we have incurred significant debt by issuing debentures, the aggregate outstanding principal amount of which as of December 31, ~~2011~~2012 was NIS ~~6,035~~6,443 million. See ““—Liquidity and Capital Resources—– A. Debt Service – Public Debentures”.

In February 2006, our Board of Directors adopted a policy to distribute each year at least 75% of our annual net income. Our net income was determined under Israeli GAAP for periods until December 31, 2007 and for periods commencing on or after January 1, 2008, is determined under IFRS, following the adoption of IFRS in accordance with the Israeli Accounting Standard No. 29 “Adoption of International Financial Reporting Standards”. In March 2007, our Board resolved to distribute dividends within the boundaries of the February 2006 dividend policy and until resolved otherwise, on a quarterly basis.

In respect of 2012, a dividend was declared for the first quarter only and our board of directors chose not to declare dividends for the second, third and fourth quarters given the intensified competition and substantial changes in pricing and in order to strengthen our balance sheet. In March 2012, in connection with ~~our plans to raise~~raising of additional debt, we undertook limitations on our dividend distributions. See “Item 8. Financial Information – A. Statements and Other Financial Information - Dividend Policy” and “— B. Liquidity and Capital Resources—Dividend payments.” and "- Debt Service –Shelf Prospectus".

~~Recent Developments~~

Acquisition of Netvision Ltd.

On August 31, 2011, we completed the acquisition of 100% of the share capital of Netvision for a total consideration of approximately NIS 1.57 billion ($~~411~~421 million) pursuant to a merger agreement dated June 15, 2011, by and among our Company, Netvision and a wholly owned subsidiary of our Company, which we formed solely for effecting the merger

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transaction. Following the consummation of the merger transaction, Netvision became a wholly owned subsidiary of our Company. We funded the acquisition of Netvision through a combination of available cash and issuance of additional debentures from our ~~existing~~ Series D and Series E debenture series on the TASE. The offerings described above were made in Israel to residents of Israel only. For further details, see "Item 5. B – Operating and Financial Review and Prospects – Liquidity and Capital Resources". For Additional details see "Item 4. Information on the Company - ~~Significant Developments~~Acquisition of Netvision Ltd. During 2011."

Since the acquisition of Netvision's share capital was completed on August 31, 2011, the consolidated results for the year ended December 31, 2011, included elsewhere in this annual report, include Netvision's results for the months of September through December 2011 only.

In regards to Netvision's results for 2012 compared with its results for the full year of 2011, there was a 5% decrease in revenues due to increased competition, which was more than compensated by a higher decrease in operating expenses due to efficiency measures implemented since the acquisition by us, resulting in an increase in operating income and net income.

Revenues

We derive our revenues primarily from the sale of cellular network services (such as ~~airtime)~~airtime and data surfing), handsets and other services, including content and value added services, extended handset warranties and the provision of transmission and landline services. Revenues from airtime are derived from cellular subscribers originating calls on our network and from interconnect revenues from other operators for calls terminating on our network. Since the second quarter of 2012 we also derive our revenues from hosting services. Revenues also include roaming charges that we

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bill to our subscribers for the use of the networks of our roaming partners outside Israel, to which we refer as outbound roaming, and charges that we bill to our roaming partners whose subscribers use our network, to which we refer as inbound roaming.

Since the acquisition of Netvision, we also derive our revenues from the provision of internet connectivity and related services (ISP); and provision of telephony services consisting mainly of international calling services, operator services, teleconferencing services and landline telephony services. In addition, Netvision's revenues are also derived from additional business activities such as internet content services and custom internet applications.

Our revenues from cellular services are usually affected by ~~seasonality. The~~seasonality with the third quarter of the year ~~is usually the strongest quarter with the highest revenues, since it occurs in the summer season,~~ characterized by ~~longer daylight hours (facilitating~~ higher ~~airtime usage) and~~roaming revenues due to increased incoming and outgoing tourism (facilitating higher roaming revenues). The fourth quarter of the year is usually the weakest quarter with lower revenues, since the Jewish holiday season, characterized by reduced usage, usually occurs in this quarter, and since it occurs in the fall-winter seasons, characterized by shorter daylight hours (resulting in lower airtime usage).tourism.

Cost of revenues

The principal components of our cost of revenues are ~~interconnect fees,~~ the purchase of handsets, accessories, equipment and spare parts, interconnect fees, content cost, cell site leasing costs, transmission services cost, internet connectivity services, the purchase of call minutes related mainly to international call services, outbound roaming services fees, royalty payments to the government of Israel, salaries and network development and maintenance. Our cost of revenues also includes depreciation of the cost of our network equipment and amortization of

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our spectrum licenses, rights of use of communications lines and capitalized handset subsidies. See “—Application of Critical Accounting Policies and Use of Estimates—Long-lived assets - depreciation.”

Selling and marketing expenses

Selling and marketing expenses consist primarily of sales force salaries and commissions, advertising, public relations and promotional expenses. We compensate our sales force through salaries and incentives. Our selling and marketing expenses also include depreciation, mainly of leasehold improvements and equipment in our service centers and points of sales and amortization of capitalized sales commissions, as well as amortization of intangible assets related to the acquisition of Netvision.

General and administrative expenses

General and administrative expenses consist primarily of salaries and compensation, professional and consultancy fees, leases and maintenance of our offices, bad debt and doubtful accounts allowance, and other administrative expenses. Our general and administrative expenses also include depreciation and maintenance fees, mainly for our billing and information systems.

Other income and expenses

Other income and expenses consist primarily of capital gains or losses from sale and disposal of capital ~~assets.~~

~~Table~~assets and from sales of ~~Contents~~subsidiaries.

Financing income and expenses

Financing income and expenses consist primarily of interest expense on long-term and short-term loans and interest on our debentures, the interest income component of handset long-term installment sales, the effects of fluctuations in currency exchange rates, Israeli CPI adjustments related to the Israeli CPI-linked debentures and other expenses, and income or losses relating to financial derivative instruments that do not qualify for hedge accounting according to IFRS. Financing income and expenses also include interest income on deposits, premium amortization associated with our debentures, and gains and losses from our current investment in tradable securities.

Income Tax

Generally, Israeli companies were subject to ~~Corporate~~corporate tax on their taxable income at the rate of 25% for the 2010 tax year, which decreased to 24% for the 2011 tax ~~year.~~year and increased again to 25% for the 2012 tax year and onwards. Israeli companies are subject to capital gains tax at the ~~Corporate~~corporate tax rate. A deferred tax asset or liability is created for temporary differences between ~~income recognized~~the carrying amounts of assets and liabilities for ~~tax~~financial reporting purposes and the amounts used for ~~accounting~~taxation purposes.

In December 2011, the Israeli Income Tax Ordinance was amended following the tax recommendations of the Israeli public committee for socio-economic reform. The amendment includes, among other things, cancelation of the previously scheduled reduction in the corporate tax rate, so that the corporate tax rate ~~will increase~~increased to 25% commencing January 1, 2012 and will remain at such rate for future tax years (corporate tax rate for 2011 was 24% and was scheduled to gradually decrease to 18% by 2016). Following this amendment, we

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incurred in the fourth quarter of 2011 a one-time deferred tax expense in the amount of approximately NIS 33 million, as a result of an increase in deferred tax liability.

Results of Operations - Comparison of ~~2009,~~ 2010, 2011 and ~~2011~~2012

The following table sets forth key performance indicators for the periods indicated:

	Year Ended December 31,									Change*						Year Ended December 31,									Change*
	2009			2010			2011			2010 vs. 2009			2011 vs. 2010			2010			2011			2012			2011 vs. 2010			2012 vs. 2011
Subscribers at end of period(1) (in thousands)		3,292			3,394			3,349			3.1	%		(1.3	%)		3,394			3,349			3,199			(1.3	%)		(4.5	%)
Period churn rate(1)(2)		19.6	%		20.5	%		25.1	%	0.9pp			4.6pp
Churn rate of cellular subscribers(1)(2)																	20.5	%		25.1	%		31.5	%	4.6		pp	6.4		pp
Average monthly usage per subscriber (MOU) (in minutes)(1)(3)		331			335			346			1.2	%		3.3	%		335			346			390			3.3	%		12.7	%
Average monthly revenue per subscriber (ARPU) (1)(4) (in NIS)		144			144			106			-			(26.3	%)		144			106			88			(26.3	%)		(17.5	%)
Operating income (in NIS millions)		1,768			1,938			1,422			9.6	%		(26.6	%)		1,938			1,422			985			(26.6	%)		(30.7	%)
Net income (in NIS millions)		1,182			1,291			825			9.2	%		(36.1	%)		1,291			825			531			(36.1	%)		(35.6	%)
EBITDA(5) (in NIS millions)		2,529			2,667			2,167			5.5	%		(18.7	%)		2,667			2,167			1,753			(18.7	%)		(19.1	%)
Operating income margin(6)		27.3	%		29.1	%		21.9	%	1.8pp			(7.2)pp				29.1	%		21.9	%		16.6	%	(7.2)		pp	(5.3)		pp
EBITDA margin(7)		39.0	%		40.0	%		33.3	%	1.0pp			(6.7)pp				40.0	%		33.3	%		29.5	%	(6.7)		pp	(3.8)		pp

~~Cellcom Israel Ltd. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~Note 3 - Significant Accounting Policies (cont'd)~~

~~Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists.~~

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, not to exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit and loss. Impairment loss in respect of goodwill is not reversed.

