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Bezeq’s general license for fixed-line communication services received from the Minister of Communications obligates it to ensure that its relationships with its principal subsidiaries do not result in favoring them over their competitors. Separation is required between the managements of Bezeq and such other companies, as is separation between the financial and marketing systems, assets and employees, which causes high administration overheads. Bezeq is also subject to limitations with respect to the offering of joint service bundles with those companies, which adversely impacts its business, particularly in light of the recent entry into the market of communications companies competing directly with Bezeq in most of its areas of operation based on the provision of bundled services to the customer.

Bezeq’s systems and operations are vulnerable to damage or interruption, which could expose it to material risk of loss or litigation.

Bezeq’s systems and operations are vulnerable to damage or interruption due to human error, natural disasters, power loss, communications failures, break-ins, sabotage, computer viruses, intentional acts of Internet vandalism and similar events. Any of these events could expose Bezeq to a material risk of loss or litigation. While Bezeq currently has partially redundant systems, its does not have full redundancy, or alternative providers of hosting services.

Bezeq is currently deploying its new generation network, which to a large extent will replace its traditional networks. The set-up of a new network based on advanced technology involves operational and business risks, such as damaging the continuity and quality of the services provided to Bezeq’s customers, which could adversely impact its business.

Bezeq’s operations in the cellular market are exposed to losses in the event of malfunctions in the terminal equipment that it sells, including various property risks and liabilities. Bezeq’s cellular information systems are networked throughout the country through designated communications lines and via the Internet, and its cellular business is highly dependent upon these systems. Wide-scale malicious harm or malfunction might adversely affect Bezeq’s cellular business and financial results. Also, Bezeq’s cellular communications network is deployed around the country through network core sites and antenna sites and it cellular business is totally dependent upon these systems. Damage caused by natural or other disasters, war or damage to the switching farm and/or servers used by B ezeq for its core cellular activities could have an adverse effect on its business and results of operations. Bezeq’s cellular business uses two frequency ranges: 850 MHz and 2100 MHz. These frequencies are exposed to interruptions and could impair service quality of the networks that it operates.

Bezeq’s operations and business may be adversely impacted by strikes or work stoppages and other labor related disputes.

As part of its preparations for the intensifying competition in the market sector and for greater efficiency of its operations, Bezeq is continuing to formulate plans for organizational changes and a further reduction in its headcount. The implementation of these plans involves coordination with Bezeq’s employees and substantial costs, including the costs of early retirement in amounts exceeding existing agreements. The implementation of these plans has caused labor unrest, which could harm Bezeq’s regular business.

In connection with the sale by Ap.Sb.Ar. Holdings Ltd. of the controlling interest in Bezeq to us, the employees of Bezeq demanded additional compensation a new collective bargaining agreement. On March 25, 2010, Bezeq received a strike notice from the labor union that represents Bezeq’s employees. On May 2, 2010, the labor union announced that it will begin to initiate limited work stoppages. If Bezeq’s employees were to engage in a strike, work stoppage, or other slowdown, Bezeq could experience a significant disruption of its operations or higher ongoing labor costs, either of which could have a material adverse effect on its results of operations and financial condition. Additionally, a new collective bargaining agreement could significantly increase Bezeq’s costs for wage s and other benefits, which could have a material adverse impact on its results of operations, financial condition, and liquidity.

Bezeq and its subsidiaries are parties to legal proceedings, which could result in them being ordered to pay significant sums.

Bezeq and its subsidiaries are parties legal proceedings, including class actions, which could result in them being ordered to pay significant sums, the amount of which cannot be estimated. Class action claims can reach large amounts, as virtually all residents of Israel are consumers of Bezeq’s services and a claim that relates to a minor loss for a single consumer can become a material claim for Bezeq if it is certified as a class action applicable to all consumers or a significant portion of them. In addition, since Bezeq provides communications infrastructure as well as billing services to other licensees, parties suing those licensees in other class actions are also likely to try to involve Bezeq as a party to such proceedings.

The market in which Bezeq operates is characterized by material capital investments in infrastructure and subscriber equipment and changing technology, which imposes a heavy financial burden on Bezeq.

The market in which Bezeq operates is characterized by material capital investments in infrastructure and subscriber equipment and changing technology. The frequent technological changes in infrastructure and terminal equipment and the fierce competition in various market segments impose a heavy financial burden on the companies operating in the market, requiring them to update their infrastructure technology from time to time or to introduce new devices into the market at heavy cost. The development of new technologies can render existing technologies obsolete, resulting in the need for large monetary investments in order to retain a competitive position. Bezeq’s future success will depend on its ability to develop and introduce, on a timely and cost-effective basis, new infrastructure and subscrib er equipment that keep pace with technological developments. If Bezeq is unable to respond promptly and effectively to changing technology, it will be unable to compete effectively in the future and its business could be adversely affected.

Bezeq’s results of operations are subject to market risks such as currency fluctuations, inflation in Israel and the financial condition of the market in Israel and worldwide.

Bezeq’s results of operations are subject to market risks such as currency fluctuations, inflation in Israel and the financial condition of the market in Israel and worldwide. Bezeq measures exposure to changes in exchange rates and inflation by the surplus or deficit of assets against liabilities, based on the type of linkage. In addition, Bezeq’s exposure to inflation changes in Israel is high. Bezeq’s also has exposure to market risk for changes in interest rates relating primarily to its borrowings.

Bezeq collects payments from part of its costumers in foreign currency, primarily U.S. dollars. In addition, Bezeq consumes services from suppliers outside Israel and pays for these services in foreign currency, primarily U.S. dollars. Changes in the exchange rates of the currencies in which Bezeq operates, primarily the New Israeli Shekel against the U.S. dollar, could have an adverse effect on Bezeq’s cash flow and profitability.

Market and financial stability and the strength of the economy in Israel and worldwide have recently been subject to great volatility and led to a global economic slowdown. Although global economic conditions have begun to stabilize or improve, if the local market continues to be weak or weakens further, Bezeq’s business results could be harmed and its revenues may decline.

Risks Related to Our Company

We have a substantial amount of existing debt, which could restrict our financing and operating flexibility and have other adverse consequences.

To facilitate the funding of our acquisition of the controlling interest in Bezeq, we entered into two financing agreements under which we received loans in a total principal amount of NIS 5.1 billion (approximately $1.35 billion). The financing agreements include certain financial covenants, including, among other things, the requirement that Bezeq maintain certain minimum shareholders equity and minimum ratio of shareholders’ equity. In addition, our wholly-owned subsidiary that directly holds the Bezeq interest must maintain a minimum ratio of debt to EBITDA and a debt service coverage ratio. The Bezeq shares we acquired and all of such subsidiary’s other rights and assets (except additional shares of Bezeq that it might acquire in the future) have been pledged to the lenders as security un der the loan agreement. In addition, we have pledged to the lenders the entire equity we hold in the subsidiary we established to acquire the Bezeq shares and the debt owed by such subsidiary. Our ability to repay our debt may be affected by Bezeq’s distribution policy and the amount of dividends we receive from Bezeq. If we are unable to meet our debt obligations or comply with our debt covenants, we could be forced to renegotiate or refinance our indebtedness, seek additional equity capital or sell assets. We may be unable to obtain financing or sell assets on satisfactory terms, or at all. For more information regarding our debt instruments and our indebtedness, see Item 5.B “Operating and Financial Review and Prospects - Liquidity and Capital Resources.”

If we, Internet Gold or any other member of the Eurocom group subject to the control permit for the acquisition of the controlling interest in Bezeq fails to comply with such permit or other regulatory provisions relating to the control of Bezeq, the control permit could be revoked and our rights with respect to our Bezeq interest would be adversely impacted, which would have a material adverse effect on our business and financial position.

As part of our acquisition of the controlling interest in Bezeq, we, Internet Gold, our indirect fully owned-subsidiary which holds the Bezeq interest, or SP2, our wholly-owned subsidiary that directly owns such subsidiary and other members of the Eurocom group were granted a permit to control Bezeq, pursuant to the Communications Law and Communications Order. The control permit includes several conditions, including, among others, the requirement that SP2 be controlled exclusively by the other parties to the control permit and that the parties to the control permit hold not less than 30% of any type of means of control of Bezeq and SP2. In addition, the control permit requires that a certain percentage of SP2 be held at all times by an “Israeli Party,” as defined in the Communications Order. The control permit also includes certain notice requirements regarding changes in the composition of the board of directors and certain holdings in us and Internet Gold. If we, Internet Gold or any other member of the Eurocom group subject to the control permit fails to comply with the terms of the control permit or with other regulatory provisions relating to the control of Bezeq, such permit could be revoked and our rights with respect to our Bezeq interest would be adversely impacted, which would have a material adverse effect on our business and financial position.

If we do not maintain control of Bezeq we may be deemed to be an “investment company” under the Investment Company Act of 1940, which could have a material adverse effect on our business.

Section 3(a)(1)(A) of the Investment Company Act of 1940, or the Investment Company Act, defines an investment company as any issuer that is, holds itself out as being, or proposes to be, primarily engaged in the business of investing, reinvesting or trading in securities and Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” (within the meaning of the Investment Company Act) having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. However, an issuer will be deemed not to be a n investment company if no more than 45% of the value of such issuer’s total assets (exclusive of government securities and cash items) consists of, and no more than 45% of such issuer’s net income after taxes (for the last four fiscal quarters combined) is derived from, securities other than, among other things, securities issued by companies which are controlled primarily by such issuer. Primary control is presumed if the issuer owns over 25% of the controlled company’s voting securities and the issuer has control greater than that of any other person. Accordingly, so long as we maintain control of Bezeq, we will not be deemed an investment company.

If we were to no longer maintain the control of Bezeq, we could, among other things, be required either (i) to change substantially the manner in which we conduct our operations to avoid being subject to the Investment Company Act or (ii) to register as an investment company. An investment company that is organized under the laws of a foreign country may not register as an investment company, or publicly offer its securities through interstate commerce in the United States, unless the company applies to the Securities and Exchange Commission for an order permitting the company to register under the Investment Company Act, and to make a public offering in the United States. The Securities and Exchange Commission may issue an order granting the application if it finds that, by reason of special circumstances or arrang ements, it is both legally and practically feasible effectively to enforce the provisions of the Investment Company Act against the issuer, and further finds that granting the application is otherwise consistent with the public interest and the protection of investors.

If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with certain affiliates, reporting, record keeping, voting, proxy and disclosure requirements, and meeting these requirements would be costly, if at all possible.

We may fail to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, which could have an adverse effect on our financial results and the market price of our ordinary shares.

Section 404 of the Sarbanes-Oxley Act requires any company subject to the reporting requirements of the U.S. securities laws to do a comprehensive evaluation of its and its combined subsidiaries’ internal control over financial reporting. To comply with this statute, we are required to document and test our internal control procedures, and our management is required to assess and issue a report concerning our internal control over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are relatively new and complex and require significant documentation, testing and possible remediation to meet the detailed standards under the rules.

Beginning in the 2010 second quarter, we began consolidating Bezeq’s financials results into our financial statements following our acquisition of the controlling interest in Bezeq. Effective for the year ended December 31, 2011, our management report on internal control over financial reporting must include our assessment with respect to Bezeq’s internal control over financial reporting. Prior to our acquisition of the controlling interest, Bezeq was not subject to Section 404 of the Sarbanes-Oxley Act. We may in the future identify a material weakness in Bezeq’s internal control over financial reporting. Failure to maintain effective internal control over financial reporting could result in investigation or sanctions by regulatory authorities and could have a material advers e effect on our operating results, investor confidence in our reported financial information and the market price of our ordinary shares.

Risks Related to Our Relationship with Internet Gold and Eurocom Communications Ltd.

Because Internet Gold and Eurocom Communications control substantially all the voting power of our ordinary shares, investors will not be able to affect the outcome of all shareholder votes.

Internet Gold owned approximately 76.62% of our outstanding ordinary shares, and Eurocom Communications beneficially owned 77.99% of our outstanding ordinary shares, as of June 30, 2010. Mr. Shaul Elovitch, the chairman of our board of directors and the chairman of the board of directors of Internet Gold and its parent, Eurocom Communications, and the controlling shareholder of Eurocom Communications, will be able to exercise control over our operations and business strategy and control the outcome of all matters involving shareholder approval.

For as long as Internet Gold has a controlling interest in our company, it, Eurocom Communications and Mr. Elovitch indirectly, will have the ability to exercise a controlling influence over our business and affairs, including any determinations with respect to potential mergers or other business combinations involving us, our acquisition or disposition of assets, our incurrence of indebtedness, our issuance of any additional ordinary shares or other equity securities, our repurchase or redemption of ordinary shares and our payment of dividends. Similarly, as long as Eurocom Communications has a controlling interest in Internet Gold, our corporate parent, Eurocom Communications and Mr. Elovitch will have the power to determine or significantly influence the outcome of matters submitted to a vote of our shareholders, including the power to elect all of the members of our board of directors (except outside directors, within the meaning of Israeli law), prevent an acquisition or any other change in control of us. Because the interests of Internet Gold and Mr. Elovitch may differ from the interests of our other shareholders, actions taken by Internet Gold with respect to us may not be favorable to our other shareholders. See Item 10B. “Additional Information - Memorandum and Articles of Association” and Item 7B. “Major Shareholders and Related Party Transactions - Related Party Transactions.”

Conflicts of interest may arise between Internet Gold, Eurocom Communications, other companies within the Eurocom group and us that could be resolved in a manner unfavorable to us and result in reduced revenues and income.

Conflicts of interest may arise between Internet Gold, Eurocom Communications and us in a number of areas relating to our past and ongoing relationships. Areas in which conflicts of interest between Internet Gold, Eurocom Communications and us could arise include, but are not limited to, the following:

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

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

Risks Related to Our Ordinary Shares

Our share price has been volatile and may decline in the future.

The market price of our ordinary shares has been subject to significant price movements and could be subject to wide fluctuations in the future in response to factors such as the following, some of which are beyond our control:

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

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global economic conditions;

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price movements in the market price of Bezeq’s ordinary shares;

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

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

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

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changes in market valuations of other communications companies;

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

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

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

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

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additions or departures of key personnel;

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future sales of our ordinary shares; and

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stock market price and volume fluctuations.

Domestic and international stock markets often experience extreme price and volume fluctuations. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events or hostilities in or surrounding Israel, could adversely affect the market price of our ordinary shares.

We have never paid cash dividends to our shareholders and have not adopted a dividend distribution policy.

We have never declared or paid cash dividends on our ordinary shares and have not adopted a dividend distribution policy. Our indirect wholly-owned subsidiary, B Communications (SP2) Ltd., or SP2, which directly holds Bezeq’s shares and our principal source of revenues and income, is subject to limitations on the payment of dividends under the terms of the financing agreements entered into in connection with its acquisition of the controlling interest in Bezeq. You should not rely on an investment in our company if you require dividend income from your investments.

We may in the future be classified as a passive foreign investment company, which will subject our U.S. investors to adverse tax rules.

There is a risk that we may be treated in the future as a “passive foreign investment company.” Our treatment as a passive foreign investment company could result in a reduction in the after-tax return to the U.S. holders of our ordinary shares may cause a reduction in the value of such shares. A foreign corporation will be treated as a passive foreign investment company for U.S. federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of “passive income,” or (2) at least 50% of the average value of the corporation’s gross assets produce, or are held for the production of, such types of “passive income.” For purposes of these tests, “passive income” includes dividends, interest and gains from the sale or exchange of investment property; and cash is considered to be an asset that produces passive income. If we are classified in the future as a passive foreign investment company for U.S. federal income tax purposes, highly complex rules would apply to U.S. shareholders owning ordinary shares. Accordingly, you are urged to consult your tax advisors regarding the application of such rules. United States residents should carefully read “Item 10E. Additional Information - Taxation, United States Federal Income Tax Consequences” for a more complete discussion of the U.S. federal income tax risks related to owning and disposing of our ordinary shares.

Risks Related to the Operations of Bezeq and our Company in Israel

Bezeq conducts its operations in Israel and its business focuses on the Israeli audience, therefore our results of operations may be adversely affected by political, economic and military instability in Israel.

We and Bezeq are incorporated and based in the State of Israel and Bezeq derives substantially all of its revenues from markets within the State of Israel. As a result, the political, economic and military conditions affecting Israel directly influence Bezeq and us. Any major hostilities involving Israel, a full or partial mobilization of the reserve forces of the Israeli army, the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel could have a material adverse effect on Bezeq’s business, financial condition and results of operations.

Since the establishment of the State of Israel in 1948, Israel and its Arab neighbors have engaged in a number of armed conflicts. A state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Major hostilities between Israel and its neighbors may hinder Israel’s international trade and lead to economic downturn. This, in turn, could have a material adverse effect on our operations and business. Ongoing violence between Israel and the Palestinians as well as tension between Israel and the neighboring countries may have a material adverse effect on Bezeq’s business, financial condition and results of operations.

Many of Bezeq’s and our executive officers and employees in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces and may be called for active duty under emergency circumstances at any time. If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time. Bezeq’s operations could be disrupted by the absence for a significant period of one or more of its executive officers or key employees or a significant number of other employees due to military service. Any disruption in Bezeq’s operations could adversely affect its business.

Bezeq may be restricted in the conduct of its operations during periods of national emergency, which could negatively affect its business operations.

During periods of national emergency, the Minister of Communications and other governmental authorities may issue various instructions regarding the use of Bezeq’s network, including the use of the network by the Israeli security forces. In addition, the Israeli Equipment Registration and IDF Mobilization Law, 1987 permits the registration, taking and use of engineering equipment and facilities by Israel’s Defense Forces. These actions could adversely affect Bezeq’s business operations.

Our operating results may be adversely affected by significant fluctuations of the NIS against foreign currencies and in the consumer price index in Israel.

We report our financial results in NIS. Bezeq receives payments in NIS for most of its sales. As a result, fluctuations in rates of exchange between NIS and the U.S. dollar may affect our operating results and financial condition. In addition, when the Israeli inflation rate exceeds the rate of the NIS depreciation against foreign currencies, some of our NIS expenses increase to the extent of the difference between the rates. A significant disparity of this kind may have a material adverse effect on our operating results.

From time to time, we engage in currency hedging transactions to reduce the impact on our cash flows and results of operations of currency fluctuations. We recognize freestanding derivative financial instruments as either assets or liabilities in our statements of financial position and we measure those instruments at fair value. However, accounting for changes in the fair value of a derivative instrument, such as a currency hedging instrument, depends on the intended use of the derivative instrument and the resulting designation. For derivative instruments that are not designated as cash flow hedges, changes in fair value are recognized in our income statement without any reference to the change in value of the related budgeted expenditures. These differences could result in fluctuations in our reported net i ncome on a quarterly basis.

Further, as the principal amount of, and interest that we pay on, our Series B Debentures are linked to the Israeli consumer price index, any increase in the Israeli consumer price index will increase our financial expenses and could adversely affect our results.

As a foreign private issuer whose shares are listed on the NASDAQ Global Market, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.

As a foreign private issuer whose shares are listed on the NASDAQ Global Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Listing Rules. As a foreign private issuer listed on the NASDAQ Global Market, we may follow home country practice with regard to, among other things, the composition of the board of directors, compensation of officers, director nomination process and quorum at shareholders’ meetings. In addition, we may follow home country practice instead of the NASDAQ requirement to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company). A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the Securities and Exchange Commission each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.

Our shareholders generally may have difficulties enforcing a U.S. judgment against us, our executive officers and directors and some of the experts named in this annual report, or asserting U.S. securities law claims in Israel.

We are incorporated in Israel and all of our executive officers and directors named in this annual report reside outside the United States. Service of process upon them may be difficult to effect within the United States. Furthermore, all of our assets and most of the assets of our executive officers and directors and some of the experts named in this annual report are located outside the United States. Therefore, a judgment obtained against us or any of them in the United States, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to assert U.S. securities law claims in original actions instituted in Israel.

Provisions of Israeli law, the licenses of Bezeq and our articles of association may delay, prevent or make difficult an acquisition of our company, which could prevent a change of control and, therefore, depress the price of our shares.

Following our acquisition of the controlling interest in Bezeq, we and our shareholders are required to comply with the Israeli Communications Law (Telecommunications and Broadcasting), 1982, or the Communications Law, the Communications Order (Determination Of Essential Service Provided By “Bezeq” The Israel Telecommunication Corp., Limited), 5757-1997, or the Communications Order, and regulations promulgated by the Ministry of Communications.

Pursuant to the Communications Order, we were required to obtain the prior written consent of the Prime Minister of Israel and the Israeli Minister of Communications in order to acquire the controlling interest in Bezeq. Under the Communications Order, no person may acquire, directly or indirectly, the ability to exercise “significant influence” over Bezeq or 5% or more of any particular class of means of control in Bezeq, nor may any person, together with any other person, appoint the general manager of Bezeq or cause the election or appointment of any director of Bezeq, without the prior written consent of the Prime Minister of Israel and the Israeli Minister of Communications. Subject to certain exceptions, prior written approval of such Ministers is also required to increase the holdings or other rig hts in excess of those determined in the initial approval, including by means of an agreement (including a voting agreement). Furthermore, under the Communications Order, no person may transfer control, “significant influence” or means of control in Bezeq to another, if, as a result of the transfer, the holdings of the transferee would require approval pursuant to the Communications Law or Communications Order and the transferee is not in possession of the requisite approval. For the foregoing purposes, “significant influence” means the ability to significantly influence the activity of a corporation, whether alone or together with or through others, directly or indirectly, as a result of holding means of control in that corporation or in another corporation, including ability derived from the corporation’s articles of association, a written, oral or other kind of agreement, or from any other sour ce, excluding solely as a result of the performance of an office holder’s duties in the corporation. In this context, holding 25% of our means of control is presumed to confer significant influence. “Means of control” means the right to vote at a general meeting of the company, to appoint a director or general manager of the company, to participate in the profits of the company or a share of the remaining assets of the company after payment of its debts upon liquidation.

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. Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders, including Israeli shareholders and 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 conti ngent 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 of Israeli law may delay, prevent or make difficult an acquisition of our company, which could prevent a change of control and therefore depress the price of our shares. For additional discussion about some anti-takeover effects of Israeli law, see “Item 6C. Directors, Senior Management and Employees –Board Practices – Approval of Related Party Transactions Under Israeli Law” and Item 10E. “Taxation -Israeli Tax Considerations.”

The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from those under Delaware law.

Because we are an Israeli company, the rights and responsibilities of our shareholders are governed by our articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in a Delaware corporation. In particular, a shareholder of an Israeli company has a duty to act in good faith towards the company and other shareholders and to refrain from abusing his, her or its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable to shareholder votes on, among other things, amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and interested party tran sactions requiring shareholder approval. In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness towards the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensive revisions in recent years, there is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.

ITEM 4. INFORMATION ON THE COMPANY

A.	History and Development of the Company

We were incorporated under the laws of the State of Israel in 1999 as “Gold E Ltd.” In 2000, we changed our name to Goldtrade Electronic Trading Ltd., and in 2006, we changed our name to Smile.Communications Ltd. In 2007, we changed our name to 012 Smile.Communications Ltd. following our acquisition of 012 Golden Lines Ltd., or 012 Golden Lines. On March 16, 2010, we changed our name to B Communications Ltd. in connection with our acquisition of the controlling interest in Bezeq.

We are a public limited liability company under the Israeli Companies Law, 5739-1999 and operate under such law and associated legislation. Our principal executive offices are located at 2 Dov Friedman Street, Ramat Gan 52503, Israel, and our telephone number is +972-3-9240000. Our website address is www.bcommunications.co.il. The information on our website is not incorporated by reference into this annual report.

Prior to our October 2007 initial public offering in the United States, we were a wholly-owned subsidiary of Internet Gold, a public company traded on the NASDAQ Global Market and the Tel Aviv Stock Exchange, or TASE, whose shares are included in the TASE-75 Index. Internet Gold owned approximately 76.62% of our ordinary shares as of June 30, 2010. Eurocom Communications owned 77.99% of Internet Gold’s outstanding shares as of June 30, 2010. Mr. Shaul Elovitch, our chairman and the chairman of Internet Gold and its parent, Eurocom Communications, and the controlling shareholder of Eurocom Communications, is able to exercise control over our operations and business strategy and control the outcome of all matters involving shareholder approval.

Our Legacy Communications Business

Prior to January 2010, we were a communication services provider in Israel that provided a wide range of broadband and traditional voice services, which we refer to in this annual report as the legacy Communications Business. Our controlling shareholder, Internet Gold began providing Internet access services in 1996 and began offering broadband services in 2001 and traditional voice services in 2004. As part of its internal restructuring in 2006, Internet Gold transferred to us its broadband and traditional voice services businesses.

On December 31, 2006, we acquired one of our principal competitors, 012 Golden Lines.

As part of our acquisition of the controlling interest in Bezeq, on November 16, 2009, we entered into an agreement to sell our legacy Communications Business (excluding certain retained indebtedness and liabilities) to a wholly-owned subsidiary of Ampal-American Israel Corporation (NASDAQ: AMPL), or Ampal, for NIS 1.2 billion (approximately $318 million). The sale of our legacy Communications Business to Ampal was completed on January 31, 2010, effective as of January 1, 2010.

In connection with the sale of our legacy Communications Business, substantially all of our executive officers and employees as of the closing of the transaction were hired by Ampal. Effective as of the closing of the sale, Mr. Eli Holtzman (the Chief Executive Officer of Internet Gold) was appointed as our new Chief Executive Officer and Mr. Doron Turgeman (the Deputy Chief Executive Officer and Chief Financial Officer of Internet Gold) was appointed as our Chief Financial Officer.

Acquisition of the Controlling Interest in Bezeq

On April 14, 2010, we completed the acquisition of 30.44% of Bezeq’s outstanding shares from Ap.Sb.Ar. Holdings Ltd. for an aggregate cash purchase price of NIS approximately 6.5 billion (approximately $1.72 billion) and became the controlling shareholder of Bezeq. The Bezeq interest was directly acquired by an indirect wholly-owned subsidiary. The transaction was completed after all conditions in the agreement were met, including receipt of the approval of the Prime Minister of Israel and the Israeli Minister of Communications (including the grant of control permits) and the Israeli Antitrust Commissioner. In accordance with the terms of the transaction, effective as of the closing of the acquisition, we designated seven d irectors to replace the Apax-Saban-Arkin Group’s representatives on Bezeq’s Board of Directors, which numbers a total of 13 directors. We began consolidating Bezeq’s financial results into our financial statements effective as of the closing of the acquisition and will begin to report the consolidated results in our 2010 second quarter earnings release.

Bezeq, which was established as a government company in 1980, became a public company in 1990 and its shares are traded on the TASE.

Bezeq is the principal provider of communications services in Israel. Bezeq and its subsidiaries implement and provide a broad range of telecommunications operations and services, including domestic fixed-line, cellular, Internet services, international communication services, multi-channel television, satellite broadcasts, customer call centers, maintenance and development of communications infrastructures, provision of communications services to other communications providers, television and radio broadcasts, and supply and maintenance of equipment on customer premises (such as network endpoint services).

Bezeq has the following four principal areas of operation, which are reported as business segments in its consolidated financial statements:

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

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

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Bezeq International– Internet, international communications and network endpoint, or NEP, services. Internet service provider, or ISP, services, international communications services and NEP services. Bezeq International owns 44.99% of Walla! Communications Ltd., or Walla!, an Israeli company whose shares are listed on the TASE that provides portal services and Internet media services. Bezeq owns an additional 9,902,467 shares of Walla! that are held in a blind trust and Bezeq has no voting rights with respect to such shares.

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

Permit to Control Bezeq Granted to Members of the Eurocom Group

According to the Companies’ Control Permit, the parties must hold not less than 30% of any type of means of control of Bezeq and SP2. Our subsidiary which owns the Bezeq shares is deemed to hold the Bezeq shares directly notwithstanding that the Bezeq interest is recorded in the name of a trust company wholly-owned by Bank Hapoalim, which was granted a lien over the Bezeq shares held by SP2 as a security for the repayment of the NIS 4.6 billion (approximately $1.24 billion) loan provided by Bank Hapoalim and other banking and financial institutions, referred to as the Lending Parties, for the funding of acquisition of the Bezeq interest.

In accordance with the Companies’ Control Permit, our subsidiary which holds the Bezeq shares is required to notify the Prime Minister of Israel and Israeli Minister of Communications of any changes in the composition of its board of directors every six months and if the change represents half or more of the members of the board of directors, within 30 days of the change. The parties to the Companies’ Control Permit are also required to notify such Ministers of any “Exceptional Holdings” immediately upon becoming aware of such event. Such parties are also required to notify such Ministers in the event a shareholder becomes a “Principal Shareholder” and regarding any change in the holdings of a Principal Shareholder within 48 hours of becoming aware of such change. The t erms “Exceptional Holdings” and “Principal Shareholder” are defined in the Communications Order and in our Articles of Association and are described below in Item 10B “Additional Information - Memorandum and Articles of Association - Rights Attached to Shares - Exceptional Holdings; Principal Shareholders.”

The parties to the Companies’ Control Permit may not transfer means of the control in Bezeq at a rate which requires the approval of the Prime Minister of Israel and Israeli Minister of Communications under the Communications Order, without such Ministers prior written approval. The foregoing includes a transfer of the Bezeq interest in one transaction or a series of transactions, by one party or together with the other parties to the Companies’ Control Permit or the parties to the Individuals’ Control Permit. However, the parties may transfer the means of control of Bezeq among themselves, subject to compliance with certain conditions set forth in the Companies’ Control Permit.

The Lending Parties undertook to comply with the provisions of the Communications Law, Communications Order and the lien permit granted to them relating to their rights under the credit agreement entered into among SP2 and the Lending Parties and the realization of the lien. The rights granted to the Lending Parties are deemed to be an encumbrance of collateral and the Lending Parties may not exercise rights pursuant to the means of control except as set forth in the lien permit. The lien permit was granted exclusively to the Lending Parties and any change in the composition of the Lending Parties or a modification of the credit agreement entered into among SP2 and the Lending Parties requires the prior written consent of the Prime Minister of Israel and Israeli Minister of Communications. The appointment of a receiver, on any grounds whatsoever, with respect to the holdings in SP2 or SP2’s holdings in Bezeq, will constitute grounds for canceling the lien permit. The violation of the lien permit by the Lending Parties will constitute grounds for canceling such permit and for the appointment of a receiver and trustee, in accordance with the terms of such permit.

According to the Companies’ Control Permit, SP2 must at all times be held by an “Israeli Party,” as defined in the Communications Order, to the following extent:

(i) At least 19% of each of the means of control of SP2 must be held by an Israeli Party at all times; or

(ii) Both of the following:

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

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

The Prime Minister of Israel and Israeli Minister of Communications have determined that we and Internet Gold are deemed to be “Israeli Parties,” so long as we and Internet Gold are controlled by a citizen and resident of Israel and that the ownership interest of Messrs. Shaul Elovitch and Yossef Elovitch in each of us and Internet Gold does not fall below 50%. In accordance with such approval, we and Internet Gold may only transfer our holdings in Bezeq to an Israeli Entity, subject to all approvals required by law.

The parties to the Companies’ Control Permit may not be controlled by any country or government company or a company controlled by a government company. The Companies’ Control Permit will terminate if the foregoing condition ceases to exist with respect to any such party without the approval of the Prime Minister of Israel and Israeli Minister of Communications. Such Ministers may authorize a government company to hold an interest in any such party, provided that the government company’s aggregate direct or indirect holdings in Bezeq do not exceed 5% of any type of means of control of Bezeq and that it does not control such party.

In the event the Prime Minister of Israel and Israeli Minister of Communications find that the information they were provided is incorrect, that there has been a material change in the details provided by the parties to the Companies’ Control Permit which justifies its cancellation or such parties failed to submit a required report, and such Ministers determine that there is probable cause to believe that the provision of the services that Bezeq is required to provide pursuant to its general license (including basic telephone, infrastructure, transmission and data transmission services and ancillary services) or the grounds for determining that any such service has been harmed, such Ministers may take action to cancel the Companies’ Control Permit. Upon its cancellation, all the shareholdings purchased under the Co mpanies’ Control Permit will be deemed “Exceptional Holdings,” as described above.

The Companies’ Control Permit also authorizes an interested party in Internet Gold and our company that is not a party to the Companies’ Control Permit or the Individuals’ Control Permit to hold means of control in Bezeq, provided that such interested party does not hold more than 15% of any type of means of control of Internet Gold and our company. The foregoing authorization is subject to the condition (among others) that the percentage of holdings of the parties to the Companies’ Control Permit in Internet Gold, of Internet Gold’s holdings in our company and of Eurocom Communications’ holdings in Internet Gold exceed 50% of the means of control in each of such companies at all times. We and Internet Gold are required to notify the Prime Minister of Israel and Israeli Minister o f Communications of the shareholdings of any such interested party.

The provisions of the Companies’ Control Permit are subject to the terms of the Communications Order and Communications Law, as they may be amended from time to time.

B. Business Overview

Since April 14, 2010, we have been the controlling shareholder of Bezeq (TASE:BZEQ), Israel’s largest telecommunications provider. For detailed information about Bezeq’s business, see Bezeq’s Periodic Report for 2009, prepared in accordance with Israeli Securities Regulation (Periodic and Immediate Reports), 5730-1970, which report is available on Bezeq’s website at http://ir.bezeq.co.il. The information on Bezeq’s website is not incorporated by reference into this annual report.

The Israeli Communications Industry

Development and History of the Israeli Communications Industry

The communications industry around the world and in Israel has developed rapidly. The technology and corporate structure and regulations governing the communications industry have undergone and continue to be subject to constant changes. A number of communications groups operate in the Israeli communications market on the basis of marketing cooperation between a number of companies and/or common holdings for the supply of comprehensive communications services, thus utilizing the marketing and operational advantages inherent in such a structure.

Regulatory Changes in the Israeli Communications Industry

The Israeli communications industry is regulated and controlled by the Israeli Ministry of Communications, including by means of issuance of licenses for operators. During recent years, the Ministry of Communications has issued licenses to a limited number of operators for data transmission and communication, broadband Internet access and telephony (including licenses for the provision of domestic landline communication services with no obligation to provide universal, nationwide service, as compared to Bezeq, which is obliged to provide its domestic landline communication services on universal basis), and there is intense competition is these areas.

The Gronau Committee

On March 12, 2008, a report was published by a public committee headed by Professor Gronau that was appointed by the Minister of Communications in December 2006 to formulate detailed recommendations for a policy and principles of competition in the communication market in Israel, referred to as the Gronau Committee. On August 13, 2008, the Minister of Communications announced his decision to adopt the conclusions of the Gronau Committee, subject to a number of changes, which constitute the policy of the Minister of Communications for the near future.

The following measures were advanced by the Ministry of Communications, aimed at enhancing competition in the sector, in part following a decision made by the government and the recommendations of the Gronau Committee:

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Changes in the fixed-line sector. The Minister of Communications decided that the Ministry of Communications will prepare the regulatory and pricing infrastructure for the establishment of a wholesale market for fixed-line communications (including resale and the provision of access to infrastructure), including arrangements for local loop unbundling, or LLU.

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Tariff flexibility for Bezeq – alternative service packages. To improve the efficiency of the approval process for alternative payment packages, the Minister of Communications decided to change the system for their approval so that Bezeq would be able to offer packages 45 days after submitting a detailed application to the Ministry of Communications, unless the Minister of Communications or the Minister of Finance gives notice of his objection to the application. The Minister adopted the recommendations of the Gronau Committee that so long as Bezeq’s market share is more than 60%, the control of Bezeq’s tariffs should continue in the format of fixed prices and with respect to alternative payment packages, the smaller Bezeq’s share in landline telephony in Israel, the higher the maximum discount permitted (a 15% discount so long as the market share is higher than 85%; 25% discount when the market share is between 75% and 85%; and 40% discount when the market share is between 60% and 75%). The alternative payment package will be approved only if it is worthwhile for at least 30% of the subscribers who consume the services offered in the package.

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Mobile virtual network operators. In January 2009, the Israeli Government’s decided to take actions to promote the entry of mobile virtual network operators, or MVNOs, into Israel’s cellular market and on January 20, 2010, the Minister of Communications signed regulations allowing the grant of MVNO licenses.

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Multi-channel television – basic channel package. Under a proposed amendment to the Communications Law, as of August 1, 2012, DBS and HOT will be obligated (i) to allow any subscriber to connect to a package which includes Israel’s five non-cable television channels, referred to as the Basic Package, the payment for which will be calculated based on subscriber connection costs plus reasonable profit for DBS and HOT; (ii) to allow any subscriber to separately purchase any other channel offered by them and not to make the purchase of one channel conditional upon the purchase of another channel; (iii) to set a price for the Basic Package based on usage cost plus reasonable profit. In addition, under the proposed amendment, DBS and HOT will be authorized to broadcast commercials commencing January 1, 2012. ; The Broadcast Council will determine rules regarding the maximum time during which commercials may be broadcast and on which channels which will be in effect for a period of three years.

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Structural separation. Under its current general license, Bezeq is required to maintain full structural separation between itself and those subsidiaries and affiliates specified in the license. Bezeq is also required to maintain separate operations from those of Pelephone due to the determination of the Antitrust Commissioner. The HOT group’s licenses also required them to maintain structural separations. The Granau Committee’s recommendation, as adopted by the Ministry of Communications, determines to leave in place Bezeq’s structural separation so long as only two companies own fixed-line infrastructure that is deployed nationwide. Furthermore, should the Minis ter find, within two years following the establishment of the wholesale market for fixed communications (including resale and the provision of access), that the manner in which Bezeq established the wholesale market prevents greater competition in the domestic communications market, then he will act to apply structural separation between Bezeq’s infrastructure operations and service operations.

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Service Packages. The Granau Committee recommended that Bezeq and its subsidiaries be allowed to offer service packages consisting of telephony and Internet protocol, or IP, television services once the wholesale market arrangements, as described above, have been implemented.

During May and June 2010, a few amendments to the licenses of Bezeq and its subsidiaries were issued regarding the provision of breakable bundled service packages (in which there is no requirement that each service in the package can also be purchased separately on the same terms as provided in the service package). At this preliminary stage, Bezeq and its subsidiaries are examining these new amendments and cannot estimate the impact of such amendments on their operations and results.

Structural changes in the data transmission and communications sector.

The data transmission and communications sector, particularly at high speeds, was opened to competition at the end of 2000. The companies that currently operate and compete in this area are Bezeq, Cellcom, Partner, HOT, and the Internet companies that also lease ISP infrastructure.

HOT started to provide telephony services on a commercial basis in November 2004. The Ministry of Communications granted HOT a license in 2000 for the provision of broadband Internet access services to ISPs, which was subsequently replaced with a license to provide fixed-line domestic services, including telephony, data communications, transmissions and infrastructure and access to Internet providers in nationwide deployment. On June 4, 2009, the Ministry of Communications announced an amendment to the license of HOT requiring structural separation between HOT’s multi-channel television services and telephony services.

The Ministry of Communications’ policy requires Bezeq and HOT to provide ISPs with “open access” to their infrastructure.

Since 2005, the Ministry of Communications has granted several general licenses for the provision of fixed-line domestic services without a geographical deployment or universal service obligations. In April 2006, Cellcom was granted a special general license to provide landline telecommunication services and has been offering these services since July 2006. Cellcom’s entry into the domestic landline telephony market enables it to offer its customers a complete basket of solutions that includes domestic telephony, data communications and cellular. In February 2007, 012 Smile Telecom started to provide voice over broadband, or VoB, services in Israel and was the first company to obtain a commercial license in Israel to offer VoB servic es without any limitation on the number of subscribers. Partner was granted a special license for providing data transmission and communication services on August 15, 2006. During the winter of 2008, Partner began to provide VoB telephony services.

Regulatory changes in the cellular market.

The measures set forth below were adopted by the Ministry of Communications, aimed at enhancing competition in the cellular market, in part following a decision made by the Israeli Government and the recommendations of the Gronau Committee.

In March 2008, the Ministry of Communications published a public hearing document concerning the policy for regulating commercial telephony services. Commercial telephony services include, among other things, information, voice and visual services, entertainment and dating services. Bezeq believes that the regulations if adopted as proposed may harm Bezeq’s revenues in the commercial telephony services sector. As of the date of this annual report, the Ministry of Communications has not determined its final policy on this subject.

In November 2009, the Ministry of Communications, following the Israeli Government’s decision to review roaming cellular tariffs, approached the cellular operators and requested detailed data concerning roaming cellular tariffs. As of the date of this annual report, Bezeq is not aware of any decisions having been made in this matter.

In August 2009, the Ministry of Communications published a request to receive the public’s position on the regulation of the provision of broadband services over a cellular network. As part of the hearing, the Ministry of Communications wishes to examine the possibility of requiring a separation between the provider of access to broadband infrastructure and the ISP. Bezeq submitted its position that it objects to the proposal and presented its position to the Ministry of Communications at a hearing in December 2009. As of the date of this annual report, there have been no further developments.

In February 2010, an amendment to Bezeq’s cellular licenses was issued, which provides that as of August 1, 2010, a new tariff structure will take effect for international calls made from mobile telephones. Under the new tariff structure, a subscriber will not pay the cellular operator for the air-time for the international call made from a mobile telephone, but rather the subscriber will pay a tariff consisting of the international operator’s price to be determined by the international operator and a cellular connection fee, as determined by the regulations governing cellular connection fees. Bezeq expects that the new tariff structure will adversely affect its revenues from international calls made from cellular telephones.

During March 2010, the Israeli Ministry of Communications published for public comment proposed changes to the cellular license with respect to several consumer services and cellular tariffs. If the changes are adopted, among other things, Bezeq would be required to obtain the permission of customers for the use of various content services and it would also be required to inform customers via text message when they have used 75% and 90% of a package of services. Bezeq believes that such changes, if adopted, would likely have substantive consequences on its business and operations. Bezeq is currently preparing its responses to the proposed changes and intends to request a meeting with representatives from the Ministry of Communications to discuss the issues.

On May 4, 2010, Bezeq was notified by the Minister of Communications that he is considering amending the existing regulations governing mobile connection fees in a manner that would reduce cellular connection rates for call and text messages commencing August 1, 2010, to NIS 0.0414 and to NIS 0.0019 (excluding VAT), respectively. In addition, the Ministry of Communications is considering further gradual reductions in the cellular connection fees for calls and text messages. Bezeq is currently unable to assess the full impact of the proposed amendment; however, it believes that if the proposed amendment is adopted and implemented in full, it would have a material adverse effect on its business results.

Domestic Landline Operators

On June 3, 2004, new Israeli regulations were published regarding the provision of domestic landline services, on a non-universal service basis. Under such regulations, an application may be filed by competitors of Bezeq for a special general domestic to provide landline services, which does not involve an obligation to provide services to the entire Israeli public, as is required under Bezeq’s general license. 012 Smile Telecom (now owned by Ampal), or 012 Smile, Cellcom and Partner, the principal competitors of Bezeq in this field, have all been granted such licenses and in 2009 they increased their activity in the area. Unlike Bezeq, Partner, Cellcom and 012 Smile are entitled to offer packages that combine cellular and landline services, which gives them a competitive advantage over Bezeq.