J. I.

Employee benefits

Post employment benefits

Part of the Group's liability for post employment benefits is covered by a defined contribution plan financed by deposits with insurance companies or with funds managed by a trustee. ~~Obligation~~A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and has no legal or constructive obligation to pay further amounts. The Group's obligation of contribution to defined contribution pension plan is recognized as an expense in profit and loss in the periods during which services are rendered by employees. In addition, there is a liability for a defined post employment benefit plan that is determined using actuarial assessment techniques. A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. Calculation of the liability involves determining estimates, among others, regarding the capitalization rates, anticipated return on the assets, the rate of the increase in salary and the rates of employee turnover. There is ~~material~~significant uncertainty in respect to these estimates because of the long-term ~~programs,~~programs. For further information, see ~~note 18.~~Note 17.

The Group recognizes immediately, directly in retained earnings through other comprehensive income, all actuarial gains and losses arising from defined benefit plans. Interest costs and expected return on plan assets that were recognized in profit or loss are presented under financing income and expenses, respectively.

~~Short term~~Short-term benefits

~~Short term~~Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

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Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 3 - Significant Accounting Policies (cont'd)

Share based payments

The grant date fair value of options granted to employees is recognized as salaries and related expenses, with a corresponding increase in retained earnings, over the period that the employees become unconditionally entitled to the options. ~~The amount recognized as an expense is adjusted to reflect the actual number of share options that vest.~~

Fair value is measured using the Black-Scholes model. The expected life used in the model has been adjusted, based on management’s best estimate, ~~for the effects of non-transferability,~~ exercise restrictions and behavioral ~~considerations and that are expected to vest to shares.~~considerations.

K. J.

Provisions

A provision is recognized if ~~as a result of a past event,~~ the Group has a present legal or constructive obligation, as a result of a past event, that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are measured at management's best estimate of the expenditure required to settle the obligation at the reporting date.

A provision for claims is recognized if ~~as a result of a past event,~~ the Group has a present legal or constructive obligation, as a result of a past event, and it is more likely than not that an outflow of economic benefits will be required to settle the obligation and the amount of obligation can be estimated reliably.

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~~Cellcom Israel Ltd. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~Note 3 - Significant Accounting Policies (cont'd)~~

A provision for onerous contracts is recognized when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract.

L. K.

Revenue

Revenues derived from services, including ~~airtime,~~cellular services, internet connectivity services (ISP), international calls services~~services~~, fixed local calls, interconnect and roaming revenues, are recognized when the services are provided, in proportion to the stage of completion of the transaction and all other revenue recognition criteria are met.

~~A contract with~~The sale of a ~~customer~~handset is generally adjacent to the sale ~~handset, usually includes an engagement to provide future~~of services. Usually, the sale of handset to the customer is executed with no contractual obligation of the client to consume services in a minimal amount for a predefined period. As a result, the Group refers to the sale transaction as a separate transaction and recognizes revenue from sale of handset upon delivery of the handset to the customer. Revenue from services is recognized and recorded when the services are provided.

In case the customer is obligated towards the Group to consume services in a minimal amount for a predefined period, the contract is characterized as a multiple element arrangement and thus, revenue from sale of handset is recorded in an amount not higher than the fair value of the said handset, which is not contingent upon delivery of additional components (such as services) and is recognized upon delivery to the customer and when the criteria for revenue recognition are met. The Group determines the fair value of the individual elements based on prices at which the deliverable is regularly sold on a standalone basis, after considering ~~volume~~ discounts where appropriate.

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Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 3 - Significant Accounting Policies (cont'd)

The Group recognizes revenue from providing services in connection with software transactions, the results of which are reliably estimable, according to the stage of the completion of the transaction at the reporting date.

~~The Group, among others,~~also offers ~~value added services including voice mail, text and multimedia messaging, as well as downloadable wireless data applications, including ring tones, music, games, and~~ other informational content. Generally, these enhanced features and data applications generate additional service revenues through monthly subscription fees or increased usage through utilization of the features and applications. Other optional services, such as extended equipment ~~extended~~ warranty plans, which are ~~also~~ provided for a monthly fee and are either sold separately or bundled and included in packaged rate plans. Revenues from ~~enhanced features and optional~~those services are recognized when earned.

Revenues from long-term credit arrangements are recognized on the basis of the present value of future cash flows, discounted according to market interest rates at the time of the transaction. The difference between the original credit and its present value is recorded as interest income over the credit period.

Prepaid wireless airtime sold to customers is recorded as deferred revenue prior to the commencement of services and is recognized when the airtime is used or expires.

When the Group acts as an agent or an intermediary without bearing the risks and rewards resulting from the transaction, revenues are presented on a net basis (as a profit or a commission). However, when the Group acts as a principal supplier and bears the risks and rewards resulting from the transaction, revenues are presented on a gross basis, distinguishing the revenue from the related expenses. ~~Costs~~

L.	Cost of revenues

Cost of revenues mainly include equipment purchase costs, salaries and related expenses, value added services costs, royalties expenses, ongoing license fees, interconnection and roaming expenses, cell site

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~~Cellcom Israel Ltd. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~Note 3 - Significant Accounting Policies (cont'd)~~

~~leases,~~ leasing costs, depreciation and amortization ~~charges and technical repair~~expenses and maintenance expenses, directly related to services rendered.

M.	Advertising expenses

Advertising costs are expensed as incurred.

N.	Lease payments

Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease.

N. O.

Financing income and expenses

Financing income is comprised of interest income on cash deposits, interest income on installment sales, gain from hedging transactions, income from exchange rate differences and from investment in debt securities. Interest income is recognized in the consolidated ~~statement~~statements of income as it accrues using the effective interest method.

Financing expenses are comprised of interest and indexing expenses on loans and debentures, loss from hedging transactions, expenses from exchange rate differences and unwinding of the discount on provisions. All borrowing costs are recognized in profit and loss using the effective interest method.

In the statements of cash flows, interest received and dividends received are presented as part of cash flows from investing activities. Interest paid and dividends paid are presented as part of cash flows from financing activities.

Foreign currency, investment in debt securities and hedging instruments gains and losses that are recognized in profit or loss are reported on a net basis.

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Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 3 - Significant Accounting Policies (cont'd)

O. P.

~~Income tax expense~~Taxes on income

~~Income tax comprises~~Taxes on income comprise current and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that it relates to a business combination, or are recognized directly in equity or in other comprehensive income to the extent they relate to items recognized directly in equity or in other comprehensive income.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognized ~~using the balance sheet method, providing~~ for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted at the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

P. Q.

Earnings per share

The Company presents basic and diluted earnings per share ("EPS") data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit and loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise share options granted to employees.

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~~Cellcom Israel Ltd. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~Note 3 - Significant Accounting Policies (cont'd)~~

Q.	~~Advertising expenses~~

~~Advertising costs are expensed as incurred.~~

R.	New ~~standards and interpretations~~standard not yet adopted

~~A number of new standards, amendments to standards and interpretations are not yet effective, and have not been applied in preparing these consolidated financial statements:~~

IFRS 10 Consolidated Financial Statements (hereinafter – “IFRS 10”). IFRS 10 replaces the requirements of IAS 27 Consolidated and Separate Financial Statements and the requirements of SIC-12 Consolidation – Special Purpose Entities with respect to the consolidation of financial statements, so that the requirements of IAS 27 will continue to be valid only for separate financial statements.

IFRS 10 introduces a new single control model for determining whether an investor controls an investee and should therefore consolidate it. This model is implemented with respect to all investees. According to the model, an investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with that investee, has the ability to affect those returns through its power over that investee and there is a link between power and returns.

IFRS 10 is applicable retrospectively (with a certain relief) for annual periods beginning on or after January 1, 2013. Early adoption is permitted providing that disclosure is provided and that the entire new suite of standards is early adopted, meaning also the additional standards that were issued at the same time – IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Involvement with Other Entities, IAS 27 (2011) and IAS 28 (2011).

~~The Group is examining the effect of adopting IFRS 10 on its financial statements.~~

IFRS 11 Joint Arrangements (hereinafter – “IFRS 11”). IFRS 11 replaces the requirements of IAS 31 Interests in Joint Ventures (hereinafter – IAS 31) and amends part of the requirements in IAS 28 Investments in Associates.

IFRS 11 defines a joint arrangement as an arrangement over which two or more parties have joint control (as defined in IFRS 10). Joint arrangements are divided into two types: a joint operation and a joint venture.

IFRS 11 is applicable retrospectively for annual periods beginning on or after January 1, 2013, but there are specific requirements for retrospective implementation in certain cases. Early adoption is permitted providing that disclosure is provided and that the entire new suite of standards is early adopted, meaning also the additional standards that were issued at the same time – IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Involvement with Other Entities, IAS 27 (2011) and IAS 28 (2011).

~~The Group is examining the effect of adopting IFRS 11 on its financial statements.~~

IFRS 12 Disclosure of Involvement with Other Entities (hereinafter – “IFRS 12”). IFRS 12 contains extensive disclosure requirements for entities that have interests in subsidiaries, joint arrangements (i.e. joint operations or joint ventures), associates and unconsolidated structured entities.

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~~Cellcom Israel Ltd. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~Note 3 - Significant Accounting Policies (cont'd)~~

IFRS 12 is applicable for annual periods beginning on or after January 1, 2013. Early adoption is permitted providing that the entire new suite of standards is early adopted, meaning also the additional standards that were issued at the same time – IFRS 11 Joint Arrangements, IFRS 10 Consolidated Financial Statements, IAS 27 (2011) and IAS 28 (2011).

~~Nevertheless, it is permitted to voluntarily provide the additional disclosures required by IFRS 12 prior to its adoption without early adopting the other standard.~~

~~The Group is examining the effect of adopting the standards on its financial statements.~~

IFRS 13 Fair Value Measurement (hereinafter – “IFRS 13”). IFRS 13 replaces the fair value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. It defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. IFRS 13 does not introduce new requirements to measure assets or liabilities at fair value.

IFRS 13 ~~applies to assets, liabilities and an entity’s own equity instruments that, under other IFRSs, are required or permitted to be measured at~~Fair Value Measurement ("IFRS 13") replaces the fair value ~~or when disclosure of~~measurement guidance that currently appears in various IFRSs. For this purpose, it defines fair value ~~is provided.~~and provides measurement and disclosure guidance. Nevertheless, IFRS 13 does not ~~apply~~introduce new fair value measurement requirements, but explains how to ~~share based payment transactions within the scope of IFRS 2~~ ~~Share-Based Payment~~ ~~and leasing transactions within the scope of IAS 17~~ ~~Leases~~.

measure fair value when such measurement is required by other IFRSs. IFRS 13 ~~does not apply to measurements that are similar to but are not~~is applied when fair value ~~(such as the measurement of the net realizable value of inventory, in accordance with IAS 2~~ ~~Inventories, and the measurement of value in use, in accordance with IAS 36~~ ~~Impairment of Assets~~).

measurements or disclosures are required or permitted by other IFRSs.

IFRS 13 is applicable prospectively for annual periods beginning on or after January 1, 2013. ~~Earlier application is permitted with disclosure of that fact.~~ The disclosure requirements of IFRS 13 need not be applied in comparative information for periods before initial application.

~~The Group is examining the effect of adopting IFRS 13 on its financial statements.~~

Amendment to IAS 1, Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income (hereinafter - “the Amendment”). The Amendment changes the presentation of items of other comprehensive income (hereinafter – “OCI”) in the financial statements, so that items of OCI that may be reclassified to profit or loss in the future, would be presented separately from those that would never be reclassified to profit or loss. Additionally, the Amendment changes the title of the Statement of Comprehensive Income to Statement of Profit or Loss and Other Comprehensive Income. However, entities are still allowed to use other titles. The Amendment is effective for annual periods beginning on or after July 1, 2012. The amendment will be applied retrospectively. Early adoption is permitted providing that disclosure is provided. The Group is examining the effect of adopting the Amendment on its financial statements.

~~Amendment to IAS 19, Employee Benefits (hereinafter – “the Amendment”). The Amendment introduces a number of changes to the accounting treatment of employee benefits.~~

~~The key changes are as follows:~~

•

~~The Amendment requires immediate recognition of past service costs regardless of whether the benefits have vested or not.~~

~~F-24~~

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~~Cellcom Israel Ltd. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~Note 3 - Significant Accounting Policies (cont'd)~~

•

The calculation of net financing income or expense will be determined by applying the discount rate used to measure the defined benefit obligation to the net defined benefit liability (asset). Accordingly, calculation of actuarial gains or losses will also change.

•

The Amendment changes the definitions of short-term employee benefits and of other long term employee benefits, so that the distinction between the two will depend on when the entity expects the benefits to be wholly settled, rather than when settlement is due.

•

The Amendment enhances the disclosure requirements for defined benefit plans, in an effort to provide better information about the characteristics of defined benefit plans and the risks that entities are exposed to through participation in those plans.

•

The definition of termination benefits has been clarified in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, so that termination benefits are recognized at the earlier of when the entity recognizes costs for a restructuring that includes the payment of termination benefits, and when the entity can no longer withdraw the offer of the termination benefits.

The Amendment is applicable retrospectively (excluding certain exceptions stated in the Amendment) for annual periods beginning on or after January 1, 2013. Early adoption is permitted providing that disclosure is provided.

~~The Group is examining the effect of adopting the Amendment on its financial statements.~~

Amendment to IFRS 7 Financial Instruments: Disclosures, Transfers of Financial Assets(hereinafter - “the Amendment”) - The Amendment introduces new disclosure requirements regarding transfers of financial assets, including disclosures for:

●

Financial assets that were not derecognized in their entirety, including disclosures of the risks and rewards associated with these assets, the relationship between the transferred assets and the associated liabilities, the restrictions on the Group’s use of the assets and so forth; and

●

Financial assets that were derecognized in their entirety but the entity has a continuing involvement in them, including the carrying amount and fair value that represents the Group’s involvement in these assets, the Group’s maximum exposure to losses from these assets, an analysis of the undiscounted cash flows as well as the gain or loss from the transfer of the asset and the income or expense arising from the Group’s continuing involvement in the asset.

The Amendment is effective for annual periods beginning on or after July 1, 2011. The disclosures required in the Amendment are not required for periods presented in comparative information that began before the Amendment came into effect. Early application is permitted with disclosure.

~~The Group is examining the effect of adopting the Amendment on its financial statements.~~

Amendment to IFRS 7 Financial Instruments: Disclosures and to IAS 32 Financial Instruments: Presentation - Offsetting of Financial Assets and Financial Liabilities (hereinafter - “the Amendment to IFRS 7” and “the Amendment to IAS 32”, respectively). The Amendment to IAS 32 clarifies that an entity currently has a legally enforceable right to set-off amounts that were recognized if that right is not contingent on a future event; and it is enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all its counterparties. The Amendment to IFRS 7 contains new disclosure requirements for financial assets and liabilities that are offset in the statement of financial position; or are subject to master netting agreements or similar agreements.

~~F-25~~

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~~Cellcom Israel Ltd. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~Note 3 - Significant Accounting Policies (cont'd)~~

The Amendment to IFRS 7 is effective for annual periods beginning on or after January 1, 2013. The Amendment to IAS 32 is effective for annual periods beginning on or after January 1, 2014. The Amendments are to be applied retrospectively. Early application of the Amendment to IAS 32 is permitted subject to the concurrent application of Amendment to IFRS 7.

~~The Group is examining the effect of adopting the amendments on its financial statements.~~

IFRS 9 (2010), Financial Instruments (hereinafter – “the Standard”) – This Standard is one of the stages in 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 and financial liabilities.

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 debt 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, the Standard 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 where revaluations are measured through other comprehensive income are recognized in profit or loss unless they clearly constitute a return on an initial investment.

The Standard generally preserves the instructions regarding classification and measurement of financial liabilities that are provided in IAS 39. Nevertheless, unlike IAS 39, IFRS 9 (2010) requires as a rule that the amount of change in the fair value of financial liabilities designated at fair value through profit or loss, other than loan grant commitments and financial guarantee contracts, attributable to changes in the credit risk of the liability, be presented in other comprehensive income, with the remaining amount being included in profit or loss. However, if this requirement aggravates an accounting mismatch in profit or loss, then the whole fair value change is presented in profit or loss. Amounts thus recognized in other comprehensive income may never be reclassified to profit or loss at a later date. The new standard also eliminates the exception that allowed measuring at cost derivative liabilities that are linked to and must be settled by delivery of an unquoted equity instrument whose fair value cannot be reliably measured. Such derivatives are to be measured at fair value.

~~The Group decided to early adopt the Standard from the first quarter of 2012.~~

In the opinion of the Group, ~~the new standards~~application of IFRS 13 will not have a material effect on the financial statements.

~~F-26~~F-23

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Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 4 - Determination of fair values

A number of the Group's accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

A.	~~Fixed assets~~

The fair value of fixed assets recognized as a result of a business combination is based on market values. The market value of fixed assets is the estimated amount for which a fixed asset could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction wherein the parties each acted knowledgeably. The market value of items of plant, equipment, fixtures and fittings is based on quoted market prices for similar items, when available, and on replacement costs when such quotes are unavailable. Depreciated replacement cost estimates reflect adjustments for physical deterioration as well as functional and economic obsolescence of the fixed asset.

B.	~~Intangible assets~~

The fair value of trademarks acquired in a business combination is based on the discounted estimated royalty payments that have been avoided as a result of the trademark being owned. The fair value of customer relationships acquired in a business combination is determined using the multi-period excess earnings method, whereby the subject asset is valued after deducting a fair return on all other assets that are part of creating the related cash flows.

~~The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets.~~

C.	~~Inventories~~

The fair value of inventories acquired in a business combination is determined based on the estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories.