Mobile Virtual Network Operators

Pursuant to the Israeli Government’s decision to encourage the entry of MVNOs into Israel’s cellular market, in January 2009, the Ministry of Communications published for the general public’s comments the draft of the proposed MVNO license, as well as the key rules of the Communications Law which the Minister of Communications intends to adopt in order to regulate the conditions for granting MVNO licenses.

In July 2009, an amendment to the Israeli Communications Law was approved requiring the Minister of Communications to complete all procedures required in order to commence the grant of MVNO licenses by October 1, 2009. Under the amendment, if the owner of an MVNO license holds negotiations with a cellular operator and such negotiations are not successful after 6-9 months due to anti-competitive behavior of the cellular operator, the Minister of Communications shall intervene in the commercial conditions in accordance with the powers granted to him by law. In January 2010, regulations regulating the conditions to qualify for an MNVO license were published. In June 2010, the first MVNO license was issued to Telecom 365 Ltd., an Israeli company owned by New Hamashbir Lazarchan Ltd.

VoB (Voice Over Broadband) Technology

According to a policy document published by the Ministry of Communications on January 31, 2007, Bezeq and its subsidiaries may provide VoB services only after Bezeq’s market share of the Israeli domestic landline telephony market in a particular customer sector (business or private) falls below 85%. According to a notice of the Ministry of Communications, Bezeq’s market share fell below 85% in the private sector in June 2008 and in the business sector in September 2009. On February 8, 2009, the Ministry of Communications granted Bezeq International’s subsidiary, B I P Telecom. Ltd., a special general operator’s license to provide domestic VoB services. On August 2, 2009, Bezeq International began providing domestic VoB services to its private customers. On December 30, 2 009, the foregoing license was amended to permit Bezeq International to provide the services to its business customers.

Call completion tariffs for a VoB operator are the same as those for calls completed via Bezeq’s fixed-line telecommunications network or another domestic landline operator. Call completion tariffs for domestic landline operators are expected to be reviewed by a public committee that will be appointed to draft recommendations for the landline telephony market.

WiMAX Technology

On March 1, 2009, the Ministry of Communications published its policy regarding the allocation of frequencies for WiMAX technology and establishing a broadband wireless access network using the WiMAX technology. WiMAX is a technology that aims to provide wireless data over long distances, in a variety of different methods, from point to point links to full mobile type access. According to the policy document, WiMAX frequencies will be allocated in two separate tenders for different frequencies. The first tender will allocate frequencies exclusively to a new operator and other operators will be entitled to participate in the second tender, including existing cellular operators. To date, neither of these tenders has been published.

Competition in the Israeli Communications Market

The Israeli communications market is dominated by four main groups, the Bezeq group, the IDB group (which controls Cellcom and 013 NetVision), the Partner group and the HOT group and several other players, each having interests in one or more of the main communications sub-sectors.

The Ministry of Communications has encouraged competition in the communications market by imposing restrictions and limitations on Bezeq and its subsidiaries, including:

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

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supervision and regulation of part of Bezeq’s tariffs; and

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

The Ministry of Communications has also supported competition by:

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separating infrastructure and service providers;

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granting new licenses and encouraging new and innovative technologies such as VoB; and

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mandating number portability.

Domestic Landline Communications Market. For the year ended December 31, 2009, NIS 5.0 billion ($1.3 billion) of Bezeq’s total revenues were attributable to revenues from domestic fixed-line communications. Competition in the domestic landline communications market began when HOT was granted a general license for the provision of domestic fixed-line telephony services in November 2003. Unlike Bezeq, HOT is entitled to offer bundles to its private customers and offers packages of broadband Internet access, telephony and cable television to private customers. On March 22, 2010, the Ministry of Communications published a hearing for HOT regarding the marketing of such packages, including determining that the maximum commitment period w ill be 18 months for all of the services in the package. This limitation would also apply to similar joint packages offered by Bezeq if they are permitted.

Since 2004, the Minister of Communications has been authorized to grant special general licenses for the provision of domestic landline communication services, without an obligation to provide universal service or an obligation for minimal geographic deployment as is required under Bezeq’s general license. Such licenses were granted to a number of operators, among them 012 Smile, Cellcom and Partner.

Cellular services. There are four companies presently providing cellular services in Israel: Cellcom, Partner, Pelephone (a wholly-owned subsidiary of Bezeq) and MIRS. For the year ended December 31, 2009, NIS 5.1 billion ($1.4 billion) of Bezeq’s total revenues were attributable to revenues from cellular services.

International Long Distance Market. The international long distance market in Israel is also highly competitive. There are currently four competitors in the market: Bezeq International, 012 Smile, 013 NetVision and Xfone.

ISP Market. There are a number of competitors in the ISP market in Israel including Bezeq International, 012 Smile, 013 NetVision, Partner and two minor niche players, and Bezeq believes that HOT is preparing to enter this market.

NEP services. NEP services primarily include traditional telephone exchanges, data communications and IP telephony. The traditional field of telephone exchanges is characterized by a large number of competitors and by fierce competition, which has given rise to price erosion. The most prominent competitors of Bezeq International, is this area are GlobeCall, Tadiran and Tel-Yad. The data communications and IP telephony sector is characterized by the entry of IT companies entering into telephony. These are companies such as Binat, IBM, Netcom and Teldor, which are substantially different from tradit ional NEP companies and are technologically sophisticated. Telecommunication companies are also conglomerating and new operators are entering the market with the intention of providing customers with total communications solutions, such as telephony, transmission, data communications, Internet, and information security.

For the year ended December 31, 2009, NIS 1.3 billion ($338 million) of Bezeq’s total revenues were attributable to revenues from international calls, ISP services and NEP services.

Multi-Channel Television Market. The field of television broadcasting in Israel is highly regulated. Broadcasting is carried out pursuant to various broadcast licenses and is subject to the ongoing supervision of the Ministry of Communications and Council for Cable TV and Satellite Broadcasting. Multi-channel television broadcasts have been provided in Israel since the early 1990s. Since December 2006, the cable companies operating at such time merged into a single merged cable company, HOT, which supplies cable television services to all of the subscribers of the merged cable companies pursuant to a long-term broadcast license. HOT holds all of the rights in a limited pa rtnership which owns the cable network infrastructure, including the terminal equipment and broadcasting centers.

Bezeq, through DBS, known also by its trade name YES, is currently the only company in Israel that operates in the satellite multi-channel television broadcasting sector. DBS was founded on December 2, 1998 and has been providing this service since July 2000. This service provides multi-channel encrypted digital television broadcasts and value-added services to subscribers. Most of DBS’s income is derived from subscription fees and additional payments made by viewers.

Our Legacy Communications Business

Prior to the sale of our legacy Communications Business, we were a leading communication services provider in Israel offering a range of services, including broadband and traditional voice services. Our broadband services included broadband Internet access with a suite of value-added services, specialized data services, local telephony via VoB, primary rate interface services, IP Centrex, server hosting and a WiFi network of hotspots across Israel. Our traditional voice services included outgoing and incoming international telephony, hubbing services for international carriers and roaming and signaling services for cellular operators. We offered our broadband and traditional voice services to a wide audience, which included residential and business customers, including small office-home office, or SoHo, c ustomers, small-medium size enterprise, or SME, customers, and large corporate customers, as well as international carriers and cellular operators. We provided these services through our integrated multipurpose network that was deployed through points of presence throughout Israel and in England, Germany and the United States. As of December 31, 2009, we had over one million customers registered in our database.

Broadband Services

As of December 31, 2009, we had over 500,000 active residential, business and carrier customers for our broadband services, including many of the largest companies in Israel.

Internet Access and Value-added Services

Prior to the sale of our legacy Communications Business, we were one of Israel’s three leading ISPs providing high speed broadband access to the Internet via ADSL and cable networks. We estimate that our market share of the broadband Internet access market as of December 31, 2009 was approximately 32%- 33% based on our broadband market analysis. In addition to Internet access, we offered a diverse suite of value-added services that were incremental to our core Internet access service to residential and business customers, including wireless and wired home networking, e-mail and security services.

Specialized Data Services

Prior to the sale of our legacy Communications Business, we provided specialized data services to bandwidth-intensive organizations and international carriers, allowing them to transmit electronic data from point to point or from point to multi-points. Our fee structure for these services depended on three main factors: volume of capacity, distance and the type of technology used.

VoB Services

Prior to the sale of our legacy Communications Business, we offered VoB local telephony services. We transmitted these calls using VoIP technology, which converts voice signals into digital data packets for transmission over the Internet and provided our service by using our customers’ existing broadband Internet connections.

Primary Rate Interface Services

From December 2005 and until the sale of our legacy Communications Business, we offered primary rate interface, or PRI, services to business customers This service, which offered point-to-point PRI ISDN communications lines, was primarily used by large corporate customers.

IP-TRUNKING Services

From February 2007 and until the sale of our legacy Communications Business, we offered IP-TRUNKING services, which provide interconnections between service providers using session initiation protocol, or SIP, to business customers. This service, which offered point-to-point IP communications lines, was offered to business users.

IP Centrex

From January 2005 and until the sale of our legacy Communications Business, we offered business customers an IP-based PBX, or telephone switching system, which connected to the customer through a broadband connection, IP Central Office Exchange Service, or IP Centrex, and offered VoIP and other IP-based services as well as connectivity to the regular telephone system.

Server Hosting and Co-location Services

Prior to the sale of our legacy Communications Business, we operated three server hosting facilities. Many customers utilized our services to manage their web servers. Clients were able to configure and operate their servers remotely and save on router, Internet connection, security system and network administration costs. We also offered co-location services to our business customers at our server hosting facilities. As part of our co-location services, we housed the back-up servers used by businesses to ensure that their systems do not lose data or suffer a lengthy interruption of service because of a power outage, computer fault, or other reasons.

WiFi Network

Prior to the sale of our legacy Communications Business, we operated a comprehensive network of hotspots covering hotels, hospitals, airports and other public areas. Many of the contracts that we entered into in connection with these services provided for revenue sharing arrangements.

Traditional Voice Services

Prior to the sale of our legacy Communications Business, we offered traditional voice services to residential and business customers throughout Israel and to international carriers and local cellular operators.

Incoming and Outgoing International Telephony Services

Prior to the sale of our legacy Communications Business, we were one of the three largest international telephony services providers in Israel, providing global international telephony services through direct connections with approximately 90 carriers. As of December 31, 2009, we estimate our market share of the international telephony market was 34% based on the number of incoming and outgoing minutes in Israel.

Our outgoing international telephony services to our residential and business customers included direct international dialing services, international and domestic pre-paid and post-paid calling cards and call-back services. We sold pre-paid cards to our distributors, which we treated as business customers, for distribution in the residential market. We offered our incoming international telephony services to international carriers, which included termination services for telephone calls originating outside of Israel.

Hubbing Services

Prior to the sale of our legacy Communications Business, we provided hubbing-traffic routing between approximately 90 network operators. Hubbing is defined as architecture where several network operators connect to a peering point, or a hub, from where they are rerouted.

Roaming and Signaling Services

Prior to the sale of our legacy Communications Business, we provided roaming and signaling services for cellular operators. Signaling messages indicate a mobile user’s location while roaming within Israel through our signal transfer point or when traveling abroad. We billed the cellular operators based on the number of signaling messages sent and received.

Marketing and Sales

Prior to the sale of our legacy Communications Business, we focused on presenting a “one-stop shop” solution to our residential and business customers by offering a diverse basket of solutions. We sought to strengthen our brand awareness and to create a unified branding approach among our voice and data customers for our various service offerings. We engaged in a variety of marketing and promotional activities to stimulate awareness of our broadband access services, traditional voice services and VoB telephony services. We also actively promoted and cross-sold our services to existing customers with special bundled offerings aimed at servicing their communications needs and enhancing customer loyalty. This marketing and communications strategy was executed through all levels of our business.

Customer Service and Support

Prior to the sale of our legacy Communications Business, customer service and support operations were supported by integrated customer relationship management and computer technology integration systems. Our sales and customer service functions were carried out by separate service centers that responded to calls from residential and business customers. We serviced our customer groups through dedicated multi-language call center personnel and multi-language technical support staff.

Network and Technology

Prior to the sale of our legacy Communications Business, we continuously worked on developing and enhancing our technology platform and infrastructure. We invested heavily in our multipurpose network infrastructure, which had been specifically designed to transmit data using IP. Our multi-purpose network supported broadband and traditional voice services across Israel, as well as dial-up, ADSL, ISDN and cable broadband services. Our network configuration supported the convergence of voice and data services, such as broadband Internet access, VoB and traditional voice services, as well as advanced technologies. In addition, we used our network to provide specialized data services to bandwidth-intensive organizations and international carriers using a variety of technological solutions to satisfy the demands and changing needs of our business customers.

Competition

Prior to the sale of our legacy Communications Business, we faced competition in all segments of our operations. In each segment, competition to a large extent depended on price and quality of service. Some of our competitors had greater financial, technical and marketing resources than us. Moreover, the services offered by our legacy Communications Business were subject to regulation by the Ministry of Communications, whose policy is to encourage new entrants and not limit the number of licenses, which increased competition.

Government Regulation

The Israeli communications market is highly regulated and as a result, a significant part of our legacy Communication Business was regulated by the Israeli Communications Law, the regulations promulgated under the Israeli Communications Law and the provisions of our licenses. The Ministry of Communications has the regulatory authority and broad discretionary powers under the Israeli Communication Law and licenses that we received in connection with our legacy Communication Business.

C. Organizational Structure

Internet Gold owned approximately 76.62% of our outstanding ordinary shares, and Eurocom Communications beneficially owned approximately 77.99% of our outstanding shares, as of June 30, 2010. Internet Gold is a public company, whose shares are listed on the NASDAQ Global Market and the TASE. Internet Gold is controlled by Eurocom Communications, which held 70.79% of its ordinary shares as of June 30, 2010. Eurocom Communications is controlled by Mr. Shaul Elovitch, the chairman of our board of directors and the chairman of the board of directors of Internet Gold and Eurocom Communications.

On April 14, 2010, we completed the acquisition of 30.44% of Bezeq’s outstanding shares and became the controlling shareholder of Bezeq. Our interest in Bezeq is directly held by SP2, which is a wholly-owned subsidiary directly held by SP1, our wholly-owned subsidiary. The following chart sets forth Bezeq’s shareholdings in its principal subsidiaries and affiliates:

Bezeq The Israel Telecommunications

Corp. Ltd.

Pelephone Communications Ltd.

D.B.S Satellite Services (1998) Ltd.

Bezeq International Ltd.

Bezeq On-Line Ltd.

Bezeq Gold (Holdings) Ltd.

Walla! Communications Ltd.

%100

44.99%*

%100

49.8%

*Bezeq International owns an additional 9,902,467 shares of Walla! that are being held in a blind trust and Bezeq has no voting rights with respect to such shares.

D. Property, Plants and Equipment

Effective as of January 31, 2010, our corporate headquarters are located in a 30 square meter facility in Ramat Gan, which we lease from Eurocom Communications at a token rent. The lease is for a period of three years, which may be extended each year for an additional one year period at the parties consent.

Prior to the sale of our legacy Communications Business, our corporate headquarters were located in a 7,000 square meter leased facility in Petach Tikva, Israel. The annual rent for the premises was NIS 5.5 million (approximately $1.5 million). We also leased (i) an additional 1,300 square meters in Petach Tikva at an annual rent of NIS 1.1 million (approximately $291,000); (ii) an additional 4,700 square meters in Rishon Le’zion at an annual rent of NIS 2.9 million (approximately $768,000); (iii) an additional 800 square meters in Ramat-Gan at an annual rent of NIS 0.54 million (approximately $143,000); and (iv) an additional 1,500 square meters in Petach-Tikva at an annual rent of NIS 0.8 million (approximately $212,000). All of the foregoing leases were assigned to Ampal in connection with the sale of our legacy Communications Business.

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A. Operating Results

The following discussion of our results of operations should be read together with our audited consolidated financial statements and the related notes, which appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report.

Overview

Adoption of IFRS

Effective as of January 1, 2009, we adopted IFRS as issued by the IASB, replacing the previous reporting standard which was U.S. GAAP. Accordingly, beginning January 1, 2009, we prepare our consolidated financial data according to IFRS as issued by the IASB. Our transition date to IFRS under First Time Adoption of International Financial Reporting Standards is January 1, 2008. Comparative data of our financial statements has been restated to retrospectively reflect the adoption of IFRS. IFRS differs in certain respects from U.S. GAAP. See Note 29 to our consolidated financial statements.

Our Legacy Communications Business

Prior to January 2010, we were a communications services provider in Israel and offered a wide range of broadband and traditional voice services.

Prior to our initial public offering on October 30, 2007, we were a wholly-owned subsidiary of Internet Gold, a public company traded on the NASDAQ Global Market and the TASE, whose shares are included in the TASE-100 Index. Internet Gold is controlled by Eurocom Communications, one of Israel’s major communications groups. Internet Gold began providing Internet access services in 1996 and began offering broadband services in 2001 and traditional voice services in 2004. As part of its internal restructuring in 2006, Internet Gold transferred to us its broadband and traditional voice services businesses, which we refer to in this annual report as the legacy Communications Business.

On December 31, 2006, we acquired one of our principal competitors, 012 Golden Lines. We completed the execution of our integration plan with 012 Golden Lines in the second quarter of 2008. In order to refinance a portion of a short-term debt that we incurred in connection with the acquisition, we issued an aggregate of NIS 425 million ($100 million) Series A Debentures in private placements to institutional investors in Israel in March 2007 and May 2007.

As part of our acquisition of the controlling interest in Bezeq, on November 16, 2009, we entered into an agreement to sell our legacy Communications Business (excluding certain retained indebtedness and liabilities) to a wholly-owned subsidiary of Ampal (NASDAQ: AMPL) for NIS 1.2 billion (approximately $317 million). The sale of our legacy Communications Business to Ampal was completed on January 31, 2010, effective as of January 1, 2010.

As a result of our decision to sell our legacy Communications Business, as of October 25, 2009 we classified our legacy Communications Business as “held-for-sale.” This resulted in our classification of the assets and liabilities held-for-sale in our financial statements as follows:

Assets classified as held-for-sale:

	December 31, 2009		Convenience translation into U.S. dollars
	NIS		US $
Cash and cash equivalents		934		247
Trade and other receivable		225,118		59,634
Long-term trade receivable		6,260		1,658
Property and equipment		158,794		42,065
Intangible assets		631,145		167,191
Employee benefits		13,078		3,464
Deferred expenses		326,950		86,610
		1,362,279		360,869

Liabilities classified as held-for-sale:

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

Acquisition of Controlling Interest in Bezeq

On October 25, 2009, we entered into a share purchase agreement to acquire the controlling interest in Bezeq, Israel’s largest telecommunications provider, from Ap.Sb.Ar. Holdings Ltd. (a consortium of Apax Partners, Saban Capital Group and Arkin Communications), for an aggregate cash purchase price of approximately NIS 6.5 billion (approximately $1.72 billion). On April 14, 2010, we completed the acquisition of 30.44% of Bezeq’s outstanding shares and became the controlling shareholder of Bezeq. We began consolidating Bezeq’s financial results into our financial statements effective as of the closing of the acquisition and will begin to report the consolidated results in our 2010 second quarter earnings release.

To facilitate the funding of our acquisition of the controlling interest in Bezeq, we entered into a series of long-term and short-term loans. See Item 5B “Operating and Financial Review and Prospects - Liquidity and Capital Resources.”

Revenues

Prior to the sale of our legacy Communications Business to Ampal, we earned revenues primarily from the sale of broadband and traditional voice services, as well as from ancillary sales of broadband equipment and products, such as routers. Our customers used our services on “as needed” basis or entered into monthly or longer term arrangements. We billed our residential customers for our services on a monthly basis and were typically paid by credit card or bank debit order. Business customers were also billed on a monthly basis, and we generally received payment in full within ten to 70 days of invoice. We billed our cellular and carrier customers based on the number of minutes terminated or transferred by us, and the number of signaling messages sent and received. Our rev enues were directly affected by the total number of our residential and business customers, the volume of traffic from our cellular and carrier customers and the rates we charged for our service.

Broadband services revenues primarily consisted of monthly subscriptions for broadband access to the Internet. We also earned revenues from offering a diverse suite of value-added services that were incremental to our core broadband Internet access services, such as e-mail, global remote access, wireless and wired home networking, various security services and virtual private network, or VPN, services. We earned revenues for these services based either on fixed prices for the service or a negotiated fee. We also provided specialized data services to bandwidth-intensive organizations and international carriers, allowing them to transmit electronic data from point to point or from point to multi-points. Our fee structure for these services depended on three main factors: capacity, distance and th e type of technology used. Most specialized data services are provided under one to two year contracts.

Revenues from traditional voice services were generated from payments based on the number of minutes the service was used by subscribers and the destination of the calls. We also offered our traditional voice services in monthly packages. As of December 31, 2009, we had approximately one million customers registered in our database, of which approximately 358,000 customers used our voice services and were billed by us in 2009. In addition, we billed Israeli carriers for their customers’ use of our services, which in the year ended December 31, 2009, were generated from over 617,000 lines. We provided termination services to approximately 90 international carriers for their calls originating outside of Israel. We also provided hubbing-traffic routing to our international carrier customers and roaming and signaling services for cellular operators.

We sold our legacy Business Communications products to a large number of residential, business and carrier customers. In the past three years, no customer accounted for more than 10.0% of our revenues.

Most of our revenues from our legacy Communications Business were denominated in NIS, and the remainder was principally denominated in U.S. dollars.

Following our acquisition of the controlling interest in Bezeq, our financial statements will reflect the revenues of Bezeq and its operating subsidiaries. For the year ended December 31, 2009, Bezeq had total revenues of NIS 11.5 billion ($3.1 billion), of which NIS 5.0 billion ($1.3 billion) were attributable to domestic fixed-line communications, NIS 5.1 billion ($1.4 billion) were attributable to cellular services, NIS 1.3 billion ($338 million) were attributable to international calls and NIS 62 million ($16.4 million) were attributable to other revenues.

Significant Costs and Expenses

Depreciation and Amortization. Prior to the sale of our legacy Communications Business, our depreciation and amortization expenses primarily related to our legacy Communications Business network equipment and capacity.

Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives. We depreciate such assets based on the following annual percentages:

Network equipment and computers	15%-33%
Furniture and office equipment	7%-15 %
Motor vehicles	15%
Leasehold improvements	shorter of the lease term or the useful lives of the asset (generally 10 years)

Depreciation methods, useful life and residual values are reviewed at each reporting date.

Amortization of other intangible assets is recognized in profit or loss on a straight-line basis (except customer relationships), over the estimated useful lives of the intangible assets from the date they are available for use. Customer relationships are amortized according to the economic benefit expected from those customers each period, which results in accelerated amortization during the early years of relationship. Goodwill and brand name assets having an indefinite useful life are not systematically amortized but are tested for impairment.

The estimated useful lives for the current and comparative periods are as follows:

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

The estimates regarding the amortization method and useful life are reassessed at each reporting date and adjusted if appropriate. We examine the useful life of an intangible asset that is not periodically amortized in order to determine whether events and circumstances continue to support the decision that the intangible asset has an indefinite useful life.

Salaries. Salaries include salary costs, social, statutory and employment benefits, and commissions of all our employees, compensation and commissions paid to service providers and sales representatives, and share-based payments. Salaries are net of costs associated with certain technical staff, which costs are capitalized and included in intangible assets.

General and Operating Expenses. General and operating expenses relating to our legacy Communications Business consisted primarily of costs of network services, facilities costs, costs of connecting local telephone lines into points of presence, international termination costs, the use of third party networks and leased lines and other regional network operations centers, telecommunication services expenses related to traditional voice services, agreements with several international carriers, building maintenance, services and maintenance by sub-contractors, vehicle maintenance expenses, royalties to the State of Israel and collection fees.

Finance Expense. Finance expense includes exchange rate differences arising from changes in the value of monetary assets and monetary liabilities stated in currencies other than the NIS, as well as from the decrease in market value of our marketable securities and from interest and Israeli consumer price index linkage differences charged on loans from banks and related parties and on our Series A Debentures.

Finance Income. Finance income includes exchange rate differences arising from changes in the value of monetary assets and monetary liabilities stated in currencies other than the NIS, as well as interest income on our cash and cash equivalents and short term investments in marketable securities.

Income Tax. Income tax expense is comprised of current and deferred tax. Current and deferred tax expense is recognized in profit or loss except to the extent that it relates to items recognized directly in equity or in other comprehensive income.

As of December 31, 2009, we had tax loss carryforwards in the amount of NIS 25.7 million ($6.8 million) compared to NIS 52.6 million as of December 31, 2008. In addition, our former subsidiary, 012 Telecom Ltd., had tax loss carryforwards in the amount of NIS 27.8 million ($7.4 million) compared to NIS 25.2 million as of December 31, 2008. The ultimate realization of deferred tax assets is dependent upon our ability to generate the appropriate character of future taxable income sufficient to utilize loss carry forwards or tax credits before their expiration. Deferred taxes in respect of losses carried forward and not yet utilized were not recognized in cases where future taxable income against which they can be utilized is not foreseen. Under existing Israeli tax laws, there is no time lim it on utilizing tax losses or on utilizing deductible temporary differences. As a result, as of December 31, 2009, we did not record a deferred tax asset on the tax loss carryforwards of our company in the amount of NIS 12.9 million ($3.4 million). As of December 31, 2008 and 2009, we did not record a deferred tax asset on the tax loss carryforwards of our former subsidiary, 012 Telecom Ltd., in the amount of NIS 25.2 million and NIS 27.8 million ($7.4 million), respectively.

Israeli companies were subject to corporate tax at the rate of 26% of their taxable income in 2009. The corporate tax rate was further reduced to 25% in 2010. In July 2009, the Israeli Parliament (the Knesset) passed a tax reform act that provides for a gradual reduction in the corporate income tax rate as follows: in 2011 the tax rate will be reduced to 24.0%, in 2012 the tax rate will be reduced to 23.0%, in 2013 the tax rate will be reduced to 22.0%, in 2014 the tax rate will be reduced to 21.0%, in 2015 the tax rate will be reduced to 20.0%, and from 2016 onward the tax rate will be reduced to 18.0%.

Critical Accounting Policies

The preparation of the consolidated financial statements in accordance with IFRS resulted in changes to the accounting policies as compared with the most recent annual financial statements prepared in conformity with U.S. GAAP. We have identified the policies below as critical to the understanding of our financial statements. The application of these policies requires management to make estimates and assumptions that affect the valuation of assets and expenses during the reporting period. There can be no assurance that actual results will not differ from these estimates.

Communication services revenue. Revenue from our legacy broadband and data services was earned on a fixed monthly fee basis for the provision of services. Our legacy broadband and data services included monthly fees collected for the provision of dedicated and dial-up access at various speeds and bandwidths, and also web and server hosting. These fees were recognized as services were provided. We recorded payments received in advance for services and services to be provided under contractual agreements, such as Internet broadband, as deferred income until such related services are provided. Our legacy Communications Business also offered value-added services including web faxing services, anti-spam and anti-virus protection. Generally, these enhanced features and data applications generated additional service revenues through monthly subscription fees or increased usage through utilization of the features and applications. Revenues from enhanced features and optional services were recognized when earned.

Our legacy Communications Business revenues from sales of equipment such as routers that were not contingent upon the delivery of additional products or services were recognized when products were delivered to and accepted by customers and all other revenue recognition criteria were met. In revenue arrangements including more than one deliverable, the arrangement consideration was allocated to each deliverable based on the fair value of the individual element. We determined the fair value of the individual elements based on prices at which the deliverable was regularly sold on a stand alone basis.

Property and equipment. Property and equipment items are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of direct labor, any other costs directly attributable to bringing the assets to a working condition for their intended use, and the costs of dismantling and removing the items and restoring the site on which they are located.

Depreciation. Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives.

Available-for-sale financial assets. Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale and that are not classified in any of the previous categories. Our investments in equity securities and certain debt securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes to such assets, other than impairment losses, are recognized in other comprehensive income and presented within equity in the fair value reserve. When an investment is derecognized, the cumulative gain or loss in other comprehensive income is transferred to profit or loss.

Goodwill and brand name assets. We acquired goodwill and brand name assets upon the acquisition of 012 Golden Lines on December 31, 2006. For acquisitions prior to January 1, 2008 (the date of our transition to IFRS), goodwill and brand name assets represent their deemed costs, which represent the amounts recorded under previous U.S. GAAP. Goodwill and brand name assets are measured at cost, less accumulated impairment losses. Other intangible assets that are acquired by us and have infinite useful lives are measured at cost less accumulated amortization and accumulated impairment losses. Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognized in profit or loss as incurred.

Amortization. Amortization is recognized in profit or loss on a straight-line basis (except customer relationships) over the estimated useful lives of the intangible assets other than goodwill and brand name assets from the date they are available for use. Customer relationships are amortized according to the economic benefit expected from those customers each period, which results in accelerated amortization during the early years of relationship. We examine the useful life of an intangible asset that is not periodically amortized in order to determine whether events and circumstances continue to support the decision that the intangible asset has an indefinite useful life.

Provisions. A provision is recognized if, as a result of a past event, we have a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. When the value of time is material, the provision is measured at its present value.

Income tax. Income tax expense is comprised of current and deferred tax. Current and deferred tax expense is recognized in profit or loss except to the extent that it relates 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 substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred taxes are 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 temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by 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.

Share-based compensation. Options granted to employees are measured using the Black-Sholes model. The expected life used by the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioral considerations. The amount recognized as an expense is adjusted to reflect the actual number of share options that vest.

Results of Operations

The following table sets forth our results of operations in NIS in thousands and as a percentage of revenues for the years ended December 31, 2009 and 2008 (IFRS):

	Year ended December 31,
	2008						2009
Revenues:	NIS			%			NIS			%
Broadband		548,979			49.6			609,327			51.9
Traditional voice		557,224			50.4			563,767			48.1
Total revenues		1,106,203			100.0			1,173,094			100.0
Cost and expenses:
Depreciation and amortization		112,027			10.1			97,367			8.3
Salaries		161,556			14.6			157,876			13.5
General and operating expenses		693,773			62.7			748,915			63.8
Other operating expenses		6,705			0.7			2,448			0.2
Total cost and expenses		974,061			88.1			1,006,606			85.8
Operating income		132,142			11.9			166,488			14.2
Finance expense		65,083			5.9			48,800			4.1
Finance income		(8,039	)		(0.8	)		(84,827	)		(7.2	)
Income before income tax		75,098			6.8			202,515			17.3
Income tax		22,333			2.0			55,215			4.7
Net income for the year		52,765			4.8			147,300			12.6

Year Ended December 31, 2008 Compared with Year Ended December 31, 2009

Revenues. Our revenues increased by 6% from NIS 1,106 million for the year ended December 31, 2008 to NIS 1,173 million ($311 million) for the year ended December 31, 2009. The increase was primarily due to the growth in the broadband segment of our legacy Communications Business, including our local telephony services. We expect that our revenues will increase significantly in 2010 as the operations of Bezeq will be consolidated into our financial statements beginning in the 2010 second quarter.

Revenues from our legacy broadband services, including Internet access services and related value-added services, provided to residential and business customers, which represented 52% of our total revenues for the year ended December 31, 2009, increased by 11% from NIS 549 million for the year ended December 31, 2008 to NIS 609 million ($161 million) for the year ended December 31, 2009. The increase was primarily due to an increase in our local telephony services and the continued growth of our broadband customer base.

Traditional voice services revenues, which represented 48% of our total revenues for the year ended December 31, 2009 was NIS 564 million ($149 million), similar to NIS 557 million for the year ended December 31, 2008.

Depreciation and Amortization. We recorded depreciation and amortization expenses of NIS 97 million ($26 million) for the year ended December 31, 2009 compared to NIS 112 million for the year ended December 31, 2008, a decrease of approximately 13%. The decrease was primarily due to the determination of our legacy Communication Business as “held for sale” in connection with the sale of such business which was completed effective as of January 1, 2010 and the cessation of depreciation and amortization from October 25, 2009. We expect that our depreciatio n and amortization expenses will increase significantly in 2010 as the operations of Bezeq will be consolidated into our financial statements beginning in the 2010 second quarter.

Salaries. Salaries remained substantially constant at NIS 158 million ($42 million) for the year ended December 31, 2009 compared to NIS 162 million for the year ended December 31, 2008. We expect that salaries will increase significantly in 2010 as the operations of Bezeq will be consolidated into our financial statements beginning in the 2010 second quarter.

General and operating expenses. Our general and operating expenses increased by 8% from NIS 694 million for the year ended December 31, 2008 to NIS 749 million ($198 million) for the year ended December 31, 2009. The increase was primarily due to the growth in revenues from the broadband segment of our legacy Communications Business, including our local telephony services. We expect that our general and operating expenses will increase significantly in 2010 as the operations of Bezeq will be consolidated into our financial statements beginning in the 2010 second quarter.

Finance Expense. Finance expense decreased by 25% from NIS 65 million for the year ended December 31, 2008 to NIS 49 million ($13 million) for the year ended December 31, 2009. The decrease is primarily attributable to the increase in the market value of our marketable securities in 2009, for which we incurred losses in the 2008 period, and also to the profit from the sale of marketable securities in 2009 as compared to the losses from marketable securities that we incurred in the 2008 period. We expect that our finance expense will increase significantly in 2010 as the operations of Bezeq will be consolidated into our financial statements beginning in the 2010 second quarter.

Finance Income. Finance income increased from NIS 8 million for the year ended December 31, 2008 to NIS 85 million ($22 million) for the year ended December 31, 2009. The increase was primarily due to the increase in the market value of our marketable securities and also to the profit from the sale of marketable securities. We expect that our finance income will increase significantly in 2010 as the operations of Bezeq will be consolidated into our financial statements beginning in the 2010 second quarter.

Income Tax. Income tax expense increased from NIS 22 million for the year ended December 31, 2008 to NIS 55 million ($15 million) for the year ended December 31, 2009. The increase is primarily attributable to the increase in our income from operations and also to the increase in finance income attributable to our marketable securities. We expect that our income tax expenses will increase significantly in 2010 as the operations of Bezeq will be consolidated into our financial statements beginning in the 2010 second quarter.

Net Income. Net income increased from NIS 53 million for the year ended December 31, 2008 to NIS 147 million ($39 million) for the year ended December 31, 2009. The increase is primarily attributable to the increase in income from operations and also to the increased finance income attributable to our marketable securities and decreased finance expense in 2009 compared to 2008. We expect that our net income will increase significantly in 2010 as the operations of Bezeq will be consolidated into our financial statements beginning in the 2010 second quarter.

Seasonality

Our legacy Communication Business experienced seasonal variations in the revenues and operating results of our traditional voice segment. Historically, our legacy Communication Business generated more revenues and profit in the third quarter of the fiscal year, which we believe was the result of extensive use of international telephony and roaming and signaling services during the summer vacation season, mainly in outgoing minutes and roaming services. Therefore, revenues from our traditional voice segment were generally higher in the third quarter, which in turn resulted in our revenues being consistent or slightly down in the fourth quarter.

Bezeq does not experience significant seasonality. In general, Bezeq’s revenues from its cellular mobile phone services are slightly higher in the second and third quarters of the fiscal year than the first and fourth quarters due to different usage patterns prevailing in the summer months compared to the winter months and the holiday season in Israel. In general, Bezeq’s revenues from international communications, Internet and NEP services are affected in a minor way by the seasons and holidays. For example, voice services for the business sector decrease in August and during the Passover holiday; voice services for the private sector increase in the summer months and towards the end of the calendar year; sales of Internet services and NEP equipment usually increase in the fourth quarter; and Internet services for the business sector decrease in the summer months due to the closure of educational institutions.

Impact of Currency Fluctuations and Inflation

We reported our financial results in NIS with regard to payments received in NIS for most of our legacy operations sales, while a significant amount of our expenses were paid in U.S. dollars. Therefore, we are subject to risks caused by fluctuations in the exchange rate between the NIS and the U.S. dollar.

The following table presents information about the rate of inflation in Israel, the rate of depreciation or appreciation of the NIS against the U.S. dollar, and the rate of inflation in Israel adjusted for the depreciation or appreciation:

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

The depreciation of the NIS in relation to the U.S. dollar has the effect of reducing the U.S. dollar value of any of our expenses or liabilities which are payable in NIS, unless those expenses or payables are linked to the dollar. This depreciation also has the effect of decreasing the U.S. dollar value of any asset which consists of NIS or receivables payable in NIS, unless the receivables are linked to the dollar. Conversely, the appreciation of the NIS in relation to the U.S. dollar has the effect of increasing the dollar value of any unlinked NIS assets and the dollar value of any unlinked NIS liabilities and expenses.

During the years 2008 and 2009, the NIS appreciated against the U.S. dollar, which resulted in a decrease in the NIS value of our U.S. dollar revenues and expenses.

From time to time we use derivative financial instruments, such as forward currency contracts to hedge certain of our risks associated with foreign currency fluctuations. These derivative financial instruments are carried at fair value.

Because exchange rates between the NIS and the U.S. dollar fluctuate continuously, exchange rate fluctuations, particularly larger periodic depreciations, may have an impact on our profitability and period-to-period comparisons of our results in U.S. dollars. We cannot assure you that in the future our results of operations may not be materially adversely affected by currency fluctuations. We recommend comparing our results between periods based on our NIS reports.

For a discussion regarding Bezeq’s exposure to currency fluctuations and inflation, see Item 11 “Quantitative and Qualitative Disclosures About Market Risks.”

Effective Corporate Tax Rate

Israeli companies are generally subject to income tax on their taxable income. The applicable rate for 2009 was 26% and it was reduced to 25% in 2010. In July 2009, the Israeli Parliament passed the Law for Economic Efficiency (Amended Legislation for Implementing the Economic Plan for 2009 and 2010), 2009, which prescribes, among other things, an additional gradual reduction in the rates of the Israeli corporate tax and real capital gains tax starting in 2011 to the following tax rates: 2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and thereafter - 18%. See Item 10E. “Additional Information - Taxation - Israel Tax Considerations.”

As of December 31, 2009, we had tax loss carryforwards in the amount of NIS 25.7 million ($6.8 million) compared to NIS 52.6 as of December 31, 2008. In addition, our former subsidiary, 012 Telecom Ltd., had tax loss carryforwards in the amount of NIS 27.8 million ($7.4 million) compared to NIS 25.2 million as of December 31, 2008. Under current Israeli tax laws, tax loss carryforwards do not expire and may be offset against future taxable income.

Conditions in Israel

We are incorporated, based in and currently derive substantially all of our revenues from markets within the State of Israel. See Item 3.D. “Key Information – Risk Factors – Risks Relating to Our Operations in Israel” for a description of governmental, economic, fiscal, monetary or political polices or factors that have materially affected or could materially affect our operations.

Trade Relations

Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation. Israel is a member of the World Trade Organization and is a signatory to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriers among its members. In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada and Japan. These preferences allow Israel to export products covered by such programs either duty-free or at reduced tariffs.

Israel and the European Union Community concluded a Free Trade Agreement in July 1975, which confers certain advantages with respect to Israeli exports to most European countries and obligates Israel to lower its tariffs with respect to imports from these countries over a number of years. In 1985, Israel and the United States entered into an agreement to establish a Free Trade Area. The Free Trade Area has eliminated all tariff and specified non-tariff barriers on most trade between the two countries. On January 1, 1993, an agreement between Israel and the European Free Trade Association, known as EFTA, established a free-trade zone between Israel and the EFTA nations. In November 1995, Israel entered into a new agreement with the European Union, which included a redefinement of rules of origin and other improvements, including providing for Israel to become a member of the research and technology programs of the European Union. In recent years, Israel has established commercial and trade relations with a number of other nations, including China, India, Russia, Turkey and other nations in Eastern Europe and Asia.

Recently Issued Accounting Standards

In April 2009, the IASB adopted 15 amendments to various IFRS on a wide range of accounting issues. The amendments apply to periods beginning on or after January 1, 2010 and permit early adoption, subject to the specific conditions of each amendment. The following amendments may be relevant to us and are expected to have an effect on our financial statements:

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

Amendment to IAS 36, Impairment of Assets. In accordance with the amendment, for purposes of goodwill impairment testing the largest cash-generating unit to which goodwill should be allocated is the operating segment level as defined in IFRS 8 before applying the aggregation criteria in Paragraph 12 of IFRS 8. The amendment is to be applied prospectively for annual periods beginning on or after January 1, 2010. We are considering the implications of the standard and its impact, if any, on our company.

IFRS 9, Financial Instruments. This standard is the first part of a comprehensive project to replace IAS 39 Financial Instruments: Recognition and Measurement and it replaces the requirements included in IAS 39 regarding the classification and measurement of financial assets. In accordance with IFRS 9, there are two principal categories for measuring financial assets: amortized cost and fair value, with the basis of classification for debt instruments being the entity’s business model for managing financial assets and the contractual cash flow characteristics of the financial asset. In accordance with IFRS 9, an investment in a debt instrument will be measured at amortized cost if the objective of the entity’s business model is to hold assets in orde r to collect contractual cash flows and the contractual terms give rise, on specific dates, to cash flows that are solely payments of principal and interest. All other financial assets are measured at fair value through profit or loss. Furthermore, embedded derivatives are no longer separated from hybrid contracts that have a financial asset host. Instead, the entire hybrid contract is assessed for classification using the principles above. In addition, investments in equity instruments are measured at fair value with changes in fair value being recognized in profit or loss. Nevertheless, IFRS 9 allows an entity on the initial recognition of an equity instrument not held for trading to elect irrevocably to present fair value changes in the equity instrument in other comprehensive income where no amount so recognized is ever classified to profit or loss at a later date. Dividends on equity instruments measured through other comprehensive income are recognized in profit or loss unless they clearly constitute a return on an initial investment. IFRS 9 removes financial liabilities from its scope.

IFRS 9 is effective for annual periods beginning on or after January 1, 2013, but may be applied earlier, subject to providing disclosure and at the same time adopting other IFRS amendments as specified in IFRS 9. IFRS 9 is to be applied retrospectively other than in a number of exceptions as indicated in the transitional provisions included in the Standard. In particular, if an entity adopts IFRS 9 for reporting periods beginning before January 1, 2012 it is not required to restate prior periods. We expect IFRS 9 to impact the classification and measurement of financial assets, however the extent of the impact has not yet been determined.

B. Liquidity and Capital Resources

From our inception in 1999 until our initial public offering in October 2007, we operated as a subsidiary of Internet Gold. From the commencement of our operations until 2003, when we began to generate positive operating cash flow, our operations were financed by our parent from its financial resources.