D. A.

Trade and other receivables

The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date.

Current investments and derivatives

The fair value of forward exchange contracts is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate (based on government bonds).

The fair value of interest rate swaps is based on broker quotes. Those quotes are tested for reasonableness by discounting estimated future cash flows based on the terms and maturity of each contract and using market interest rates for a similar instrument at the measurement date. The fair value of investments in debt securities is based on quoted market prices.

For further information regarding the fair value hierarchy see Note 20 regarding financial instruments.

Non-derivative financial liabilities

Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date.The fair value of marketable debentures is determined by reference to the quoted closing asking price at the reporting date.

Share- based payment transactions

Fair value of employee stock options is measured using the Black-Scholes formula. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behavior), and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value.

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Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

~~Note 4 - Determination of fair values (cont'd)~~

~~Share- based payment transactions~~

Fair value of employee stock options is measured using the Black-Scholes formula. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behavior), expected dividends, and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value.

Note 5 - Financial Risk Management

The Group is exposed to credit, liquidity and market risks as part of its normal course of business. The Group's risk management objective is to monitor risks and minimize the possible ~~influence~~influences that ~~results~~result from this exposure, according to its evaluations and expectations of the parameters that affect the risks. The Group uses derivative instruments in order to partially hedge its exposure to foreign currency exchange rate and interest rate fluctuations. See also ~~note 21.~~Note 20.

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's ~~receivables from customers.~~trade and other receivables. Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. The Group conducts credit evaluations on receivables over a certain amount, and requires financial guarantees against them. Management monitors outstanding receivable balances and the financial statements include appropriate allowances for estimated irrecoverable amounts. The Group is exposed to credit risk arising mainly from its operation in Israel. The Group invests in high ranked Israeli government and institutional debt securities. The Group’s cash and cash equivalents are maintained with major banking institutions in Israel. At the reporting date, there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivatives, in the consolidated statement of financial position. Financial instruments that could potentially subject the Group to credit risks consist primarily of trade receivables. Credit risk with respect to these receivables is limited due to the composition of the subscriber base, which includes a large number of individuals and businesses.

Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and extreme conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The Group's policy is to ensure that it has sufficient cash and cash equivalents to meet expected operational expenses, including financial obligations.

Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Group's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk.

Interest rate risk

The Group is exposed to fluctuations in the interest rate, including changes in the CPI, as the majority of its borrowings are linked to the CPI. As part of its risk management policy the Group has entered into forward contracts that partially hedge the exposure to changes in the CPI.

~~F-28~~F-25

Table of Contents

Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 5 - Financial Risk Management (cont'd)

Currency risk

The Group's operating income and cash flows are exposed to currency risk, mainly due to handset and network related acquisitions and its roaming activity. The Group also manages bank accounts that are denominated in a currency other than its respective functional currency, primarily USD and Euro. As part of its risk management policy, the Group uses forward and option contracts to partially hedge the exposure to fluctuations in foreign exchange rates.

Capital management

The Group's capital management aim is to ensure a sound and efficient capital structure which takes into consideration, among others, the following factors:

A gearing ratio that supports the Group's cash flow needs with respect to its potential cash flow generation, supporting its dividend policy, while maintaining a net debt to EBITDA (earnings before interest (financing expenses, net), taxes, other income and expenses, depreciation and amortization and share based payments) ratio that meets the industry standards. The Group considers net debt to EBITDA ratio to be an important measure for investors, analysts, and rating agencies. This ratio is a non-GAAP figure not governed by International Financial Reporting Standards and its definition and calculation may vary from one Group to another. The Group's debt consists of short and ~~long term~~long-term debentures traded publicly in the Tel Aviv Stock Exchange.

Note 6 - Operating segments

Until August 31, 2011 the Company operated as a one operating segment. From September 1, 2011 and following the completion of the merger of Netvision Ltd. to be a wholly owned subsidiary of the Company, theThe Group ~~has identified~~operates in two reportable segments, as described below, which are the Group's strategic business units. The strategic business unit's allocation of resources and evaluation of performance are managed separately. The operating segments were determined based on internal management reports reviewed by the Group's chief operating decision maker (CODM). The CODM does not examine assets or liabilities for those segments and therefore, they are not presented.

—

Cellcom – the segment includes Cellcom Israel Ltd. and its subsidiaries, excluding Netvision Ltd. and its subsidiaries.

—

Netvision – the segment includes Netvision Ltd. and its subsidiaries.

The accounting policies of the reportable segments are the same as described in ~~note~~Note 3 regarding significant accounting policies.

Information regarding the results of each reportable segment is included below based on the internal management reports that are reviewed by the CODM.

~~F-29~~F-26

Table of Contents

Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 6 - Operating segments (cont'd)

Year ended December 31, 2011
NIS millions
Reconciliation
for
Cellcom Netvision* consolidation Consolidated

Revenues 6,125 381 - 6,506
Inter-segment revenues 7 19 (26 ) -
Interest income 92 1 - 93

Interest expenses (286 ) - - (286 )
EBITDA**
2,084 83 - 2,167
Reconciliation of reoportable segment
EBITDA to net profit
Depreciation and amortization (652 ) (40 ) (46 ) (738 )
Taxes on income (313 ) (2 ) 11 (304 )

Financing income 116

Financing expenses (409 )

Other expenses (1 )

Share based payments (6 )

Net profit 821 39 (35 ) 825

*	~~Netvision segment represents results of operations for the four month period commencing September 1, 2011 (see note 7).~~

	Year ended December 31, 2012
	NIS millions
	Cellcom			Netvision			Reconciliation for consolidation			Consolidated

External revenues		4,861			1,077			-			5,938
Inter-segment revenues		30			57			(87	)		-

EBITDA*		1,470			283			-			1,753

Reconciliation of reportable segment EBITDA to profit for the year
Depreciation and amortization		(554	)		(107	)		(104	)		(765	)
Taxes on income		(190	)		(31	)		26			(195	)
Financing income											181
Financing expenses											(440	)
Other income											4
Share based payments											(7	)

Profit for the year		464			145			(78	)		531


	Year ended December 31, 2011
	NIS millions
	Cellcom			Netvision**			Reconciliation for consolidation			Consolidated

External revenues		6,125			381			-			6,506
Inter-segment revenues		7			19			(26	)		-

EBITDA*		2,084			83			-			2,167

Reconciliation of reportable segment EBITDA to profit for the year
Depreciation and amortization		(652	)		(40	)		(46	)		(738	)
Taxes on income		(313	)		(2	)		11			(304	)
Financing income											116
Financing expenses											(409	)
Other expenses											(1	)
Share based payments											(6	)
Profit for the year		821			39			(35	)		825

EBITDA as reviewed by the CODM, represents earnings before interest (financing expenses, net), taxes, other income and expenses, depreciation and amortization and share based payments, as a measure of operating profit. EBITDA is not a financial measure under IFRS and cannot be compared to other similarly titled measures in other companies.

~~Note 7 - Acquisition of Subsidiary~~

~~Business combination~~

On August 31, 2011 (the "date of acquisition"), the merger transaction of Netvision to be a wholly owned subsidiary of the Company (hereinafter - "the Acquisition"), was completed. Netvision is primarily engaged with providing Internet service, international landline telephone service, as well as providing local landline telephony services. As a result of the merger, the Company holds 100% of the merged company, Netvision, and commencing with the date of acquisition, Netvision it is fully consolidated in the Company's financial statements.

Following the acquisition of Netvision, the Group believes it will be able to provide its customers an additional variety of communication services, which will strengthen its position as a communication group which provides wide answer to customer's cellular and wireline needs.

Since the acquisition date and until December 31, 2011, Netvision contributed NIS 374 million (net of intercompany revenues) and NIS 4 million to the Group's revenues and net income, respectively (after depreciation of Purchase Price Allocation, net in a total amount of NIS 35 million).

According to management's estimates and assumptions, if the acquisition had occurred on January 1, 2011, consolidated revenues would have been NIS 7,257 million and consolidated profit for the year would have been NIS 799 million. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition, would have been the same if the acquisition had occurred on January

**	Netvision segment represents results of operations for the four month period commencing September 1, 2011. Before the acquisition of Netvision, the Group operated in a single segment.

~~F-30~~F-27

Table of Contents

Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

~~Note 7 - Acquisition of Subsidiary (cont'd)~~

~~The following summarizes the major classes of consideration transferred, and the recognized amounts of assets acquired and liabilities assumed at the acquisition date:~~

~~Consideration transferred~~

	~~NIS millions~~
~~Cash~~		~~1,570~~
~~Share-based awards - cost of past service~~		8
~~Total consideration transferred~~		~~1,578~~

~~Replacement of share-based payment awards~~

~~According to the terms of the merger agreement, the Company committed to exchange share-based payment awards held by employees of Netvision for cash consideration.~~

The Company recognized NIS 8 million as part of the cost of the business combination on the basis of the portion of awards that can be attributed to services provided before the business combination. An amount of NIS 2 million is recognized as post-acquisition compensation cost over the service period.