During the period from March 2007 to May 2007, we issued a total of NIS 425 million of Series A Debentures. The Series A Debentures were issued to repay the indebtedness we incurred in connection with the acquisition of 012 Golden Lines. The Series A Debentures, together with the accrued interest, are payable in eight equal payments on March 15 of each year starting from March 15, 2009 and are linked to the Israeli consumer price index. The Series A Debentures bear annual interest at the rate of 5.85%, which was decreased to an annual interest rate of 4.75% when they were listed for trading on the TASE following our dual listing on the TASE after our initial public offering. The Series A Debentures allow us to issue additional Series A Debentures on the same terms, providing that such actions d o not cause the credit rating of the Series A Debentures to fall below the rating existing prior to the issuance of the additional series. We are prohibited from creating any liens on our assets without the prior approval of a majority of the holders of the Series A Debentures. We are entitled to make an early redemption of the Series A Debentures, in whole or in part, in the last two weeks of each quarter upon payment of the higher of the principal, accrued interest and linkage differences as of that date, or the present value of future cash flows as of that date based on a yield of Israeli Government Bonds + 0.3%. The Series A Debenture holders are entitled to demand the immediate repayment of the Series A Debentures or are obligated to do so if a resolution is passed in a general meeting of the Series A Debenture holders by a majority vote in the event of a winding-up, dissolution or liquidation of our company, non-payment of any amounts due and payable, foreclosure of our principal assets, or a breach of a material provisions of the Series A Debenture agreement. As of the date of this annual report we are in compliance with all of the above covenants. In June 2010, Midroog Ltd., an Israeli financial rating company which is affiliated with Moody’s, issued the A2 rating to our Series B debentures.

On March 31, 2007, Internet Gold provided us with a long-term loan of NIS 100.6 million ($26.6 million), bearing the prime interest rate published from time to time by the Bank of Israel.

In November 2008, our Board of Directors authorized the repurchase of up to NIS 100 million (approximately $26.5 million) of our Series A Debentures. The purchases may be made from time to time by us or one of our wholly-owned subsidiaries in the open market on the TASE. The timing and amount of any purchases are determined by our management based on its evaluation of market conditions and other factors. As of December 31, 2009, we had repurchased NIS 16,150,943 Series A Debentures under the program at a total purchase price of approximately NIS 15.9 million (approximately $4.2 million), or an average price of NIS 98.5 per bond. As of December 31, 2009, NIS 408,848,857 of Series A Debentures were outstanding.

As part of our acquisition of the controlling interest in Bezeq, on November 16, 2009, we entered into an agreement to sell our legacy Communications Business (excluding certain retained indebtedness and liabilities) to a wholly-owned subsidiary of Ampal, for NIS 1.2 billion (approximately $318 million). The sale of our legacy Communications Business to Ampal was completed on January 31, 2010, effective as of January 1, 2010.

In November 2009, Internet Gold provided to us a NIS 217.5 million ($58 million) loan, bearing interest equal to the yield on Israel Government bonds with an average maturity that is closest to the maturity date of the loan, as such yield is reflected in the average closing price of Israel Government bonds for the seven trading days preceding the grant of the loan.

As at December 31, 2009, we had an outstanding balance payable to Internet Gold for shareholder loans of NIS 326 million ($ 86 million).

On March 24, 2010, we completed a private placement of 3,478,000 of our ordinary shares to Israeli institutional investors and our controlling shareholder Internet Gold. The offering price of NIS 116 (approximately $31) per ordinary share was determined by means of a tender by third party, institutional investors. Based on Internet Gold’s irrevocable undertaking to subscribe for approximately 75% of the offering on the same terms and conditions negotiated with the third-party institutional investors, Internet Gold purchased 2,599,310 ordinary shares, which represent approximately 75% of the shares sold in the private placement. The private placemen t proceeds from Internet Gold were paid to us by way of our partial repayment of the loan which was provided to us in March 2007 and our full repayment of the loan which was provided to us in November 2009, as described above.

As at May 12, 2010, the remaining outstanding balance of the March 2007 loan was fully repaid.

As of December 31, 2008 and 2009, we had cash and cash equivalents and marketable securities of NIS 289 million and NIS 1.04 billion ($275 million), respectively. The increase from the 2008 to 2009 period was due our need to increase our cash and cash equivalents position in order to be in compliance with the financial covenants under the agreement we entered into in connection with our acquisition of the controlling interest in Bezeq. These covenants provide in part that we maintain NIS 1 billion of cash and cash equivalents. Our cash position also reflects our short-term bank debt in the amount of NIS 448 million ($ 119 million) and the NIS 217.5 million ($58 million) loan provided to us by Internet Gold in November 2009.

Our lines of credit bear interest at annual average rate of 2.05%. In connection with our credit lines, we have agreed not to pledge any of our assets to any person. In addition, pursuant to the terms of our credit lines, Internet Gold is required to maintain its ownership position in our company above 51%. These credit lines do not have a specified maturity date, but they may be called by each bank at any time.

We made capital expenditures for property and equipment in connection with our legacy Communications Business of NIS 47 million in the year ended December 31, 2008 and NIS 46 million ($12 million) in the year ended December 31, 2009.

On August 4, 2009, Bezeq’s board of directors adopted a dividend distribution policy according to which Bezeq will distribute to its shareholders, semiannually, a dividend at a rate of 100% of its semiannual net income after minority share in accordance with Bezeq’s consolidated financial statements. The implementation of the dividend policy is subject to the provisions of applicable law, including the dividend distribution tests set forth in the Israeli Companies Law, as well as the estimate of Bezeq’s board of directors regarding Bezeq’s ability to meet its existing and anticipated liabilities from time to time, while taking into consideration Bezeq’s anticipated cash flow, operations and liabilities, cash reserves, its plans and its condition from time to time. Each dividend distribu tion is subject to the approval of Bezeq’s shareholders, pursuant to Bezeq’s articles of association. On April 8, 2010, Bezeq’s shareholders approved the distribution of a dividend of NIS 0.9170679 (approximately $0.25) per share (a total of approximately NIS 2.453 billion or $656 million) to Bezeq shareholders of record on April 15, 2010, which was paid on May 3, 2010. We received NIS 750 million (approximately $199 million) in connection with such dividend distribution.

Over the next 12 months, we expect that the dividends that we will receive from our controlling interest in Bezeq, along with our existing cash and cash equivalents and marketable securities, will be sufficient to fund our operations. We believe that Bezeq and its subsidiaries will be able to funds their operations in the next 12 months with their cash flows from operating activities.

Financing for the Acquisition of the Bezeq Shares

On April 14, 2010, we completed the acquisition of 30.44% of Bezeq’s outstanding shares from Ap.Sb.Ar. Holdings Ltd. for an aggregate cash purchase price of approximately NIS 6.5 billion (approximately $1.72 billion) and became the controlling shareholder of Bezeq. The acquisition was funded with the proceeds that we received from the sale of our legacy Communications Business and the following loans:

●

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

(i)

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

(ii)

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

(iii)

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

(iv)

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

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

SP2’s undertakings and limitations under the loan agreement include, among other things: (a) the obligation to provide the lenders with certain financial information; (b) limitations as to the use of amounts which will be received from Bezeq and the ability to withdraw and distribute them to SP2’s shareholders; and (c) an undertaking to object to certain changes in Bezeq’s incorporation documents if the lenders find such changes would prejudice their rights. In certain situations, payments from Bezeq must be used for early repayment of the loan or may not be withdrawn by SP2 to its parent company.

Upon the occurrence of certain events of default, but subject to certain conditions, the lenders are entitled to call the loans for immediate repayment, subject to certain procedures and remedy periods set forth in agreement, including upon the following events:

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

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

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

●

On February 19, 2010, our wholly-owned subsidiary, SP1, entered into a loan agreement with certain entities from the Migdal Insurance and Financial Holdings Ltd. or Migdal, group. According to the Migdal loan agreement, on the closing date of the acquisition of our Bezeq interest, SP1 was provided a loan of NIS 500 million. The loan will bear annual interest at a rate of 6.81%, linked to the Israeli consumer price index. In addition, a special interest payment is payable on the date of the final repayment of the loan in order to ensure a certain internal rate of return, or IRR, of the loan principal (without linkage to the Israeli consumer price index), which will be calculated according to a formula that takes into account amounts that SP1 may pay due to early repayment at Migdal’s demand and amounts with respect to which Migdal may waive its right to demand early repayment.& #160; However, in any event the abovementioned IRR will not exceed the IRR which derives from a fixed interest of 6.95%.

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

The Migdal loan is secured by a first ranking pledge on SP1’s rights in the bank account into which all payments from SP2 are made, except for certain defined expenses, referred to as the Pledged Bank Account. SP1 undertook to maintain in the Pledged Bank Account minimum funds of NIS 22.5 million (linked to the Israeli consumer price index). The Migdal facility agreement includes limitations on distributions and payments from the Pledged Bank Account (including conditions as to total debt to EBITDA ratios that relate to SP1).

The Migdal loan agreement contains certain undertakings and covenants, including, among others, (i) certain undertakings for SP1 and its direct and indirect controlling shareholders to maintain (indirect) control in Bezeq, (ii) limitations on amendments to the SP2 loan described above; and (iii) an undertaking to comply with the terms of the regulatory approvals granted with respect to purchase of control in Bezeq.

Cash Flows

The following table summarizes our cash flows for the periods presented:

	Year ended December 31,
	2008			2009
	(NIS in thousands)
Net cash provided by operating activities		217,643			249,285
Net cash (used in) provided by investing activities		(345,260	)		63,258
Net cash (used in) provided by financing activities		(21,594	)		561,618
Net (decrease) increase in cash and cash equivalents		(149,211	)		874,161
Effect of exchange rate changes		(20,032	)		5,789
Cash and cash equivalents at beginning of period		229,895			60,652
Cash and cash equivalents at end of period (*)		60,652			940,602

(*) As at December 31, 2009, NIS 934,000 is presented under assets classified as held-for-sale.

Operating Activities

Net cash provided by operating activities in 2008 and 2009 was NIS 218 million and NIS 249 million ($66 million), respectively. Our revenues increased by 6% from to NIS 1,106 million for the year ended December 31, 2008 to NIS 1,173 million ($311 million) for the year ended December 31, 2009. The increase in our net cash provided by operating activities is primarily due do an increase in our net income from NIS 53 million for the year ended December 31, 2008 to NIS 147 million ($39 million) for the year ended December 31, 2009.

Investing Activities

Net cash used in our investing activities was NIS 345 million in 2008. In 2008, most of the cash used in investing activities was used for investment in marketable securities and the remainder was used for the purchase of property and equipment, intangible assets and deferred expenses. Net cash provided by investing activities was NIS 63 million ($17 million) in 2009. This amount was attributable to NIS 451 million ($120 million) proceeds from the sale of marketable securities, which was offset in part by NIS 158 million ($42 million) used for the purchase of property and equipment, intangible assets and deferred expenses.

Financing Activities

Net cash used in financing activities was NIS 22 million for the year ended December 31, 2008. In 2008, most of the cash used in financing activities was for repurchase of NIS 16 million of Series A Debentures. Net cash provided by financing activities was NIS 562 million ($149 million) for the year ended December 31, 2009. This amount was attributable to NIS 448 million ($119 million) of short-term bank credit and the NIS 217.5 million ($58 million) loan from Internet Gold in November 2009, which amounts were offset in part by the repayment of NIS 55 million ($14 million) of our Series A Debentures and NIS 45 million ($12 million) interest paid to our Series A Debentures owners.

C. Research and Development, Patents and Licenses

We did not engage in any research and development during the last three fiscal years.

D. Trend Information

We experienced growth in our legacy Communications Business during the two fiscal years prior to its sale effective as of December 31, 2009. Our revenues increased from NIS 1,106 million for the year ended December 31, 2008 to NIS 1,173 million ($311 million) for the year ended December 31, 2009. The increase was primarily due to the growth in the broadband segment of our legacy Communications Business, including our local telephony services

Bezeq experienced growth in its revenues in the last two fiscal years. Bezeq’s revenues increased from approximately NIS 11.1 billion for the year ended December 31, 2008 to approximately NIS 11.5 billion for the year ended December 31, 2009, primarily due to an increase in revenues from its cellular segment. Financial information regarding Bezeq’s operations during the last three fiscal years is set forth below. Bezeq’s financial statements are prepared in accordance with IRFS.

Financial Information Regarding Bezeq’s Operations

Year ended December 31, 2009

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

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

Year ended December 31, 2008***

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

**	Details of the nature of the adjustments to the consolidated – transactions between areas of activity

***	Reclassified

Year ended December 31, 2007***

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

**	Details of the nature of the adjustments to the consolidated – transactions between areas of activity

***	Reclassified

Principal results and operational data

A.	Bezeq Fixed-Line (Bezeq’s activity as domestic operator)

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

*	Not including revenue from data transmission and communication services, internet services, services to communication operators, contract work and other revenue.

**	Reclassification of the sum of approximately NIS 26 million, spread over the four quarters of 2008, for financing costs for provisions for termination of labor relations under early retirement, presented in the past under the item of operating expenses (income) net.

B. Pelephone

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

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

C.	Bezeq International

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

*	The item also includes long-term investments in assets.

DBS

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

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

E. Off-Balance Sheet Arrangements

We are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.

F. Tabular Disclosure of Contractual Obligations

The following table summarizes our minimum contractual obligations and commercial commitments as of December 31, 2009 and the effect we expect them to have on our liquidity and cash flow in future periods:

Contractual Obligations		2010	2011-2012	2013-2014	more than 5 years
Contractual Obligations	Total	less than 1 year	1-3 Years	3-5 Years	more than 5 years
	(NIS in thousands)
Long-term debt obligations including interest	807,106	407,710	143,977	133,132	122,287

As a result of the sale of our legacy Communications Business effective as of January 1, 2010, we assigned substantially all of our operating obligations to Ampal, while maintaining our long-term financial arrangements. In addition, to facilitate the funding of our acquisition of the controlling interest in Bezeq, we incurred additional short-term and long-term debt. See Item 5B “Operating and Financial Review and Prospects - Liquidity and Capital Resources.”

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

Set forth below are the name, age, principal position and a biographical description of each of our directors and executive officers:


Name	Age		Position
Shaul Elovitch(1)		62	Chairman of the Board of Directors
Eli Holtzman		62	Chief Executive Officer
Hana Rado (1)(2)(3)(4)		51	Outside Director
Debbie Saperia (2)(3)(4)		43	Outside Director
Aliza Schloss(1)(3)(4)		57	Director
Doron Turgeman(3)(4)		42	Chief Financial Officer
Anat Winner(2)(3)(4)		51	Director

______________

(1) Member of our Incentive Plan Committee

(2) Member of our Audit Committee.

(3) Member of our Investment Committee.

(4) Member of our Disclosure Committee.

Mr. Shaul Elovitch, Mr. Eli Holtzman, Ms. Aliza Schloss, Mr. Doron Turgeman and Ms. Anat Winner will serve as directors until our 2010 annual general meeting of shareholders. Ms. Hana Rado and Ms. Debbie Saperia will each serve as an outside director pursuant to the provisions of the Israeli Companies Law for an initial three-year term until January 2011 (see Item 6C. “Directors, Senior Management and Employees - Board Practices - Outside and Independent Directors - Outside Directors”). There are no family relationships among any of our directors or executive officers.

Following the sale of our legacy Communications Business, Mr. Eli Holtzman (the Chief Executive Officer of Internet Gold) was appointed as our new Chief Executive Officer and Mr. Doron Turgeman (the Deputy Chief Executive Officer and Chief Financial Officer of Internet Gold) was appointed as our Chief Financial Officer. At such time, Stella Handler, our former Chief Executive Officer, and Doron Ilan, our former Chief Financial Officer, resigned from such positions and were hired by Ampal as part of its acquisition of our legacy Communications Business.

Shaul Elovitch has served as the chairman of our board of directors since March 2000 and as chairman of Internet Gold since its inception in 1992. Mr. Elovitch is the controlling shareholder of Eurocom Communications and its affiliated companies, one of Israel’s largest private communications groups. Mr. Elovitch has served as the chairman of the board of directors and chief executive officer of Eurocom Holdings (1979) Ltd., or Eurocom Holdings, and Eurocom Communications, the parent company of Internet Gold, since 1985. Mr. Holtzman also serves as a director of Bezeq and various companies within the Bezeq Group. Mr. Elovitch also serves as a member of the board of directors of Space Communications Ltd., Satcom Systems Ltd. and E.G.R.E. Ltd and other various companies of the Eurocom Group.

Eli Holtzman has served as our chief executive officer since February 2010. Previously, Mr. Holtzman served as the vice chairman of our board of directors from April 2000 until February 2010 and as our chief executive officer from March 2000 until January 2007. Mr. Holtzman co-founded and has been the chief executive officer of Internet Gold since 1992 and a director of Internet Gold since July 1999. Mr. Holtzman also serves as chief executive officer and director of GoldMind Media Ltd., or GoldMind, our sister company, and serves as director for various companies of the Internet Gold group. Mr. Holtzman also serves as a director of Bezeq and various companies within the Bezeq group. Mr. Holtzman holds a B.Sc. degree in Chemistr y and Pharmaceuticals from Illinois University.

Hana Rado has served as an outside director since January 2008 and is a member of our audit committee. Ms. Rado has served as the chief operating officer and chief financial officer of McCann Erickson Israel, an advertising group, since 2000. From 1995 to 2000, Ms. Rado was employed by the Strauss group in several positions, such as the financial manager of sales and distribution division, SAP project manager and the finance manager of the food division. Ms. Rado serves as an outside director of Excellence Nessuah Brokerage Services Ltd. Ms. Rado holds a B.A. degree in biology, an M.B.A. degree in accountancy and finance, and is a certificated teacher, all from Tel Aviv University.

Debbie Saperia has served as an outside director since January 2008 and is a member of our audit committee. Since June 2009, Ms. Saperia has also served as a director of First International Underwriters and Investment Ltd. (part of FIBI bank). Ms. Saperia has served as the general manager of Yarden Nahara Ltd., a private company that is engaged in marketing and sale of products to Evangelical Christians, since 2005. From 1993 to 1999, Ms. Saperia was an associate at Rosensweig & Co - Law Offices. From 2000 to 2004, Ms. Saperia served as the business development manager of Promedico Limited and served as a director of a number of companies within the Promedico group. From 2001 to 2004, Ms. Saperia served as director and gener al manager of Vitamedic (1999) Limited. Ms. Saperia holds a LL.B (Hons.) degree from the University of Manchester.

Aliza Schloss has served as a director since January 2008. Ms. Schloss has served as an Executive Vice President of the Eurocom group since March 2009 and as director and/or officer of various other companies within the Eurocom group since 2005. Ms. Schloss served as a director of Internet Gold from July 2005 until February 2010. Ms. Schloss also serves as a member of the board of directors of Satcom Systems Ltd and Sahar Investments Ltd. From 2002 to 2005, Ms. Schloss served as an independent director, chairman of the audit committee and member of various committees of the Israel Electric Company Ltd. From October 2000 to October 2003, Ms. Schloss served as a director , chairman of the audit committee and member of various committees of Bezeq. From 2000 to 2003, Ms. Schloss served as an independent director and member of the audit committee of several companies, including Hiram Gat Engineering & Construction Co., Ltd. and F.I.B.I Lamelcha - The First International Bank Ltd. and LAHAK Management of Trust Funds Ltd. – Bank Hapoalim. Ms. Schloss holds a Ph.D. degree in political science and public administration from the Hebrew University of Jerusalem. Ms. Schloss also holds an M.A. degree in political science and M.P.A. degree in public administration, both from the Hebrew University of Jerusalem, and a B.Sc. degree in biology from the Ben-Gurion University of the Negev.

Doron Turgeman has served as our chief financial officer since February 2010. Previously, Mr. Turgerman served as our chief financial officer and vice president of finance from May 2001 until January 2007 and served as a member of our board of directors from January 2008 to February 2010. Mr. Turgeman has served as Internet Gold’s deputy chief executive officer since October 2004 and as its chief financial officer since May 2001. Mr. Turgeman has also served as deputy chief executive officer and chief financial officer of GoldMind since October 2004. Mr. Turgeman also provides financial services to Eurocom Digital Communications Ltd., which is part of the Eurocom group. Prior to joining the Internet Gold group, Mr. Turgema n served in senior financial management positions in one of Bezeq subsidiaries and in the Israeli postal authorities. Mr. Turgeman holds a B.A. degree in economics and accounting from the Hebrew University of Jerusalem and is a certified public accountant (Israel).

Anat Winner has served as a director since October 2007 and is a member of our audit committee. Ms. Winner has been self employed as a business advisor since July 2003 and serves as a director of Internet Gold and Magal Security Systems Ltd., publicly traded on the NASDAQ Global Market and TASE. From October 2001 to July 2003, Ms. Winner served as chief executive officer and chief financial officer of Israel News Ltd. From 1999 to October 2001, Ms. Winner served as chief financial officer of DBS, an Israeli company that is engaged in setting up and operating direct broadcasting satellite television systems. Ms. Winner holds a B.A. degree in Accounting and Economics from Haifa University and has been a certified public accountant (CPA) sinc e 1986.

Set forth below are the name, age, principal position and a biographical description of each of the principal executives of Bezeq, our principal subsidiary:


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

Shlomo Rodav has served as the chairman of the board of directors of Bezeq since September 2007 and serves as a director of various companies in the Bezeq group. Between the years 1996 and 2007, Mr. Rodav served as the chairman of the board of directors of Kror Holdings Ltd. and Jafora-Tabori Ltd., both of which are privately held Israeli companies. Between the years 2003 and 2005, Mr. Rodav served as the chairman of the board of directors and chief executive office of Gilat Satellite Networks Ltd., an Israeli company listed on NASDAQ (symbol: GILT). Mr. Rodav holds a B.A. degree in economics from Tel Aviv University and an M.B.A. degree from Colombia University.