~~Identifiable assets acquired and liabilities assumed~~

~~Summary of assets acquired and liabilities assumed at acquisition date:~~

	~~NIS millions~~

~~Trade and other receivables~~		~~599~~
~~Inventory~~		5
~~Intangible assets~~		~~1,099~~
~~Deferred tax liabilities~~		~~(44~~	)
~~Property, plant and equipment~~		~~180~~
~~Trade and other payables~~		~~(326~~	)
~~Credit and loans~~		~~(45~~	)
~~Provisions~~		~~(10~~	)
~~Net assets acquired~~		~~1,458~~

~~Cash acquired~~		~~120~~

~~Total consideration transferred~~		~~1,578~~

The acquisition is accounted for using the acquisition method. The Company allocated the total purchase price to assets acquired and liabilities assumed using estimates of their fair values and amortization periods.

The intangible assets which were recognized during the acquisition, mainly consist of goodwill in the amount of approximately NIS 753 million, and customer relationship in the amount of approximately NIS 277 million, which is amortized over its useful life of approximately 6 years.

~~Goodwill was calculated as a residual value of the consideration that was paid, net of the assets that were identified at the time of the acquisition.~~

The goodwill is attributable mainly to the synergies expected to be achieved from integrating Netvision into the Group's communication business and the skills and technical talent of the acquiree's work force (see also note 12 regarding intangible assets, net)~~. None of the goodwill recognized is expected to be deductible for tax purposes.~~

~~F-31~~

~~Table of Contents~~

~~Cellcom Israel Ltd. and Subsidiaries~~

~~Notes to the Consolidated Financial Statements~~

~~Note 7 - Acquisition of Subsidiary (cont'd)~~

~~Acquisition-related costs~~

The Company incurred acquisition-related costs of NIS 8 million mainly related to consulting fees, legal fees and due diligence costs. These costs have been included in general and administrative expenses in the statement of income.

Note 87 - Cash and Cash Equivalents

Composition

	December 31,
	2010		2011		December 31,
	NIS millions		NIS millions		2011		2012
					NIS millions		NIS millions
Bank balances		32		14		14		38
Call deposits		501		906		906		1,376
		533		920		920		1,414

The Group's exposure to interest rate risk and sensitivity analysis for financial assets and liabilities isare disclosed in ~~note 21.~~Note 20.

Note 98 - Trade and Other Receivables

Composition

					December 31,
					2011		2012
	December 31				NIS millions		NIS millions
Current	2010		2011
Trade Receivables*	NIS millions		NIS millions
Open accounts		486		524		524		484
Checks and credit cards receivables		221		250		250		219
Accrued income		115		148		148		116
Current maturity of long-term receivables		656		937		937		1,037
		1,478		1,859		1,859		1,856
Other Receivables
Prepaid expenses		49		60		60		55
Other		15		6		6		12
Assets held for sale		-		27		27		-
		64		93		93		67
		1,542		1,952		1,952		1,923
Non-current
Trade receivables*		523		980		980		888
Rights of use of communication lines		-		259		259		249
Deposits and other receivables		55		56		56		62
Other		19		42		42		20
		597		1,337		1,337		1,219
		2,139		3,289		3,289		3,142

* Net of allowance for doubtful debts.

The Group is exposed to credit risks and impairment losses related to trade and other receivables as disclosed in ~~note 21.~~Note 20.

~~F-32~~F-28

Table of Contents

Cellcom Israel Ltd. and Subsidiaries

Notes to the Consolidated Financial Statements

Note 109 - Inventory

Composition

	December 31,				December 31,
	2010		2011		2011		2012
	NIS millions		NIS millions		NIS millions		NIS millions
Handsets		68		137		137		83
Accessories		14		14		14		14
Spare parts		22		19		19		15
		104		170		170		112

Inventories of handsets, accessories and spare-parts as at December 31, ~~2011~~2012 and December 31, ~~2010~~2011, are presented net of a provision for impairment and inventory write off in the amount of NIS 197 million and NIS 819 million, respectively.

Note 1110 - Property, Plant and Equipment, Net

																		Communication Network			Control and testing equipment			Vehicles			Computers, furniture and office equipment			Leasehold improvements			Total
	Communication network			Control and testing equipment			Vehicles			Computers, furniture and office equipment			Leasehold improvements		Total			NIS millions			NIS millions			NIS millions			NIS millions			NIS millions			NIS millions
	NIS millions			NIS millions			NIS millions			NIS millions			NIS millions		NIS millions
Cost

Balance at January 1, 2010		5,927			342			32			863			216		7,380
Balance at January 1, 2011																			6,125			362			42			896			236			7,661

Business combination*																			577			-			19			444			60			1,100
Additions																			291			14			7			69			5			386
Disposals**																			(17	)		(1	)		(4	)		(11	)		-			(33	)
Reclassification to assets held for sale																			(1	)		-			-			(4	)		-			(5	)
Balance at December 31, 2011																			6,975			375			64			1,394			301			9,109

Additions		319			20			14			47			20		420			322			16			-			39			12			389
Disposals		(121	)		-			(4	)		(14	)		-		(139	)		(1,810	)		(250	)		(18	)		(714	)		(131	)		(2,923	)
Balance at December 31, 2010		6,125			362			42			896			236		7,661
Balance at December 31, 2012																			5,487			141			46			719			182			6,575

Accumulated Depreciation

Balance at January 1, 2011																			4,425			282			12			714			165			5,598
Business combination*		577			-			19			444			60		1,100			493			-			6			376			45			920
Additions		291			14			7			69			5		386
Disposals		(17	)		(1	)		(4	)		(11	)		-		(33	)
Depreciation for the year																			343			20			7			71			16			457
Disposals**																			(15	)		(1	)		(3	)		(11	)		-			(30	)
Reclassification to assets held for sale		(1	)		-			-			(4	)		-		(5	)		(1	)		-			-			(3	)		-			(4	)
Balance at December 31, 2011		6,975			375			64			1,394			301		9,109			5,245			301			22			1,147			226			6,941

Accumulated Depreciation

Balance at January 1, 2010		4,202			261			10			661			150		5,284
Depreciation for the year		342			21			4			64			15		446			337			21			8			88			16			470
Disposals		(119	)		-			(2	)		(11	)		-		(132	)		(1,808	)		(250	)		(11	)		(713	)		(131	)		(2,913	)
Balance at December 31, 2010		4,425			282			12			714			165		5,598

Business combination*		493			-			6			376			45		920
Depreciation for the year		343			20			7			71			16		457
Disposals		(15	)		(1	)		(3	)		(11	)		-		(30	)
Reclassification to assets held for sale		(1	)		-			-			(3	)		-		(4	)
Balance at December 31, 2011		5,245			301			22			1,147			226		6,941
Balance at December 31, 2012																			3,774			72			19			522			111			4,498

Carrying amounts

At January 1, 2010		1,725			81			22			202			66		2,096
At December 31, 2010		1,700			80			30			182			71		2,063
At January 1, 2011																			1,700			80			30			182			71			2,063
At December 31, 2011		1,730			74			42			247			75		2,168			1,730			74			42			247			75			2,168
At December 31, 2012																			1,713			69			27			197			71			2,077


	For the transition period from ____________ to ___________

OR

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, par value NIS 0.01 per share	New York Stock Exchange (“NYSE”)

		Page
	PART I
	~~PART I~~
Item 1.	Identity of Directors, Senior Management and Advisers	5
Item 2.	Offer Statistics and Expected Timetable	5
Item 3.	Key Information	5
Item 4.	Information on the Company	32 35
Item 4A	Unresolved Staff Comments	94
Item 5.	Operating and Financial Review and Prospects	94
Item 6.	Directors, Senior Management and Employees	~~119~~ 122
Item 7.	Major Shareholders and Related Party Transactions	~~139~~ 140
Item 8.	Financial Information	~~143~~ 144
Item 9.	The Offer and Listing	~~146~~ 148
Item 10.	Additional Information	~~149~~ 150
Item 11.	Quantitative and Qualitative Disclosures About Market Risk	~~163~~ 165
Item 12.	Description of Securities Other than Equity Securities	~~164~~
166
PART II
Item 13.	Defaults, Dividend Arrearages and Delinquencies	~~165~~ 166
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds	~~165~~ 166
Item 15.	Controls and Procedures	~~165~~ 166
Item 16A.	Audit Committee Financial Expert	~~166~~ 168
Item 16B.	Code of Ethics	~~166~~ 168
Item 16C.	Principal Accountant Fees and Services	~~167~~ 168
Item 16D.	Exemptions from the Listing Standards for Audit Committees	~~167~~ 169
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	~~167~~ 169
Item 16F.	Change In Registrant’s Certifying Accountant	~~168~~ 169
Item 16G.	Corporate Governance	~~168~~ 169
Item 16H.	Mine Safety Disclosure	170
PART III
Item 17.	Financial Statements	~~169~~ 171
Item 18.	Financial Statements	~~169~~ 171
Item 19.	Exhibits	~~169~~ 171
Financial Statements		F-1

	Year Ended December 31,																		Year Ended December 31,
	2007			2008			2009			2010			2011(1)			2011(1)			2008			2009			2010			2011(1)			2012			2012
	(In NIS millions, except per share data)															(In US$ millions)			(In NIS millions, except per share data)															(In US$ millions)
Income Statement Data:

Revenues		6,050			6,417			6,483			6,662			6,506			1,703			6,417			6,483			6,662			6,506			5,938			1,591
Cost of revenues		3,315			3,396			3,333			3,322			3,408			892			3,396			3,333			3,322			3,408			3,463			928
Selling and marketing expenses		685			701			716			756			990			259			701			716			756			990			865			232
General and administrative expenses		653			659			660			641			685			179			659			660			641			685			629			168
Other (income) expenses, net		3			(29	)		6			5			1			-			(29	)		6			5			1			(4	)		(1	)
Operating income		1,394			1,690			1,768			1,938			1,422			373			1,690			1,768			1,938			1,422			985			264
Financing expense, net		(147	)		(310	)		(219	)		(230	)		(293	)		(77	)		310			219			230			293			259			70
Income tax		328			391			367			417			304			80			391			367			417			304			195			52
Net income		919			989			1,182			1,291			825			216			989			1,182			1,291			825			531			142
Basic earnings per share		9.42			10.12			12.01			13.04			8.28			2.17			10.12			12.01			13.04			8.28			5.34			1.43
Diluted earnings per share		9.34			9.96			11.90			12.98			8.28			2.17			9.96			11.90			12.98			8.28			5.33			1.43
Weighted average ordinary shares used in calculation of basic earnings per share		97,500,000			97,721,339			98,432,757			98,979,544			99,476,671						97,721,339			98,432,757			98,979,544			99,476,671			99,481,487
Weighted average ordinary shares used in calculation of diluted earnings per share		98,441,260			99,279,924			99,306,714			99,480,791			99,511,433

Weighted average ordinary shares used in calculation of diluted earnings per share																				99,279,924			99,306,714			99,480,791			99,511,433			99,609,722
Other Data:
EBITDA(2)		2,187			2,482			2,529			2,667			2,167			567			2,482			2,529			2,667			2,167			1,753			470
Capital expenditures		651			633			663			735			520			136			633			663			735			520			537			144
Dividends declared per share		13.90			11.23			11.91			13.85			7.88			2.06			11.23			11.91			13.85			7.88			1.31			0.35
Net cash provided by operating activities		1,820			1,745			2,080			2,380			1,332			349
Net cash from operating activities																				1,745			2,080			2,380			1,332			1,641			440
Net cash used in investing activities		(560	)		(528	)		(774	)		(889	)		(1,656	)		(433	)		(528	)		(774	)		(889	)		(1,656	)		(708	)		(190	)
Net cash provided by (used in) financing activities		(405	)		(1,853	)		(678	)		(1,861	)		715			187
Net cash from (used in) financing activities																				(1,853	)		(678	)		(1,861	)		715			(439	)		(118	)
Cellular Subscribers (in thousands)(3)		3,073			3,187			3,292			3,394			3,349						3,187			3,292			3,394			3,349			3,199
Cellular Period churn rate(4)		16.3	%		18.9	%		19.6	%		20.5	%		25.1	%
Churn rate of cellular subscribers(4)																				18.9	%		19.6	%		20.5	%		25.1	%		31.5	%
Cellular ARPU (in NIS)(5)		150			149			144			144			106			27.7			149			144			144			106			88			23.4

Balance Sheet Data:

Cash		911			275			903			533			920			241
Working capital		716			461			1,254			924			679			178
Total assets		6,294			5,488			6,379			5,996			8,557			2,239
Total equity		881			390			374			341			187			49

Balance Sheet Data:
Cash	275	903	533	920	1,414	379
Working capital	461	1,254	924	679	1,232	330
Total assets	5,488	6,379	5,996	8,557	8,787	2,354
Total equity	390	374	341	187	500	134

x
OR

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


	For the fiscal year ended December 31, 2012

OR

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

Month	High (NIS)		Low (NIS)
September 2011		3.725		3.574
October 2011		3.763		3.602
November 2011		3.800		3.650
December 2011		3.821		3.727
January 2012		3.854		3.733
February 2012		3.803		3.700

Year	Average (NIS)
2007		4.085
2008		3.568
2009		3.927
2010		3.732
2011		3.582

Population (millions, at end of year)	~~7.8~~		8.0
GDP ($ billions) (1)	~~239~~		241
GDP per capita ($ 000) (1)	31		30.5
Exports of goods & services ($ billions) (1)	88		91
CPI change	~~2.2%~~		1.6	%
Long-term local currency sovereign credit rating by S&P		A+(Stable)
Unemployment rate (average for nine months ending September 2011)	~~5.7%~~		6.7	%

1986	Bezeq and Motorola create a joint venture called “Pelephone”, which becomes ~~Israel’s~~Israel's first cellular operator. Pelephone launches N-AMPS services
1994	Cellcom awarded a license and launches TDMA services
1997	Cellcom introduces first pre-paid plan to the market
1998	Partner awarded a license and launches GSM services
1998	Pelephone launches CDMA services
2001	Ministry of Communications allocates additional 2G and 3G cellular frequencies for existing cellular operators and for the licensing of a new operator
2001	MIRS becomes ~~Israel’s~~Israel's fourth cellular operator with iDEN services
2002	Cellcom launches GSM/GPRS services
2003	Cellcom launches EDGE services
2004	Partner launches UMTS services Pelephone launches EVDO services
2006	Cellcom launches full scale UMTS/HSDPA services
2007	Partner launches HSDPA services
2008	Cellcom launches HSUPA services
2009	Pelephone launches UMTS/HSPA services
2010	Ministry of Communications provides MVNO licenses; Cellcom and Pelephone launch HSPA+ services
2011	Mirs and Golan awarded UMTS operator licenses Rami Levy, , MVNO operator, commences operations Cellcom stops operating its TDMA network
2012	Hot Mobile and Golan commence operation of UMTS network Home Cellular and Alon Cellular, MVNO operators, commence operations

	Year Ended December 31, 2011
	(In NIS millions)
	Cellcom		Netvision*		Reconciliation for consolidation			Consolidated
Net income		821		39		(35	)		825
Financing expenses, net									293
Taxes on income		313		2		(11	)		304
Operating income									1,422
Other expenses									1
Depreciation and amortization		652		40		46			738
Share based payments									6
EBITDA		2,084		83		-			2,167

	Year Ended December 31,						Change
	2009		2010		2011		2010 vs. 2009			2011 vs. 2010
	(In NIS millions)
Revenues		6,483		6,662		6,506		2.8	%		(2.3	%)

	* 2009					* 2010					2011
	Revenues		% of Total Revenues			Revenues		% of Total Revenues			Revenues		% of Total Revenues
	(NIS in millions)					(NIS in millions)					(NIS in millions)
Cellular voice services:
Outgoing air time**		2,953		45.5	%		2,760		41.4	%		2,167		33.3	%
Incoming air time		1,178		18.2	%		1,272		19.1	%		398		6.1	%
Roaming		340		5.3	%		358		5.4	%		314		4.8	%
Total cellular voice services		4,471		69.0	%		4,391		65.9	%		2,879		44.2	%
Cellular content and value added services***		882		13.6	%		1,112		16.7	%		1,167		17.9	%
Internet services (ISP)		-		-			-		-			216		3.3	%
International long distance services		-		-			-		-			96		1.5	%
Other services****		379		5.8	%		357		5.4	%		401		6.2	%
Total services		5,732		88.4	%		5,860		88.0	%		4,759		73.1	%
Equipment		751		11.6	%		802		12.0	%		1,747		26.9	%
Total		6,483		100.0	%		6,662		100.0	%		6,506		100.0	%

	Total		2013		2014- 2015	2016-2017	2018 and Beyond
Long-term debt obligations (including interest)(1)		7,661		1,478	2,684	2,562		937
Operating lease obligations		1,153		258	378	261		256
Purchase obligations		321		216	91	14		-
Total		9,135		1,952	3,153	2,837		1,193

	Total		2012		2013- 2015	2016-2017	2018 and Beyond
Long-term debt obligations (including interest)(1)		7,281		1,002	3,968	2,311		-
Operating lease obligations		1,448		301	611	259		277
Purchase obligations		413		337	63	13		-
Total		9,142		1,640	4,642	2,583		277