Abraham Gabbay has served as the chief executive officer of Bezeq since November 2007 and serves as a director in various companies of the Bezeq group. Between the years 2003 and 2007, Mr. Gabby served as the chief executive officer of Bezeq International. Mr. Gabbay holds a B.A. degree in economics and an M.B.A. degree, both from the Hebrew University of Jerusalem.

B. Compensation

The aggregate direct compensation we paid to our directors and executive officers as a group (including our former executives prior the sale of our legacy Communications Business to Ampal) (15 persons) for the year ended December 31, 2009 was approximately NIS 13 million ($ 3.4 million). This amount includes expenses incurred for cars made available to officers and expenses related to salaries, but does not include expenses such as business travel, professional and business association dues and expenses reimbursed to officers and other fringe benefits commonly reimbursed or paid by companies in Israel. As of December 31, 2009, the aggregate amount set aside or accrued for pension, retirement, recreation payments and vacation or similar benefits for our directors and executive officers as a group (8 persons ) was approximately NIS 1.2 million ($0.33 million).

During the year ended December 31, 2009, we paid to our outside directors, as well as to our independent director, an annual fee of NIS 51,670 ($13,687) and a per meeting attendance fee of NIS 1,988 ($ 527). Such fees are paid based on the fees set forth in regulations promulgated under the Israeli Companies Law. Our other non-employee directors do not receive compensation for their services on our board of directors or any committee of our board of directors. We are exempt from the requirements of the NASDAQ Listing Rules with regard to the process for compensation of officers, since we are a controlled company, within the meaning of NASDAQ Listing Rule 5615(c)(1). See Item 16G. “Corporate Governance - NASDAQ Exemptions for a Controlled Company.”

C. Board Practices

Board of Directors

According to the Israeli Companies Law-1999, or the Israeli Companies Law, and our articles of association, the management of our business is vested in our board of directors. Our board of directors may exercise all powers and take all actions that are not specifically granted to our shareholders. Our executive officers are responsible for our day-to-day management and have individual responsibilities established by our chief executive officer and the board of directors. Executive officers are appointed by and serve at the discretion of our board of directors, subject to any applicable agreements.

Election of Directors

Our articles of association provide for a board of directors consisting of no less than two and no more than ten directors or such other number as may be determined from time to time at a general meeting of shareholders. Our current board of directors consists of seven directors.

In accordance with our articles of association and the Israeli Companies Law, all of our directors (other than our outside directors) are elected at annual meetings of our shareholders, which are required to be held at least once during every calendar year and not more than 15 months after the last preceding meeting. Except for our outside directors, our directors are elected by a vote of the holders of a majority of the voting power represented and voting at such meeting and hold office until the next annual meeting of shareholders following the annual meeting at which they were appointed. The general meeting of shareholders may remove any director from office by an ordinary resolution, subject to applicable law. Our board of directors may temporarily fill vacancies in the board of directors until the ne xt general meeting at which directors are appointed, provided that the total number of directors does not exceed the maximum number permitted under our articles of association. The board of directors is entitled to remove from office any director appointed by it.

The board of directors of an Israeli public company is required to determine that at least one or more directors will have “accounting and financial expertise,” as defined by regulations promulgated under the Israeli Companies Law. Our board of directors determined, accordingly, that at least two directors must have “accounting and financial expertise.” Our Board of Directors has further determined that Mr. Shaul Elovitch, Ms. Aliza Schloss Ms. Hana Rado and Ms. Anat Winner have the requisite “accounting and financial expertise.”

As a controlled company within the meaning of the NASDAQ Listing Rules, we are exempt from the NASDAQ requirement regarding the nomination process of directors, and instead, follow Israeli law and practice, in accordance with which directors may be recommended by our board of directors for election by our shareholders. See Item 16G. “Corporate Governance - NASDAQ Exemptions for a Controlled Company.”

Outside Directors

Under the Israeli Companies Law, companies incorporated under the laws of the State of Israel whose shares have been offered to the public are required to appoint at least two outside directors. The Israeli Companies Law provides that a person may not be appointed as an outside director if the person, or the person’s relative, partner, employer or an entity under that person’s control, has or had during the two years preceding the date of appointment any affiliation with the company, or any entity controlling, controlled by or under common control with the company. The term “relative” means a spouse, sibling, parent, grandparent, child or child of spouse or spouse of any of the above. The term “affiliation” includes an employment relationship, a business or professional relationship maintained on a regular basis, control and service as an office holder, as defined in the Israeli Companies Law. Under the Israeli Companies Law, the term “office holder” includes a director, general manager, chief business manager, deputy general manager, vice general manager, or any person filling any of these positions in a company even if he or she holds a different title, and also includes any other manager directly subordinate to the general manager. Regulations promulgated under the Israeli Companies Law include certain additional relationships that would not be deemed an “affiliation” with a company for the purpose of service as an outside director.

In addition, no person may serve as an outside director if the person’s position or other activities create, or may create, a conflict of interest with the person’s responsibilities as director or may otherwise interfere with the person’s ability to serve as director. If, at the time an outside director is appointed all members of the board of directors are of the same gender, then that outside director must be of the other gender. A director of one company may not be appointed as an outside director of another company if a director of the other company is acting as an outside director of the first company at such time.

At least one of the outside directors must have “accounting and financial expertise” and any other outside director must have “accounting and financial expertise” or “professional qualification,” as such terms are defined by regulations promulgated under the Israeli Companies Law. However, Israeli companies listed on certain stock exchanges outside Israel, including The NASDAQ Global Market, such as our company, are not required to appoint an outside director with ‘‘accounting and financial expertise’’ if a director with accounting and financial expertise who qualifies as an independent director for purposes of audit committee membership under the laws of the foreign country in which the stock exchange is located serves on its board of directors. All of the outside directors of such a company must have ‘‘professional qualification.’’

The outside directors are elected by shareholders at a general meeting, provided that either:

●

The majority of shares voting on the matter (not including abstentions), including at least one-third of the shares of the non-controlling shareholders voting on the matter, vote in favor of the outside director; or

●

The majority of shares voting on the matter (not including abstentions) vote in favor of the outside director and the total number of ordinary shares held by non-controlling shareholders that voted against the election of the outside director does not exceed one percent of all of the voting rights in the company.

In general, outside directors serve for a three-year term and may be reelected to one additional three-year term, if certain conditions are met. However, Israeli companies listed on certain stock exchanges outside Israel, including the NASDAQ Global Market, such as our company, may appoint an outside director for additional terms of not more than three years subject to certain conditions. Such conditions include the determination by the audit committee and board of directors, that in view of the director’s professional expertise and special contribution to the company’s board of directors and its committees, the appointment of the outside director for an additional term is in the best interest of the company.

Outside directors can be removed from office only by the same special percentage of shareholders as can elect them, or by a court, and then only if the outside directors cease to meet the statutory qualifications with respect to their appointment or if they violate their duty of loyalty to the company. If an outside directorship becomes vacant, the board of directors is required under the Israeli Companies law to convene a shareholders meeting immediately to appoint a new outside director.

Each committee of the board of directors that is authorized to exercise powers vested in the board of directors must include at least one outside director, and the audit committee must include all the outside directors. An outside director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with such service.

A company may not engage an outside director as an office holder and may not employ or receive services from that person for consideration, either directly or indirectly, including through a corporation controlled by that person, for a period of two years from the termination of his or her service as an outside director.

An outside director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with such service.

Ms. Rado and Ms. Saperia each serve as an outside director pursuant to the provisions of the Israeli Companies Law for an initial three-year term until January 2011. Ms. Rado has “accounting and financial expertise,” and Ms. Saperia has “professional qualification,” as such terms are defined under the Israeli Companies Law.

Independent Directors

NASDAQ Listing Rules require us to establish an audit committee comprised of at least three members and only of independent directors each of whom satisfies the respective “independence” requirements of the Securities and Exchange Commission and NASDAQ Listing Rules.

Because Internet Gold owns more than 50% of our ordinary shares, we are considered a “controlled company” within the meaning of NASDAQ Listing Rules. Accordingly, we are exempt from certain requirements under NASDAQ Listing Rules, such as the requirement to have a majority of independent directors on our board of directors. See Item 16G. “Corporate Governance - NASDAQ Exemptions for a Controlled Company.” If the “controlled company” exemption would cease to be available to us under NASDAQ Listing Rules, we may instead elect to follow Israeli law and would not be required to elect any additional independent directors.

An Israeli company whose shares are publicly traded may elect to adopt a provision in its articles of association pursuant to which a majority of its board of directors will constitute individuals complying with certain independence criteria prescribed by the Israeli Companies Law.

Our Board of Directors has determined that each of Ms. Rado and Ms. Saperia (both outside directors under Israeli law) and Ms. Winner qualifies as an independent director under the requirements of the Securities and Exchange Commission and NASDAQ.

Audit Committee

Under the Israeli Companies Law, the board of directors of a public company must establish an audit committee. The audit committee must consist of at least three directors and must include all of the outside directors. The audit committee may not include the chairman of the board of directors, any director employed by the company or providing services to the company on an ongoing basis, or a controlling shareholder or any of the controlling shareholder’s relatives.

In addition, the NASDAQ Listing Rules require us to establish an audit committee comprised of at least three members, all of whom must be independent directors, each of whom is financially literate and satisfies the respective “independence” requirements of the Securities and Exchange Commission and NASDAQ and one of whom has accounting or related financial management expertise at senior levels within a company.

Our audit committee assists our Board of Directors in overseeing the accounting and financial reporting processes of our company and audits of our financial statements, including the integrity of our financial statements, compliance with legal and regulatory requirements, our independent registered public accountants’ qualifications and independence, the performance of our internal audit function and independent registered public accountants, finding any defects in the business management of our company and proposing to our Board of Directors ways to correct such defects, approving related-party transactions as required by Israeli law, and such other duties as may be directed by our Board of Directors.

Our audit committee consists of three members of our Board of Directors who satisfy the respective “independence” requirements of the Securities and Exchange Commission, NASDAQ and Israeli law for audit committee members. Our current audit committee members are Ms. Rado and Ms. Saperia, our outside directors under Israeli law, and Ms. Winner, who serves as the chairperson of the audit committee. Our board of directors has determined that Ms. Winner qualifies as an audit committee financial expert, as defined by rules of the Securities and Exchange Commission. The audit committee meets at least once each quarter. The audit committee has adopted an audit committee charter as required by NASDAQ listing rules.

Investment Committee

Our Board of Directors has established an Investment Committee, which is responsible for the execution of our company’s investment policy, as determined by our Board of Directors from time to time. Our Investment Committee currently consists of the three members of our Audit Committee and Ms. Aliza Schloss, a director.

Incentive Plan Committee

Our Board of Directors has established an Incentive Plan Committee, which is responsible for the implementation of our incentive plan. Our Incentive Plan Committee currently consists of Mr. Shaul Elovitch, Ms. Hana Rado and Ms. Aliza Schloss.

Disclosure Committee

We have formed a Disclosure Committee to oversee our system of disclosure controls and procedures. Among other things, this committee evaluates the effectiveness of our disclosure controls and procedures and helps to assess the quality of the disclosures that we make in the periodic reports we file with the Securities and Exchange Commission. Our Disclosure Committee currently consists of the three members of our Audit Committee as well as Ms. Aliza Schloss, a director, and Mr. Doron Turgeman, our Chief Financial Officer.

Internal Auditor

Under the Israeli Companies Law, the board of directors of a public company must appoint an internal auditor nominated by the audit committee. The role of the internal auditor is, among other things, to examine whether a company’s actions comply with applicable law and orderly business procedure. The internal auditor must meet certain statutory requirements of independence. In determining the ownership or voting interest of a person, Israeli law is expansive and aggregates that person’s direct and indirect holdings, including the holdings of certain affiliates, relatives and associates. Mr. Ilan Chaikin currently serves as our internal auditor.

Directors’ Service Contracts

There are no arrangements or understandings between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand, providing for benefits upon termination of their employment or service as directors of our company or any of our subsidiaries.

Fiduciary Duties; Approval of Related Party Transactions under Israeli Law

Fiduciary Duties of Office Holders

The Israeli Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company. An “office holder” is defined in the Israeli Companies Law as a director, general manager, chief business manager, deputy general manager, vice general manager, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of the foregoing positions without regard to such person’s title. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act at a level of care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to utilize reasonable means to obtain (i) informatio n regarding the appropriateness of a given action brought for his approval or performed by him by virtue of his position and (ii) all other information of importance pertaining to the foregoing actions. The duty of loyalty includes (i) avoiding any conflict of interest between the office holder’s position in the company and any other position he holds or his personal affairs, (ii) avoiding any competition with the company’s business, (iii) avoiding exploiting any business opportunity of the company in order to receive personal gain for the office holder or others, and (iv) disclosing to the company any information or documents relating to the company’s affairs that the office holder has received due to his position as an office holder.

Disclosure of Personal Interests of an Office Holder

The Israeli Companies Law requires that an office holder promptly, and no later than the first board meeting at which such transaction is considered, disclose any personal interest that he or she may have and all related material information known to him or her and any documents in their position, in connection with any existing or proposed transaction by us. In addition, if the transaction is an extraordinary transaction, that is, a transaction other than in the ordinary course of business, other than on market terms, or likely to have a material impact on the company’s profitability, assets or liabilities, the office holder must also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any of the foregoing, or by any co rporation in which the office holder or a relative is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager.

Approval of Transactions with Office Holders

Under the Israeli Companies Law, all arrangements as to compensation of office holders who are not directors require approval by the board of directors, and exculpation, insurance and indemnification of, or an undertaking to, indemnify an office holder who is not a director requires both board of directors and audit committee approval. The compensation of office holders who are directors must be approved by our audit committee, board of directors and shareholders and in specific circumstances only by our audit committee and our board of directors.

Some transactions, actions and arrangements involving an office holder (or a third party in which an office holder has an interest) must be approved by the board of directors or as otherwise provided for in a company’s articles of association, however, a transaction that is adverse to the company’s interest may not be approved. In some cases, such a transaction must be approved by the audit committee and by the board of directors itself, and under certain circumstances shareholder approval may be required. A director who has a personal interest in a transaction that is considered at a meeting of the board of directors or the audit committee may not be present during the board of directors or audit committee discussions and may not vote on the transaction, unless the transaction is not an extraordinary transaction or the major ity of the members of the board or the audit committee have a personal interest, as the case may be. In the event the majority of the members of the board of directors or the audit committee have a personal interest, then the approval of the general meeting of shareholders is also required.

Disclosure of Personal Interests of a Controlling Shareholder; Approval of Transactions with Controlling Shareholders

The disclosure requirements which apply to an office holder also apply to such transaction with respect to his or her personal interest in the transaction. The Israeli Companies Law provides that an extraordinary transaction with a controlling shareholder or an extraordinary transaction with another person in whom the controlling shareholder has a personal interest or a transaction with a controlling shareholder or his relative regarding terms of service and employment, must be approved by the audit committee, the board of directors and shareholders. The shareholder approval for such a transaction must include at least one-third of the shareholders who have no personal interest in the transaction who voted on the matter (not including abstentions). The transaction can be approved by shareholders without this one-third approval if the tot al shareholdings of those shareholders who have no personal interest and voted against the transaction do not represent more than one percent of the voting rights in the company.

Under the Companies Regulations (Relief from Related Party Transactions), 5760-2000, promulgated under the Israeli Companies Law, as amended, certain extraordinary transactions between a public company and its controlling shareholder(s) do not require shareholder approval. Such extraordinary transactions must be approved by both the Board and the audit committee and (i) must involve the extension of an existing transaction that was duly approved and does not involve any significant change in the terms of the existing transaction or the change is solely for the benefit of the company; (ii) is solely for the benefit of the company; (iii) is with the controlling shareholder or another person in which the controlling shareholder has an interest and the transaction is in accordance with the terms of a master agreement that was duly approved; (iv) is with the controlling shareholder or another person in which the controlling shareholder has an interest, the purpose of which is a transaction of theirs with a third party or a joint proposal to enter into a transaction with a third party, and the terms of the transaction that apply to the controlling shareholder are not significantly different from the terms that apply to the controlling shareholder or an entity controlled by him (while taking into account the extent of their respective involvement in the transaction); or (v) is among companies controlled by the controlling shareholder, or between the public company and the controlling shareholder or another person in which the controlling shareholder has a personal interest, and the transaction is on market terms, within the ordinary course of business and does not harm the company. In addition, under such regulations, directors’ compensation and employment arrangements in a public company do not require the approval of the shareholders if both the audit committee and the board of directors agree that such arrangements are solely for the benefit of the company. Also, employment and compensation arrangements for an office holder that is a controlling shareholder of a public company do not require shareholder approval if certain criteria are met. The foregoing exemptions from shareholder approval will not apply if one or more shareholders holding at least 1% of the issued and outstanding share capital of the company or of the company’s voting rights, objects to the use of these exemptions provided that such objection is submitted to the company in writing not later than fourteen days from the date of the filing of a report regarding the adoption of such resolution by the company pursuant to the requirements of the Israeli Securities Law. If such objection is duly and timely submitted, then the transaction or compensation arrangement of the directors will require shareholders’ approval as detailed above.< /div>

In addition, a private placement of securities requires the approval of the board of directors and shareholders of the company if (i) the private placement will cause a person to become a controlling shareholder or (ii) 20% or more of the company’s outstanding share capital prior to the private placement are offered and the payment for which (in whole or in part) is not in cash or not under market terms, and the private placement will increase the relative holdings of a shareholder that holds 5% or more of the company’s outstanding share capital or will cause any person to become a holder of more than 5% of the company’s outstanding share capital.

The Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company. This rule does not apply if there is already another 25% or greater shareholder of the company. Similarly, the Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would hold greater than a 45% interest in the company, unless there is another shareholder holding more than a 45% interest in the company. These requirements do not apply if, in general, the acquisition was made in a private placement that received shareholder approval, (i) was from a 25% or greater shareholder of the company whic h resulted in the acquirer becoming a 25% or greater shareholder of the company, if there is not already a 25% or greater shareholder of the company, or (ii) was from a shareholder holding a 45% interest in the company which resulted in the acquirer becoming a holder of a 45% interest in the company if there is not already a 45% or greater shareholder of the company.

If, as a result of an acquisition of shares, the acquirer will hold more than 90% of a public company’s outstanding shares or a class of shares, the acquisition must be made by means of a tender offer for all of the outstanding shares or a class of shares. If less than 5% of the outstanding shares are not tendered in the tender offer, all the shares that the acquirer offered to purchase will be transferred to the acquirer. The Israeli Companies Law provides for appraisal rights if any shareholder files a request in court within three months following the consummation of a full tender offer. If more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding shares.

Exculpation, Indemnification and Insurance of Directors and Officers

Exculpation of Office Holders

The Israeli Companies Law provides that an Israeli company cannot exculpate an office holder from liability with respect to a breach of his duty of loyalty, but may, if permitted by its articles of association, exculpate in advance an office holder from his liability to the company, in whole or in part, with respect to a breach of his or her duty of care. However, a company may not exculpate in advance a director from his or her liability to the company with respect to a breach of his duty of care in the event of distributions.

Insurance for Office Holders

The Israeli Companies Law provides that a company may, if permitted by its articles of association, enter into a contract for the insurance of liability of any of its office holders arising from their acts or omissions performed in such capacity for:

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A breach of his or her duty of care to the company or to another person;

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A breach of his or her duty of loyalty to the company, provided that the office holder acted in good faith and had reasonable cause to assume that his act would not prejudice the company’s interests; and

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A financial liability imposed upon the office holder in favor of another person.

Indemnification of Office Holders

The Israeli Companies Law provides that a company may, if permitted by its articles of association, indemnify an office holder for acts or omissions performed by the office holder in such capacity for:

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A financial liability imposed on the office holder in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court;

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Reasonable litigation expenses, including attorney’s fees, actually incurred by the office holder as a result of an investigation or proceeding instituted against him or her by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against the office holder or the imposition of any financial liability in lieu of criminal proceedings, or concluded without the filing of an indictment against the office holder and a financial liability was imposed on the officer holder in lieu of criminal proceedings with respect to a criminal offense that does not require proof of criminal intent; and

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Reasonable litigation expenses, including attorneys’ fees, incurred by such office holder or which were imposed on him by a court, in proceedings the company instituted against the office holder or that were instituted on the company’s behalf or by another person, or in a criminal charge from which the office holder was acquitted, or in a criminal proceeding in which the office holder was convicted of a crime which does not require proof of criminal intent.

In accordance with the Israeli Companies Law, a company’s articles of association may permit the company to:

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

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Retroactively indemnify an office holder of the company.

Limitations on Exculpation, Insurance and Indemnification

The Israeli Companies Law provides that neither a provision of the articles of association permitting the company to enter into a contract to insure the liability of an office holder, nor a provision in the articles of association or a resolution of the board of directors permitting the indemnification of an office holder, nor a provision in the articles of association exempting an office holder from duty to the company shall be valid, where such insurance, indemnification or exemption relates to any of the following:

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a breach by the office holder of his duty of loyalty, except with respect to insurance coverage or indemnification if the office holder acted in good faith and had reasonable grounds to assume that the act would not prejudice the company;

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a breach by the office holder of his duty of care if such breach was committed intentionally or recklessly, unless the breach was committed only negligently;

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any act or omission committed with intent to derive an unlawful personal gain; and

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any fine or forfeiture imposed on the office holder.

In addition, pursuant to the Israeli Companies Law, exemption of, procurement of insurance coverage for, an undertaking to indemnify or indemnification of an office holder must be approved by the audit committee and the board of directors and, if such office holder is a director or a controlling shareholder or a relative of the controlling shareholder, also by the shareholders general meeting. A special majority at the general meeting is required if a controlling shareholder is interested in such transaction as an office holder or as a relative of an office holder, as described above.

Our articles of association allow us to insure, indemnify and exempt our office holders to the fullest extent permitted by law, subject to the provisions of the Israeli Companies Law. We maintain a directors’ and officers’ liability insurance policy with liability coverage of up to $10 million per claim and in the aggregate. We have undertaken to indemnify each of our directors and officers to the extent permitted by law, in an aggregate amount not to exceed $5 million, to the extent that their liability is not covered under our directors’ and officers’ liability insurance policy.

D. Employees

On December 31, 2009, prior to the sale of our legacy Communications Business, we had 500 full-time employees and 1,334 part-time employees, while on December 31, 2008, we had 504 full-time employees and 1,211 part-time employees, and at December 31, 2007, we had 511 full-time employees and 1,200 part-time employees. All of such employees were located in Israel.

In connection with the sale of our legacy Communications Business, which was completed on January 31, 2010, effective as of January 1, 2010, substantially all of our executive officers and employees employed by us in such business upon the effective date of the sale were hired by Ampal. Effective as of the closing of the sale, Mr. Eli Holtzman (the Chief Executive Officer of Internet Gold) was appointed as our new Chief Executive Officer and Mr. Doron Turgeman (the Deputy Chief Executive Officer and Chief Financial Officer of Internet Gold) was appointed as our Chief Financial Officer. Other than such officers, as of Jan uary 31, 2010, we had two additional employees who are engaged in management, financial and administrative activities.

Our employees are not represented by any labor union. Since our inception, we have not experienced any labor-related work stoppages and believe that our relations with our employees are good.

As of December 31, 2009, Bezeq employed a total of 16,159 persons, of which 7,364 persons were employed in domestic fixed-line communications, 4,192 persons were employed in cellular services, 2,445 persons were employed in international communications, Internet and NEP services and 2,158 persons were employed in multi-channel digital television broadcasts.

Israeli labor laws and regulations are applicable to our employees. Israeli labor laws govern the length of the workday, minimum wages for employees, procedures for hiring and dismissing employees, determination of severance pay, annual leave, sick days and other conditions of employment. Israeli law generally requires severance pay upon the retirement or death of an employee or termination of employment by our company. For employees who are entitled to a pension arrangement, we fund future severance pay obligations by contributing to managers’ insurance or other pension arrangements. A provision in our financial statements covers severance pay to those employees who are not entitled to managers’ insurance or other pension arrangements. Furthermore, we and our employees a re required to make payments to the National Insurance Institute, which is similar to the U.S. Social Security Administration. Such amounts also include payments by the employee for health insurance.

Labor relations with Bezeq’s employees involved in fixed-line communications are regulated by the collective agreements among Bezeq, the workers representatives and the Israeli labor union that represents Bezeq’s employees (the Histadrut), as well as by personal contracts. Additionally, expansion orders to certain general collective agreements apply Bezeq’s employees, such as cost-of-living increment agreements.

In connection with the sale by Ap.Sb.Ar. Holdings Ltd. of the controlling interest in Bezeq to us, the employees of Bezeq demanded additional compensation from Ap.Sb.Ar. Holdings Ltd. and us and a new collective bargaining agreement. On March 25, 2010, Bezeq received a strike notice from the labor union that represents Bezeq’s employees. On May 2, 2010, the labor union announced that it will begin to initiate limited work stoppages. Bezeq and its employees are currently in negotiations in an attempt to resolve the dispute.

E. Share Ownership

As of June 30, 2010, none of our directors and executive officers beneficially owns any of our ordinary shares, other than Mr. Shaul Elovitch, the chairman of our board of directors, who is deemed to beneficially own 23,311,318 or 77.99% of our ordinary shares as of such date through his controlling interest in Eurocom Communications (assuming 29,889,045 ordinary shares were outstanding as of such date, excluding 19,230 ordinary shares held as treasury stock).

As of June 30, 2010, Eurocom Communications held of record 410,000 or 1.37% of our ordinary shares, and Internet Gold, our controlling shareholder, held of record 22,901,318 or 76.62% of our outstanding ordinary shares. Eurocom Communications is the controlling shareholder of Internet Gold, holding 70.79% of its ordinary shares as of such date. Eurocom Communications is 50.33% owned by Eurocom Holdings and 49% of its shares are held by four holding companies, which are 80% owned by Mr. Shaul Elovitch. The remaining 0.67% interest in Eurocom Communications is directly owned by Mr. Shaul Elovitch. Mr. Shaul Elovitch holds 80% of Eurocom Holdings’ shares and 75% of Eurocom Holdings’ management shares. Mr. Shaul Elovitch also serves as the chairman of the board of directors o f Internet Gold, Eurocom Communications and Eurocom Holdings. Accordingly, Mr. Shaul Elovitch may be deemed to have the sole voting and dispositive power over our ordinary shares beneficially owned by Eurocom Communications. See also Item 7A. “Major Shareholders and Related Party Transactions - Major Shareholders.”

2007 Equity Incentive Plan

Our 2007 Equity Incentive Plan, or the 2007 Plan, allows us to grant awards that qualify under Section 102 of the Israeli Income Tax Ordinance, or Section 102, which provides certain tax benefits in connection with share-based compensation to employees, officers and directors. The 2007 Plan received the approval of the Israeli Tax Authority.

Under the 2007 Plan, we may grant our directors, officers and employees restricted shares, restricted share units and options to purchase our ordinary shares under Section 102. We may also grant consultants awards under the 2007 Plan; however, such persons will not be entitled to the tax benefits provided by Section 102. The 2007 Plan provides for the issuance of up to an aggregate 2,250,000 ordinary shares, which amount is reduced by two ordinary shares for each restricted share unit or restricted share that we grant under the 2007 Plan with a per share or unit purchase price lower than 100% of fair market value of our ordinary shares on the date of grant and by one share for each option that we grant under the 2007 Plan.

Based on Israeli law currently in effect and the election of the capital gains tax track, and provided that options, restricted shares and restricted shares units granted or, upon their exercise or vesting, the underlying shares, issued under the plan are held by a trustee for the two years following the date in which such awards are granted, our employees, officers and directors will be (i) entitled to defer any taxable event with respect to the awards until the underlying shares are sold, and (ii) subject to capital gains tax of 25% on the sale of the shares. However, if we grant awards at a value below the underlying shares’ market value at the date of grant, the 25% capital gains tax rate will apply only with respect to capital gains in excess of the underlying shares’ market value at the date of gran t and the remaining capital gains will be taxed at the grantee’s regular tax rate. We intend to grant awards at fair market value. We may not recognize expenses pertaining to the employees’ restricted shares, restricted share units and options that qualify under Section 102 for tax purposes.

Restricted shares, restricted share units and options granted under the 2007 Plan will generally vest over four years from the grant date. Any option not exercised within seven years of the grant date will expire. Any expired or unvested options, restricted shares or restricted share units immediately return to the 2007 Plan for reissuance.

As of December 31, 2009, options to purchase 1,100,000 ordinary shares were outstanding under the 2007 Plan, none of which had vested. In connection with the sale of our legacy Communications Business to Ampal effective as of January 1, 2010, the vesting periods of the foregoing options were accelerated and the options became fully vested in accordance with the terms of the 2007 Plan. All of such options were subsequently exercised by our former employees that had been hired by Ampal and all of the issued shares were placed in trust due to Israeli tax requirements. On May 1, 2010, Internet Gold purchased such ordinary shares from the former employees at a price per share of NIS 109 per share (approximately $28.91 per share) or an aggregate of NIS 119,900,000 (approximately $31,803,700).

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

Internet Gold owned 22,901,318 or approximately 76.62% of our outstanding ordinary shares, and Eurocom Communications beneficially owned 23,311,318 or approximately 77.99% of our outstanding shares, as of June 30, 2010. Internet Gold is a public company, whose shares are listed on the NASDAQ Global Market and the TASE. Internet Gold is controlled by Eurocom Communications, which held 70.79% of its ordinary shares as of June 30, 2010. Eurocom Communications is controlled by Mr. Shaul Elovitch, the chairman of our board of directors and the chairman of the board of directors of Internet Gold and Eurocom Communications. Accordingly, Mr. Shaul Elovitch may be deemed to have the sole voting and dispositive power over our ordinary shares beneficially owned by Eurocom Communications.

The following table sets forth certain information as of June 30, 2010, regarding the beneficial ownership by all shareholders known to us to own beneficially 5% or more of our ordinary shares:

Name	Number of Ordinary Shares Beneficially Owned (1)		Percentage of Ownership (2)
Eurocom Communications Ltd.(3)		23,311,318		77.99	%
Internet Gold		22,901,318		76.62	%
Clal Insurance Enterprises Holdings Ltd.(4)		1,831,033		6.13	%

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(1)

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Ordinary shares relating to options currently exercisable or exercisable within 60 days of the date of this table, are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.

(2)	The percentages shown are based on 29,889,045 ordinary shares outstanding (not including 19,230 shares held as treasury stock) as of June 30, 2010.

(3)

Eurocom Communications holds of record 410,000 of our ordinary shares, and Internet Gold, our controlling shareholder, holds of record 22,901,318 of our ordinary shares. Eurocom Communications is the controlling shareholder of Internet Gold, holding 70.79% of its ordinary shares. Eurocom Communications is 50.33% owned by Eurocom Holdings and 49% of its shares are held by four holding companies, which are 80% owned by Mr. Shaul Elovitch. The remaining 0.67% interest in Eurocom Communications is directly owned by Mr. Shaul Elovitch. Mr. Shaul Elovitch holds 80% of Eurocom Holdings’ shares and 75% of Eurocom Holdings’ management shares. Mr. Shaul Elovitch also serves as the chairman of the board of directors of Internet Gold, Eurocom Communications and Eurocom Holdings. Accordingly, Mr. Shaul Elovitch may be deemed to have the sole voting an d dispositive power over our ordinary shares beneficially owned by Eurocom Communications.

(4)

Based solely upon, and qualified in its entirety with reference to, a notification dated March 28, 2010 provided to us. Based on a Schedule 13G/A filed with the Securities and Exchange Commission on February 16, 2010, by reason of the ownership interest of IDB Development Corporation Ltd. and IDB Holding Corporation, or IDB Holding, in Clal Insurance Enterprises Holdings Ltd., or Clal, and by reason of the interests in, and relationships among them, with respect to IDB Holding, of Mr. Nochi Dankner, Mrs. Shelly Bergman, Mrs. Ruth Manor and Mr. Avraham Livnat, such entities and persons may each be deemed a beneficial owner of the ordinary shares deemed beneficially owned by Clal; however such persons and entities disclaim beneficial ownership of the ordinary shares covered by the Schedule 13G/A.

Significant Changes in the Ownership of Major Shareholders

On February 14, 2008, Wellington Management Company, LLP, or Wellington, an investment adviser, filed a Schedule 13G with the Securities and Exchange Commission reflecting beneficial ownership of 1,377,040 or 5.43%, of our ordinary shares, which are held of record by clients of Wellington. On February 17, 2009, Wellington filed Amendment No. 1 to Schedule 13G reflecting ownership of 1,371,005, or 5.41 %, of our ordinary shares, which are held of record by clients of Wellington. On February 12, 2010, Wellington filed with the SEC Amendment No. 2 to Schedule 13G reflecting that it ceased to own any of our shares.

On May 7, 2009, Clal, Clal Finance and the Clal Reporting Persons filed a Schedule 13G with the Securities and Exchange Commission reflecting beneficial ownership of 2,545,938 or 10.0% of our ordinary shares. On February 16, 2010, Clal, Clal Finance and the Clal Reporting Persons filed Amendment No. 1 to Schedule 13G reflecting ownership of 1,760,475, or 6.9%, of our ordinary shares. The Schedule 13G/A provides that the Statement shall not be construed as an admission by Clal that it is the beneficial owner of more than 81,618 ordinary shares covered by the Schedule 13G/A. In addition, the Schedule 13G/A states that Clal Finance and the Clal Reporting Persons disclaim beneficial ownership of the ordinary shares covered by the Statement.

On March 24, 2010, Internet Gold purchased 2,599,310 of our ordinary shares in a private placement of 3,448,275 of our ordinary shares in Israel for a price per share of NIS 116 (approximately $30.7). Internet Gold paid an aggregate purchase price of NIS 301.5 million (approximately $79.8 million) for such shares, which represent approximately 75% of the aggregate shares sold in the private placement. See Item 7B, “Major Shareholders and Related Party Transactions - Related Party Transactions.”

On May 1, 2010, Internet Gold purchased 1,100,000 ordinary shares from former employees of our legacy Communications Business at a price per share of NIS 109 per share (approximately $28.91 per share) or an aggregate of NIS 119.9 million (approximately $31.8 million). Such shares had been issued to the former employees upon the exercise of options that were accelerated and became fully vested in connection with the sale of our legacy Communications Business to Ampal effective as of January 1, 2010, in accordance with the terms of the 2007 Plan.

Major Shareholders Voting Rights

Our major shareholders do not have different voting rights.

Record Holders

Based on a review of the information provided to us by our transfer agent and other information available to the company, as of June 28, 2010, one record holder holding approximately 23.38% of our outstanding ordinary shares had a registered address in the United States. Such numbers are not representative of the portion of our shares held in the United States nor are they representative of the number of beneficial holders residing in the United States, since such ordinary shares were held of record by one U.S. nominee company, CEDE & Co.

B. Related Party Transactions

Agreements with the Eurocom Group and Internet Gold

As part of our legacy Communications Business, we provided broadband and traditional voice services to companies affiliated with the Eurocom group at our customary rates and charges. During the years ended December 31, 2008 and 2009, our revenues from the Eurocom group, not including Internet Gold, were NIS 5.3 million and NIS 11 million ($2.9 million), respectively. Our revenues from Internet Gold and GoldMind were approximately NIS 1.5 million and NIS 0.8 million ($0.2 million), respectively.

We have entered into a registration rights agreement with Internet Gold granting it the right to register our ordinary shares it owns under the Securities Act of 1933, as amended. Under the registration rights agreement, we have granted to Internet Gold “demand” registration rights that allow it, at any time after one year following the consummation of our initial public offering in October 2007, to request that we register under the Securities Act of 1933, as amended, some or all of our ordinary shares it owns. Internet Gold is entitled to an aggregate of five demand registrations. We are not required to affect any demand registration unless such demand registration is for a number of ordinary shares with a market value that is equal to at least $7.5 million. We are also not requir ed to affect more than one demand registration during any 12-month period thereafter. We are not obligated to grant a request for a demand registration within 90 days of any other demand registration. Internet Gold also has “piggyback” registration rights that allow it to include our ordinary shares it owns in any public offering of equity securities initiated by us (other than those public offerings pursuant to registration statements on Forms F-4, S-8 or any other successor forms). We have also granted Internet Gold the right to request a shelf registration on Form F-3, provided that we shall be eligible to utilize a registration statement on such form, providing for an offering to be made on a continuous basis but for no longer than one year without the consent of our audit committee.

Under the registration rights agreement we have agreed to indemnify Internet Gold against any losses or damages resulting from any untrue statement or omission of material fact in any registration statement or prospectus pursuant to which they sell ordinary shares, unless such liability arose in reliance upon and in strict conformity with information furnished in writing from Internet Gold. We will pay all expenses incident to any demand registration, and Internet Gold will pay its respective portions of all underwriting discounts, commissions and fees attributable to the sale of our ordinary shares it owns under the registration rights agreement.

We have agreed that, for as long as Internet Gold is required to consolidate our results of operations, we will maintain the same fiscal year end and accounting periods as Internet Gold, and to the extent possible conform our financial presentation with that of Internet Gold. We have also agreed, among other things, to provide to Internet Gold and its independent auditors all information required for Internet Gold to meet its schedule for the filing and distribution of its financial statements and to make available to Internet Gold and its independent auditors access to all personnel and documents necessary for the annual audit of our company. We have also agreed to adhere to certain specified Internet Gold accounting policies and to notify and consult with Internet Gold regarding any changes to our accounting princ iples and estimates used in the preparation of our financial statements.

In February 2008, we entered into an execution services agreement with Eurocom Capital Finance Ltd., or Eurocom Capital, which is controlled by Mr. Shaul Elovitch, our controlling shareholder and the chairman of our Board of Directors, under which Eurocom Capital provides us with various financial services. Under the agreement, Eurocom Capital handles the execution of our financial investments pursuant to direct instructions from our Chief Financial Officer, which is based on a policy that was established by our management and approved by our Board of Directors. In consideration for these services, we agreed to pay Eurocom Capital fees which are customary for such agreements and on market terms. We paid Eurocom Capital an aggrega te amount of approximately NIS 261,000 and NIS 283,000 ($74,985) in fees for its services in 2008 and 2009, respectively.

On October 25, 2009, our controlling shareholder Eurocom Communications granted us an option to require it to provide us, upon our demand, at any time after 120 days from the date of the undertaking, a loan of up to NIS 1.2 billion ($318 million) bearing interest at the “risk-free” or lower rate and subordinated to any committed third-party financing, for the purpose of financing the acquisition of our controlling interest in Bezeq. We did not exercise this option.

On March 24, 2010, we completed a private placement of 3,478,000 of our ordinary shares to Israeli institutional investors and our controlling shareholder Internet Gold. The offering price of NIS 116 (approximately $30.7) per ordinary share was determined by means of a tender by third party, institutional investors. Based on Internet Gold’s irrevocable undertaking to subscribe for approximately 75% of the offering on the same terms and conditions negotiated with the third-party institutional investors, Internet Gold purchased 2,599,310 ordinary shares, which represent approximately 75% of the shares sold in the private placement. The private placement proceeds from Internet Gold were paid to us by way of early repayments of shareholders loans:

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On March 31, 2007, Internet Gold provided us with a long-term loan of NIS 100.6 million ($26.6 million), bearing the prime interest rate published from time to time by the Bank of Israel. As of December 31, 2009, we had an outstanding balance payable to Internet Gold of NIS 326 million ($86.4 million). On March 24, 2010, NIS 302 million ($80 million) of the loan was repaid from the proceeds from Internet Gold’s participation in our March 2010 private placement. On May 12, 2010, we repaid the remaining outstanding balance of NIS 31.5 million ($6.4 million).

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In November 2009, Internet Gold provided to us a NIS 217.5 million ($58 million) loan, which bears interest equal to the yield on Israel Government bonds with an average maturity that is closest to the maturity date of the loan, as such yield is reflected in the average closing price of Israel Government bonds for the seven trading days preceding the grant of the loan. On March 24, 2010, the loan was fully repaid from proceeds from Internet Gold’s participation in our March 2010 private placement.

We have entered into an arrangement with Internet Gold according to which, due to the fact that Mr. Eli Holtzman, the chief executive officer of Internet Gold, also serves as our chief executive officer, we will bear 50% of Internet Gold’s employment costs with respect to Mr. Holtzman.

We have entered into an arrangement with Eurocom Digital Communications Ltd., or Eurocom Digital, which is indirectly controlled by Eurocom Communications, and Internet Gold according to which Mr. Doron Turgeman, the chief financial officer of Internet Gold, will provide financial services to us and Eurocom Digital. In consideration for such services, Eurocom Digital will bear 50% of Internet Gold’s employment costs with respect to Mr. Turgeman and we will bear 25% of such employment costs.

Agreements between the Eurocom Group and Bezeq Group

Following our acquisition of the controlling interest in Bezeq on April 14, 2010, Bezeq’s Audit Committee and Board of Directors approved contractual arrangements between companies within the Bezeq group and Eurocom group, including any companies within the Eurocom Group that it may be engaged with in the future. The aggregate scope of such transactions is estimated, as of the date of this annual report, at approximately NIS 50.7 million ($13.43 million), of which approximately NIS 7 million ($1.85 million) are transactions with the Eurocom group as suppliers to Bezeq and approximately NIS 43.7 million ($11.57 million) are transactions with the Eurocom group as customers.

General Communication Services

Bezeq provides companies within the Eurocom group with telephone lines, transmission services and PRI services. There is no limitation on the annual scope of engagement, provided that the terms offered to members of the Eurocom group will be the same as those offered to similar business customers. The approval is valid for three years ending April 13, 2013 and any purchase order received during such period will be valid until the end of the period stipulated in the purchase order.

Bezeq

On June 1, 2010, Bezeq entered into a management services agreement with Eurocom Communications, which is controlled by Mr. Shaul Elovitch, our controlling shareholder and the chairman of our Board of Directors, under which Eurocom Communications agreed to provide Bezeq with various advisory and management services. Under the agreement, Bezeq will pay Eurocom Communications in NIS an amount equal to $1.2 million per year. The agreement is for a term of three years, expiring on May 30, 2013.

Pelephone

On June 25, 2006, Pelephone entered into an agreement with DBS, which, among other things, grants Pelephone a license to use DBS’s content over the cellular network. Pelephone’s monthly payment is calculated in accordance with a formula set forth in the agreement, which is dependent primarily upon the level of content consumption.

On February 24, 2009, Pelephone entered into an agreement with Eurocom Digital for the provision of cellular services and value added services, as well as the purchase and upgrade of cellular peripheral equipment for its employees. The agreement is for a period of three years. On February 24, 2009, Pelephone entered into an agreement with Eurocom Cellular Communications Ltd. for the provision of cellular services and value added services, as well as the purchase and upgrade of cellular peripheral equipment for its employees. The agreement is for a period of three years.