Ami Erel (2), (3)	64	65	Chairman of the Board
Nochi Dankner (3)	57	~~Director~~
~~Shay Livnat (2), (3)~~58	53	Director
Raanan Cohen (2), (4)	44	45	Director
Rafi Bisker (4)	60	61	Director
Shlomo Waxe (1), (2), (4)	66	67	Independent Director
Haim Gavrieli	41	42	Director
Ari Bronshtein (2)	42	~~Director~~
~~Tal Raz~~43	50	Director
Edith Lusky (2), (5)	61	62	Director
~~Assaf Topaz (2)~~	41	~~Director(a)~~
Ephraim Kunda (1), (2)	59	60	Independent Director
Joseph Barnea (1), (2), (3), (4), (5)	76	77	Independent / External Director
Ronit Baytel (1), (5)	44	45	Independent / External Director
~~Amos Shapira~~Nir Sztern	62	41	President and Chief Executive ~~Officer(b)~~Officer
Yaacov Heen	42	43	Chief Financial Officer
Yoni Sabag	39	40	Vice President of Marketing
Eliezer (Lipa) Ogman	58	59	Chief Technology Officer
~~Isaiah Rozenberg~~	51	~~Vice President of Engineering and network operation~~
Itamar Bartov	49	50	Vice President of Executive and Regulatory Affairs
~~Yoav Kirmayer~~ Keren Shtevy		40	Vice President of Business Customers ~~(c)~~(a)
~~Meir Barav~~Sharon Amit	54	46	Vice President of Human Resources
Amos Maor		49	Vice President of Sales and Service ~~(d)~~
~~Sharon Amit~~Jack Oster	45	~~Vice President of Human Resources(e)~~
~~Amos Maor~~39	48	~~Vice President of Operations and Supply Chain (d)~~
~~Ran Harpaz~~	38	Vice President of Information Technology ~~(f)~~(b)
Liat Menahemi-Stadler	45	~~General~~46	Vice President of Legal ~~Counsel~~Affairs and Corporate Secretary
Teimurz Romashvily	33	34	Vice President of Pre Paid Activity ~~(g)~~
Liat Straus	33	34	Netvision Vice President of Sales and Service ~~(h)~~
Gil Ben-Itzhak	46	47	Controller

	Number of Full-Time Equivalent Positions						Number of Full-Time Equivalent Positions
Unit	December 2009 **		December 2010 **		December 2011 **		December 2010 ****		December 2011 ****		December 2012 ****
Management and headquarters		34		37		68		37		68		62
Human resources		54		52		72		52		72		55
Marketing		80		83		107		83		107		79
Customers*		3,452		3,779		5,518		3,779		5,518		4,159
Finance		133		134		176		134		176		144
Technologies		679		596		851		596		851		716
Operation and administration**								-		-		86
Netvision subsidiaries***		-		-		462		-		462		134
Total		4,432		4,681		7,254		4,681		7,254		5,435

	Shares Beneficially Owned					Shares Beneficially Owned
Name of Beneficial Owner	Number		Percent			Number		Percent

Discount Investment Corporation Ltd.*		46,793,635		47.04	%		45,102,635		45.34	%
Directors and executive officers as a group (29 persons)**		47,005,465		47.25	%
Psagot Investment House Ltd.**							3,843,089		3.86	%
Directors and executive officers as a group (26 persons)***							45,447,458		45.68	%


	High		Low
	NIS		NIS
Annually
2007		84.3		60.0
2008		82.0		55.4
2009		98.2		56.6
2010		109.4		81.0
2011		105.9		59.5

Quarterly
2010
First Quarter		107.7		92.8
Second Quarter		103.7		81.3
Third Quarter		95.6		81.0
Fourth Quarter		109.4		96.1
2011
First Quarter		105.9		97.3
Second Quarter		104.2		86.9
Third Quarter		90.5		70.0
Fourth Quarter		79.4		59.5

Monthly
2011
September		75.4		70.0
October		79.4		69.9
November		77.9		61.2
December		63.4		59.5
2012
January
February


	High $		Low $		High $		Low $
Annually
2007		20.8		10.2
2008		24.2		14.4		22.7		13.5
2009		26.0		14.1		24.3		13.2
2010		30.1		20.8		28.2		19.5
2011		30.1		15.7		28.2		14.7
2012						15.4		5.1

Quarterly
2010
2011
First Quarter		28.2		25.2		28.0		25.1
Second Quarter		28.0		20.9		28.2		23.7
Third Quarter		26.1		20.8		24.8		17.7
Fourth Quarter		30.1		26.3		20.7		14.7
2011
First Quarter		29.8		26.8
Second Quarter		30.1		25.4
Third Quarter		26.5		18.9
Fourth Quarter		22.1		15.7

Monthly
2011
September		20.9		18.9
October		22.1		18.6
November		21.1		16.1
December		16.6		15.7
2012
January		33.6		30.5
February		32.3		30.4

	As of December 31,															As of December 31,
	2009					2010					2011					2010					2011					2012
	Par Value		Fair Value			Par Value		Fair Value			Par Value		Fair Value			Par Value		Fair Value			Par Value		Fair Value			Par Value		Fair Value
	(In NIS millions)															(In NIS millions)
Forward contracts on exchange rate (mainly US$– NIS)		586		(10	)		439		(14	)		497		24			439		(14	)		497		24			326		(10	)
Forward contracts on Israeli CPI rate		1,700		51			1,325		12			1,825		(22	)		1,325		12			1,825		(22	)		1,625		(25	)
Options on the exchange rate (mainly US$– NIS)		868		2			500		2			377		1			500		2			377		1			198		2
Compounded foreign currency and interest swap		240		(5	)		-		-			-		-			-		-			-		-			-		-
Total		3,394		38			2,264		-			2,699		3			2,264		-			2,699		3			2,149		(33	)

Exhibit Number		Description

1.1		Updated Articles of Association and Memorandum of Association *††††
2.1		Form of Ordinary Share Certificate†
~~4.1~~		~~Series A Indenture dated December 21, 2005 and an addendum dated February 27, 2006 between Cellcom and Aurora Fidelity Trust Ltd.~~ †
~~4.1.1~~		~~Series A Debentures Trustee Replacement Agreement dated June 11, 2009.~~ ~~†††~~
4.2		Series B Indenture dated December 21, 2005 and an addendum dated February 27, 2006 between Cellcom and Hermetic Trust (1975) Ltd. †
4.3		Series C Indenture dated September 20, 2007, between Cellcom and Aurora Fidelity Trust Ltd. ††
4.3.1		Series C Debentures Trustee Replacement Agreement dated June 11, 2009. †††

4.4		Series D Indenture dated September 20, 2007, between Cellcom and Hermetic Trust (1975) Ltd. ††
4.5		Series E Indenture dated March 31, 2009, between Cellcom and Hermetic Trust (1975) Ltd. †††
4.6		Shelf Prospectus Indenture dated July 14, 2011, between Cellcom and Hermetic Trust (1975) Ltd. *††††
4.6.1		Shelf Prospectus Indenture dated March 7, 2012, between Cellcom and Strauss Lazar Trust Company (1992) Ltd.*††††
4.6.2.		Amendment and Addendum no. 1 to the Indenture from ~~March 7,~~January 19, 2012, dated March 7, 2012, between Cellcom and Strauss Lazar Trust Company (1992) Ltd.*††††
4.7		Amended 2006 Share Incentive Plan*Plan†††††
4.8		Registration Rights Agreement dated March 15, 2006 among Cellcom, Goldman Sachs International, DIC, DIC Communication and Technology Ltd. and PEC Israel Economic Corporation†
4.9		Amended Non-Exclusive General License for the Provision of Mobile Radio Telephone Services in the Cellular Method dated June 27, 1994*
4.10		Netvision Ltd. Merger Agreement*Agreement††††
8.1		Subsidiaries of the Registrant*††††

Exhibit Number	Description
12.1		Certification of Principal Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act *
12.2		Certification of Principal Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant to §302 of the Sarbanes-Oxley Act *
13.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act *
15		Consent of Independent Registered Public Accounting Firm *

Cellcom Israel Ltd.

By:	/s/ Nir Sztern
	Name:	Nir Sztern
	Title:	President and Chief Executive Officer

Contents

	Page

Auditors' Report	~~F2-F3~~ F3-F4


Consolidated Financial Statements


Consolidated Statements of Financial Position	F4 F5


Consolidated Statements of Income	F5 F6


Consolidated Statements of Comprehensive Income	F6 F7


Consolidated Statements of Changes in Equity	F7 F8


Consolidated Statements of Cash Flows	~~F8-F9~~ F9-F10


Notes to the Consolidated Financial Statements	~~F10-F72~~ F11-F66

									Convenience
									translation into
									US dollar (Note 2D)
			December 31,			December 31,			December 31,
			2011			2012			2012
	Note		NIS millions			NIS millions			US$ millions

Assets
Cash and cash equivalents		7		920			1,414			379
Current investments, including derivatives				290			493			132
Trade receivables		8		1,859			1,856			497
Other receivables		8		93			67			18
Inventory		9		170			112			30

Total current assets				3,332			3,942			1,056

Trade and other receivables		8		1,337			1,219			327
Property, plant and equipment, net		10		2,168			2,077			556
Intangible assets, net		11		1,680			1,515			406
Deferred tax assets		26		40			34			9

Total non- current assets				5,225			4,845			1,298

Total assets				8,557			8,787			2,354

Liabilities
Short term credit and current maturities of long term loans and debentures		16		674			1,129			302
Trade payables and accrued expenses		12		1,026			827			221
Current tax liabilities				69			87			23
Provisions		13		148			175			47
Other payables, including derivatives		14		547			492			132
Dividend declared		18		189			-			-

Total current liabilities				2,653			2,710			725

Long-term loans from banks		16		19			10			3
Debentures		16		5,452			5,368			1,438
Provisions		13		21			21			6
Other long-term liabilities		15		41			21			6
Liability for employee rights upon retirement, net		17		10			12			3
Deferred tax liabilities		26		174			145			39

Total non- current liabilities				5,717			5,577			1,495

Total liabilities				8,370			8,287			2,220

Equity attributable to owners of the Company		18
Share capital				1	��		1			-
Cash flow hedge reserve				7			(12	)		(3	)
Retained earnings				175			509			136

Non-controlling interest				4			2			1

Total equity				187			500			134

Total liabilities and equity				8,557			8,787			2,354

Date of approval of the consolidated financial statements: March 4, 2013.

		December 31, 2010			December 31, 2011		Convenience translation into US dollar (Note 2D) December 31, 2011
	Note	NIS millions			NIS millions		US$ millions
Assets
Cash and cash equivalents	8		533			920		241
Current investments, including derivatives			404			290		76
Trade receivables	9		1,478			1,859		487
Other receivables	9		64			93		24
Inventory	10		104			170		44
Total current assets			2,583			3,332		872
Trade and other receivables	9		597			1,337		350
Property, plant and equipment, net	11		2,063			2,168		567
Intangible assets, net	12		753			1,680		440
Deferred tax assets	28		-			40		10
Total non- current assets			3,413			5,225		1,367
Total assets			5,996			8,557		2,239
Short term credit and current maturities of long term loans and debentures	17		348			674		176
Trade payables and accrued expenses	13		716			1,026		268
Current tax liabilities			132			69		18
Provisions	14		84			148		39
Other payables, including derivatives	15		379			547		143
Dividend declared	19		-			189		49
Total current liabilities			1,659			2,653		693
Long-term loans from banks	17		-			19		5
Debentures	17		3,913			5,452		1,427
Provisions	14		17			21		5
Other long-term liabilities	16		-			41		11
Liability for employee rights upon retirement, net	18		1			10		3
Deferred tax liabilities	28		65			174		46
Total non- current liabilities			3,996			5,717		1,497
Total liabilities			5,655			8,370		2,190
Equity attributable to owners of the Company	19
Share capital			1			1		-
Cash flow hedge reserve			(21	)		7		2
Retained earnings			361			175		46
Non-controlling interest			-			4		1
Total equity			341			187		49
Total liabilities and equity			5,996			8,557		2,239

		Year ended December 31, 2009			Year ended December 31, 2010			Year ended December 31, 2011			Convenience translation into US dollar (Note 2D) Year ended December 31, 2011
	Note	NIS millions			NIS millions			NIS millions			US$ millions
Revenues	22		6,483			6,662			6,506			1,703
Cost of revenues	23		(3,333	)		(3,322	)		(3,408	)		(892	)
Gross profit			3,150			3,340			3,098			811
Selling and marketing expenses	24		(716	)		(756	)		(990	)		(259	)
General and administrative expenses	25		(660	)		(641	)		(685	)		(179	)
Other expenses, net	26		(6	)		(5	)		(1	)		-
Operating profit			1,768			1,938			1,422			373
Financing income			151			106			116			30
Financing expenses			(370	)		(336	)		(409	)		(107	)
Financing expenses, net	27		(219	)		(230	)		(293	)		(77	)
Profit before taxes on income			1,549			1,708			1,129			296
Taxes on income	28		(367	)		(417	)		(304	)		(80	)
Profit for the year			1,182			1,291			825			216
Attributable to:
Owners of the Company			1,182			1,291			824			216
Non-controlling interests			-			-			1			-
Profit for the year			1,182			1,291			825			216
Earnings per share
Basic earnings per share (in NIS)	19		12.01			13.04			8.28			2.17
Diluted earnings per share (in NIS)	19		11.90			12.98			8.28			2.17

												Convenience
												translation into US
												dollar (Note 2D)
			Year ended			Year ended			Year ended			Year ended
			December 31,			December 31,			December 31,			December 31,
			2010			2011			2012			2012
	Note		NIS millions			NIS millions			NIS millions			US$ millions

Revenues		21		6,662			6,506			5,938			1,591
Cost of revenues		22		(3,322	)		(3,408	)		(3,463	)		(928	)

Gross profit				3,340			3,098			2,475			663

Selling and marketing expenses		23		(756	)		(990	)		(865	)		(232	)
General and administrative expenses		24		(641	)		(685	)		(629	)		(168	)
Other income (expenses), net				(5	)		(1	)		4			1

Operating profit				1,938			1,422			985			264

Financing income				106			116			181			48
Financing expenses				(336	)		(409	)		(440	)		(118	)
Financing expenses, net		25		(230	)		(293	)		(259	)		(70	)

Profit before taxes on income				1,708			1,129			726			194

Taxes on income		26		(417	)		(304	)		(195	)		(52	)
Profit for the year				1,291			825			531			142
Attributable to:
Owners of the Company				1,291			824			530			142
Non-controlling interests				-			1			1			-
Profit for the year				1,291			825			531			142

Earnings per share
Basic earnings per share (in NIS)		18		13.04			8.28			5.34			1.43

Diluted earnings per share (in NIS)		18		12.98			8.28			5.33			1.43

	Attributable to owners of the Company											Non-controlling interests			Total equity			Convenience translation into US dollar (Note 2D)
	Share capital		Capital reserve			Retained earnings			Total
	NIS millions																	US$ millions

Balance as of January 1, 2009		1		(11	)		400			390			-			390			102
Other comprehensive income for the year, net of tax		-		(12	)		-			(12	)		-			(12	)		(3	)
Profit for the year		-		-			1,182			1,182			-			1,182			309
Share based payments		-		-			1			1			-			1			-
Dividend paid in cash		-		-			(1,187	)		(1,187	)		-			(1,187	)		(311	)

Balance as of December 31, 2009		1		(23	)		396			374			-			374			97
Other comprehensive income for the year, net of tax		-		2			-			2			-			2			1
Profit for the year		-		-			1,291			1,291			-			1,291			338
Share based payments		-		-			1			1			-			1			-
Cash dividend paid		-		-			(1,327	)		(1,327	)		-			(1,327	)		(347	)

Balance as of December 31, 2010		1		(21	)		361			341			-			341			89

Other comprehensive income for the year, net of tax		-		28			-			28			-			28			7
Profit for the year		-		-			824			824			1			825			216
Share based payments		-		-			6			6			-			6			2
Dividend paid in cash		-		-			(827	)		(827	)		-			(827	)		(216	)
Declared dividend		-		-			(189	)		(189	)		(1	)		(190	)		(50	)
Non-controlling interests in respect of business combination (see note 7)		-		-			-			-			4			4			1
Balance as of December 31, 2011		1		7			175			183			4			187			49

	Attributable to owners of the Company											Non-controlling interests			Total equity			Convenience translation into US dollar (Note 2D)
	Share capital		Capital reserve			Retained earnings			Total
	NIS millions																	US$ millions

Balance as of January 1, 2010		1		(23	)		396			374			-			374			100
Comprehensive income for the year
Profit for the year		-		-			1,291			1,291			-			1,291			346
Other comprehensive income for the year, net of tax		-		2			-			2			-			2			-
Transactions with owners, recognized directly in equity
Share based payments		-		-			1			1			-			1			-
Dividend paid in cash		-		-			(1,327	)		(1,327	)		-			(1,327	)		(355	)

Balance as of December 31, 2010		1		(21	)		361			341			-			341			91
Comprehensive income for the year
Profit for the year		-		-			824			824			1			825			221
Other comprehensive income for the year, net of tax		-		28			-			28			-			28			8
Transactions with owners, recognized directly in equity
Share based payments		-		-			6			6			-			6			2
Dividend paid in cash		-		-			(827	)		(827	)		-			(827	)		(222	)
Declared dividend		-		-			(189	)		(189	)		(1	)		(190	)		(51	)
Non-controlling interests in respect of business combination		-		-			-			-			4			4			1

Balance as of December 31, 2011		1		7			175			183			4			187			50
Comprehensive income for the year
Profit for the year		-		-			530			530			1			531			142
Other comprehensive income for the year, net of tax
Net changes in fair value of cash flow hedges		-		(19	)		-			(19	)		-			(19	)		(5	)
Actuarial losses on defined benefit plan		-		-			(1	)		(1	)		-			(1	)		-
Transactions with owners, recognized directly in equity
Share based payments		-		-			7			7			-			7			2
Dividend paid in cash		-		-			(202	)		(202	)		-			(202	)		(54	)
Derecognition of non-controlling interests due to loss of control in a consolidated company		-		-			-			-			(3	)		(3	)		(1	)
Balance as of December 31, 2012		1		(12	)		509			498			2			500			134

	Exchange rates of US$		Consumer Price Index (points)*
As of December 31, 2012		3.733		219.39
As of December 31, 2011		3.821		216.27
As of December 31, 2010		3.549		210.89

Change during the year:

Year ended December 31, 2012		(2.3%)		1.4%
Year ended December 31, 2011		7.7%		2.6%
Year ended December 31, 2010		(6.0%)		2.3%

*According to 1993 base index.

		%
Communication network	~~5-20~~		5-25
Control and testing equipment			15-25
Vehicles			15-33
Computers and hardware			15-33
Furniture and office equipment			6-15