On August 19, 2009, Pelephone entered into an agreement with DBS for the provision of cellular services and value added services, as well as the purchase and upgrade of cellular peripheral equipment for DBS employees. The agreement is for a period of three years. On June 10, 2010, Pelephone entered into a framework agreement with Eurocom Cellular Communication Ltd., a controlled subsidiary of Eurocom Communications, for the purpose of regulating the acquisition and supply of Nokia products, replacement parts and accessories by Pelephone and for the provision of maintenance services for these products. The framework agreement is for a period of three years and the aggregate annual amount payable under the agreement is NS 450 million ($119.2 million), which amount may be increased by the audit committee and board of directors of Bezeq each year without the need for shareholder approval. The prices for the products and services will be determined based on negotiations between the parties to the agreement and the agreement includes a mechanism designed to ensure that prices for Pelephone are competitive. Pelephone is not subject to any minimum purchase requirements.

On June 23, 2010, Pelephone approved a framework under which it may purchase advertising, whether directly or by means of advertising firms, from companies within the Eurocom Group (including Radius Broadcasts Ltd., Radio FM Ha-Shefela Ltd., Start Net Ltd. and GoldMind). The contractual engagement is approved for the period ending on April 13, 2013.

DBS

In June 2001, Bezeq On-Line Ltd. entered into an agreement with DBS for the purpose of providing outsourced call center services. The monthly payment to Bezeq On-Line Ltd. is calculated in accordance with the prices set forth in the agreement and is dependent upon the scope of services provided, based on DBS’s needs (with minimum monthly hours, based on a yearly calculation). The agreement expires on December 31, 2010.

DBS and Bezeq entered into a framework agreement for the provision by Bezeq of maintenance services for equipment of DBS that Bezeq’s technical division maintains for DBS’s customers. The agreement is for a three year period ending April 13, 2013. DBS issues purchase orders to Bezeq under such agreement from time to time.

DBS issues purchase orders to Bezeq from time to time for the provision by Bezeq of various communication services to DBS as a business customer of Bezeq.

Bezeq entered into an agreement with DBS for the receipt of multi-channel television services, for a three year period ending April 13, 2013.

On June 23, 2010, DBS entered into an agreement with Eurocom Digital for the purchase of power suppliers for ADB yesMaxHD converters.

In addition, DBS has entered into a number of agreements with Eurocom Digital for the purchase of power suppliers and digital converters from Eurocom Digital and the repair and maintenance of such equipment by Eurocom Digital.

D.M. Engineering Ltd., or DM

In 2005, Bezeq entered into an agreement with DM, a controlled subsidiary of Eurocom Communications, for the maintenance of Bezeq’s billing system. The agreement expires on November 20, 2010 and may be extended for additional periods until November 2018, subject to the approval of Bezeq’s audit committee and board of directors.

In 2005, Bezeq entered into an agreement with DM for the maintenance and upgrade of Bezeq’s interconnect system, which is designed to settle accounts with other communication suppliers based on network traffic.

Bezeq and DM have entered into a framework agreement for the acquisition by Bezeq of plastic covers for Bezeq’s manholes. The agreement is for a three year period ending April 13, 2013. Bezeq issues purchase orders to DM under such agreement from time to time.

On January 1, 2008, Bezeq entered into an agreement with DM for the maintenance of fixed-line testing systems operated by Bezeq. The agreement includes troubleshooting services, ongoing maintenance activities and other services. The agreement expires on December 31, 2010 and may be extended for two consecutive one year terms, subject to the approval of Bezeq’s audit committee and board of directors.

On January 1, 2008, Bezeq entered into an agreement with DM for the employment of an employee of DM in Bezeq’s IT division on an hourly, as needed, basis. The agreement expires on December 31, 2010 and any extension is subject to the approval of Bezeq’s audit committee and board of directors.

Eurocom Digital Communications Ltd.

From time to time Bezeq issues Eurocom Digital, a subsidiary of Eurocom Communications, purchase orders for the acquisition of electronic equipment for internal use by Bezeq (not for resale to customers) and repair service. With regard to those purchase orders the parties entered into a framework agreement for the years 2010 - 2012.

From time to time Bezeq may issue purchase orders to Eurocom Digital for the acquisition of IP Centrex telephones for resale to its customers.

In 2002, Bezeq entered into a consignment agreement with Eurocom Digital for the sale of Eurocom’s equipment in Bezeq’s retail stores. The agreement expires on April 13, 2013.

Bezeq is a party to a consignment agreement with Eurocom Digital for the sale of Eurocom’s equipment via Bezeq’s online stores. The agreement expires on April 13, 2013.

Bezeq is a party to a distribution agreement with Eurocom Digital as a marketer of Bezeq’s PRI and IP virtual private network services and additional services as required by Bezeq. The agreement expires on December 31, 2010 and its extension is subject to the approval of Bezeq’s audit committee and board of directors.

GoldMind Media Ltd. and Radius Broadcasts Ltd.

Bezeq advertises from time to time on websites and portals owned by GoldMind and Radius Broadcasts Ltd., both of which entities are controlled by the Eurocom Group, through its engagement of third party advertising firms.

Bezeq International

On May 11, 2004, Bezeq International entered into an agreement with Eurocom Digital, pursuant to which Eurocom Digital agreed to provide Bezeq International maintenance and spare parts services for Panasonic switchboards. In addition, Bezeq International may purchase under the agreement peripheral equipment (office telephones and fax machines) on the basis of customer needs, according to purchase orders.

In 2004, Bezeq International entered into an agreement with Gilat Satcom Ltd., or Gilat Satcom, a company controlled by the Eurocom Group, pursuant to which Bezeq International provides Gilat Satcom with international telephony transfer and completion services. The agreement is renewed from time to time and will remain in effect until such time as one of the parties provides notification of its decision to terminate the agreement. On June 26, 2006, Bezeq International entered into an agreement with Gilat Satcom pursuant to which Gilat Satcom was granted the right, for a period of 10 years, to use Bezeq International’s international communications infrastructure.

In September 2006, Bezeq International entered into an agreement with Radio FM Hashefela Ltd., a company controlled by the Eurocom Group, for the provision of radio advertising services to Bezeq International. Bezeq International has entered into a number of agreements with DBS which are renewed on a monthly basis, for the provision by Bezeq International of Internet access services, maintenance services for a Nortel switchboard, international telephone services and security information services.

On December 18, 2007, Bezeq International entered into an agreement with SatLink Communications Ltd., or SatLink, a company controlled by the Eurocom Group, pursuant to which Bezeq International will provide Internet access services. On June 19, 2007, Bezeq International entered into an agreement with SatLink for the purpose of providing data communication services. The amount payable to Bezeq International is fixed and set forth in the agreements and the aggregate annual amount under both agreements is NIS 220,000 ($58,278) and the aggregate amount paid under the agreements was approximately NIS 214,000 ($56,000) for the year ended December 31, 2009.

In May 2010, Bezeq International also entered into the following agreements with SatLink:

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Agreement pursuant to which Bezeq International agreed to provide SatLink international data communication services between Israel and France for a period of 12 months and SatLink has an annual option to extend the agreement for periods of 12 months.

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Agreement pursuant to which Bezeq International agreed to grant to SatLink the right to use an international data communications infrastructure between Israel and Greece for a period of 12 months and SatLink has an option to extend the agreement for periods of 12 months each time.

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Agreement pursuant to which Bezeq International agreed to provide SatLink international data communication services between Israel and the United Kingdom for a period of 12 months and SatLink has an option to extend the agreement for periods of 12 months each time.

In June 2009, Bezeq International entered into an agreement with GoldMind pursuant to which GoldMind agreed to provide Bezeq International with services relating to the publication of help-wanted advertisements and advertising on websites owned by GoldMind at market rates. .

On August 25, 2009, Bezeq International entered into an agreement with DBS, pursuant to which Bezeq International agreed to provide DBS with hosting and maintenance services for servers and Internet access.

On June 23, 2010, Bezeq International entered into an agreement with GoldMind for the provision of hosting services on Bezeq International’s server farm and Internet access services to be provided by Bezeq International to GoldMind. The agreement is for a period of 24 months.

On June 23, 2010, Bezeq International entered into an agreement with Eurocom Digital for the supply of Internet access services to Bezeq International. The agreement is for a period of 24 months. On June 23, 2010, Bezeq International entered into an agreement with Eurocom Digital for the purchase of up to 50 Panasonic liquid crystal display (LCD) screens from Eurocom Digital

C. Interests of Experts and Counsel

Not applicable.

ITEM 8. FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

Financial Statements

See the consolidated financial statements, including the notes thereto, listed in Item 18 “Financial Statements“ and incorporated herein by this reference.

Export Sales

Not applicable.

Legal Proceedings

We and Bezeq are involved in certain legal and regulatory actions, all of which have arisen in the ordinary course of business, except for the matters described in the following paragraphs. Management believes that the ultimate resolution of such matters is unlikely to have a material adverse effect on our consolidated results of operations and/or financial condition, except as described below.

Bezeq

A number of labor claims are pending against Bezeq, as described below.

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In September 2000, a lawsuit was filed in the Jerusalem Regional Labor Court against Bezeq by 2,423 retired employees of Bezeq. The plaintiffs were seeking declaratory relief to determine that grossed up compensation for tax purposes, clothing allowance and incentive payments are considered part of the regular salary and therefore should be considered as part of determining wages for the purpose of calculating their pension and payments made to them upon retirement. The plaintiffs were also seeking declaratory relief to determine that their last determining salary for pension should be calculated according to the last salary actually paid and not according to the average staff grade held by them. The claim was subsequently amended so that the request for declaratory relief relating to the plaintiff’s pension rights was deleted and the plaintiffs also narrowed their claim to th e incentive pay component and withdrew their claim with respect to grossing up compensation and clothing allowance. In January 2007, an additional claim was filed by 85 retired employees of Bezeq who were seeking declaratory relief to determine that grossed up compensation for tax purposes, clothing allowance and incentive pay should be included in the determining salary for their rights pursuant to the Hours of Work and Rest Law and the Annual Vacation Law. This claim was consolidated with the above claim. On December 16, 2008, the Court denied the claim. The plaintiffs filed an appeal against the Courts decision on March 3, 2009 and the appeal proceedings are continuing.

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In February 2002, a notice of a party to a collective agreement, or Party Notice, was filed in the Jerusalem Regional Labor Court by the labor union that represents Bezeq’s employees in the name of all of Bezeq employees. The applicant alleges that grossed up consideration for tax purposes, the salary component for on-call duty and clothing allowances which were paid to Bezeq’s employees constitute regular pay which forms part of the determining salary of each employee, including for the calculation of payments upon retirement. The Israeli Attorney General joined the claim. In April 2006, the Court issued its decision, denying all parts of the Party Notice. An appeal was filed against the decision, in which it was alleged that the decision is procedurally void, and the hearing was returned, with the consent of the parties and the Attorney General, to the Regio nal Labor Court. On February 10, 2010, a new party notice was filed, referring only to the on-call duty component and requesting that the Court determine that such component be included in the hourly rate for the purpose of calculating the remuneration for overtime hours and the redemption of annual leave. A preliminary hearing has been scheduled for July 2010.

Bezeq is party to the material legal proceedings related to its business discussed below.

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In September 2000, a lawsuit and motion for certification as a class action were filed against Bezeq in the Tel Aviv District Court. The amount of the claim is estimated at NIS 103 million ($27.3 million). According to the plaintiffs, Bezeq unlawfully collected “collection expenses” from its subscribers for bills which were not paid by their due date but were paid within 14 days of their due date, although Bezeq took no collection action until 14 days after the due date. In March 2010, the District Court certified the lawsuit as a class action. The plaintiffs are seeking the return of the fee that Bezeq allegedly collected unlawfully, with the class of the claim including all those who were charged collection expenses despite having paid their bill before Bezeq began collections, from March 11, 1999 through December 7, 2006. Bezeq intends to file a motion for leave to appeal the decision.

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In January 2002, a lawsuit was filed in the Tel Aviv District Court (in 2007, the lawsuit was transferred to the new Central Region District Court) by an international communications operator against Bezeq and Bezeq International. The plaintiff is seeking compensation in the amount of NIS 53 million ($14.03) for alleged damages allegedly sustained by that operator due to alleged acts and omissions in connection with the allocation of international calls to the various international call operators in Israel. In addition, the plaintiff is seeking an order requiring Bezeq to provide certain documents and to prohibit Bezeq from giving allocation priority to Bezeq International. Alternatively, the operator is seeking restitution of the access fees that it paid to Bezeq. On January 27, 2009, the plaintiff filed a motion to amend the lawsuit, which if allowed in full, would incr ease the monetary compensation sought to approximately NIS 77 million ($20.4 million). The parties were referred to a mediation proceeding and the proceedings are ongoing.

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In 2003, Bezeq filed a lawsuit in the Tel Aviv Regional Labor Court against the Makefet Fund (a pension fund) for compensation for the alleged breach of agreements between Bezeq and the Makefet Find relating to the calculation of the cost of early retirement of retired employees of Bezeq. Bezeq is seeking compensation in the amount of approximately NIS 280 million ($74.2 million). The trial is currently underway and evidence in the lawsuit is being heard.

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Between 2003 and 2005, three lawsuits were filed in the Central Region District Court by various plaintiffs against Bezeq, the Israeli Broadcasting Authority and the State of Israel, seeking compensation for physical injury and property damage allegedly caused by radiation from the one of Bezeq’s broadcasting stations. The plaintiffs are seeking compensation for alleged damages of more than NIS 15 million ($3.97 million) in one of the lawsuits, NIS 46 million ($12.2 million) in another and damages are not stated in the third lawsuit. The plaintiffs in the three lawsuits filed a motion to consolidate the lawsuits. The Court has ordered the plaintiffs to submit documents and affidavits and has issued a stay of proceedings until after the plaintiffs comply with such order.

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On December 25, 2005, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Bezeq, alleging that Bezeq unlawfully collects payment for browsing high-speed Internet while technically it is unable to provide the service in certain areas at the promised speed. The plaintiffs estimate the amount of the class action at NIS 100 million ($37.7 million) for all subscribers. On March 6, 2008, the Court certified the lawsuit as a class action in part for a group of subscribers defined in the Court’s decision. On April 7, 2008, Bezeq filed a motion for leave to appeal the decision of the District Court. The parties are currently negotiating a settlement arrangement.

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In May 2006, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court, alleging deception in advertising relating to a charge. According to the plaintiff, Bezeq deceived the public in its advertisements regarding fees for calls from a Bezeq line to a cellular line and did not disclose that the charge for the calls was made according to segments of 12 seconds. The plaintiff estimates the amount of the claim, if certified as a class action, at NIS 68.5 million ($18.14 million). On May 10 2010, the District Court certified the lawsuit as a class action. On June 9, 2010, Bezeq filed a motion for leave to appeal the decision of the District Court.

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In November 2006, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Bezeq. The plaintiffs claim that because Bezeq charged customers who connected to its ADSL service a monthly fee rather than a two-monthly fee, they incurred financing losses and expenses. The plaintiff estimates the amount of the claim, if certified as a class action, at approximately NIS 79 million ($20.92 million). A hearing in the lawsuit is scheduled for July 2010. The parties are currently pursuing settlement negotiations.

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In November 2006, a lawsuit and motion for certification as a class action were filed against Bezeq in the Tel Aviv District Court, alleging that Bezeq unlawfully collected a fee in the event of disconnection due to non-payment of customer bills. The plaintiff estimates the amount of the claim, if certified as a class action, at approximately NIS 189 million if certified as a class action. The trial is currently underway and evidence in the lawsuit is being heard.

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In November 2006, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Bezeq, HOT, Cellcom, Partner and Pelephone. The plaintiffs allege that when completing a call made from a cellular line to a landline, if the call is disconnected by the landline call recipient, Bezeq and HOT, both of which are landline operators, delay sending the disconnection signal for about 60 seconds and as a result, the plaintiffs incur a loss which is reflected in air-time costs and call fees. The plaintiffs are the seeking aggregate compensation of approximately NIS 158 million ($41.85) if the lawsuit is certified as a class action. In a procedural arrangement reached between the parties, it was determined that the lawsuit would be heard against Bezeq and HOT, while the lawsuit against Cellcom, Partner and Pelephone would be heard as part of a similar lawsuit filed against them in August 2006, as described below. The hearing on the motion to certify the lawsuit as a class action is underway; the parties have submitted written closing statements and are awaiting the Court’s decision on the motion.

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In May 2007, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Bezeq, two former chief executive officers of Bezeq, directors of Bezeq who served during the period relevant to the lawsuit and against Ap.Sb.Ar. Holdings Ltd., which at the time was Bezeq’s controlling shareholder. The plaintiff, who claims that he had purchased shares of Bezeq in 2006, alleges that the financial statements of Bezeq for fiscal years 2004 and 2005 included false and misleading material information regarding Bezeq’s annual profits, property, plant and equipment and equity, in view of the retroactive write-down of NIS 320 million of property, plant and equipment which was not being used by Pelephone. The total compensation sought in the lawsuit if certified as a class action amounts to approximately NIS 56.5 million ($15.9 million). The lawsuit is in preliminary stages of document disclosure and discovery.

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In September 2007, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Bezeq, alleging that Bezeq unlawfully collected VAT on interest due to late payments and collection fees. The total compensation sought in the lawsuit, if certified as a class action, amounts to approximately NIS 114 million ($30.2 million). The lawsuit is in preliminary stages of document disclosure and discovery.

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On October 26, 2008, one of the shareholders of DBS initiated arbitration proceedings against Bezeq and another DBS shareholder, alleging that she incurred losses as a result of the conduct of Bezeq and the other DBS shareholder relating to the management of DBS and the use of DBS for promoting purposes not provided for in the shareholders agreement to which she is a party. The plaintiff is seeking cancellation of the agreement, restitution and compensation in the amount of NIS 160 million ($42.4 million). The parties are currently in the process of document disclosure and discovery proceedings.

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In December 2009, a motion was filed in the Tel Aviv District Court by the liquidator of Adanet Business Ltd., or Adanet, which is 50%-held by Bezeq and currently in liquidation proceedings, pursuant to which the Court is requested to order Bezeq and three directors who it appointed to the Adanet board to pay, jointly and severally, the liquidator all the alleged debt of Adanet, amounting to approximately NIS 54 million ($14.3 million), plus statutory linkage and interest commencing November 11, 2003. According to the liquidator, Bezeq acted knowingly, directly and through the directors it appointed, to ensure the collapse of Adanet and its subsidiaries in order to rid itself of its obligations to Adanet. Bezeq and the three directors filed motions to st rike the liquidator’s motion. In accordance with Israeli law, the liquidator’s motion and the motions to strike the liquidator’s motion are awaiting the response of the Official Receiver, which is an Israeli statutory office that is a formal party to liquidation proceedings brought before a court in order to oversee the liquidation process.

Pelephone

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In December 2000, the State of Israel filed a lawsuit in the Tel Aviv District Court, which was subsequently transferred to the Central Region District Court, against Pelephone relating to royalties payable by Pelephone to the State of Israel on Pelephone’s revenues allegedly owed by it to the Sate of Israel for the period from January 1994 until February 1996. The State is seeking payment in the amount of NIS 260 million ($68.9 million), including principal, linkage differences and interest. An examination conducted as part of a mediation procedure found that the maximum amount of royalties with respect to Pelephone’s revenues from January 1, 1994 to February 7, 1996 was NIS 118 million ($31.3 million) (before interest, linkage differences and the sum actually paid). Bezeq undertook to reimburse Pelephone any amount that Pelephone is ordered to pay the State in a final decision for royalties with respect to Pelephone’s revenues for the period from January 1, 1994 to October 10, 1994. Bezeq’s position is that it already paid such royalties to the State of Israel under a settlement agreement between Bezeq and the State of Israel from November 29, 1995 relating to various matters, including royalty payments. All proceedings in the lawsuit have been completed and the parties are currently waiting for the Court to render its judgment.

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In September 2001, a lawsuit was filed in the Ramallah District Court by the General Public Palestinian Communications Company Ltd. against Pelephone and another company. The plaintiff alleges that Pelephone and the other defendant have unlawfully been operating landline and cellular communication services in the Palestinian Authority, while allegedly the exclusive right to provide such services has been granted to the plaintiff. The plaintiff is seeking a permanent injunction preventing the defendants from providing such communications services in the areas of the Palestinian Authority, as well as compensation in the amount of NIS 676 million ($179 million) solely from Pelephone. Pelephone was informed that the Ramallah Court may have given a decision in the lawsuit. Enforcement of decisions rendered by a court of the Palestinian Authority may only be executed if approve d by the Israeli Ministry of Justice. Pelephone is of the opinion that if such a decision was rendered, it was rendered without jurisdiction. If an attempt is made to serve the decision for the approval of the Israeli Ministry of Justice or to enforce it in any way whatsoever, Pelephone will act to prevent such approval and/or enforcement.

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In April 2003, a motion for certification as a class action was filed in the Tel Aviv District Court against the three principal Israeli cellular operators. The plaintiffs allege that the three cellular companies formed a cartel among themselves for the collection of a high and unfair tariff for text messages during the period of March-June 2002. The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 90 million ($23.84 million). The hearing on the motion to certify the lawsuit as a class action is underway.

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In August 2006, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone, Cellcom and Partner. The plaintiffs allege that when Bezeq or HOT customers initiate the termination of a call made to the customer from a cellular network there is an excess charge until the call is actually disconnected. The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 100 million ($26.5 million). In a procedural arrangement reached between the parties, it was determined that this lawsuit would be combined with a similar lawsuit filed against the defendants in November 2006, as described above. The hearing on the motion to certify the lawsuit as a class action is underway.

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In June 2007, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone. The plaintiffs claim that Pelephone misled the subscribers of the New Immigrants Plan with respect to call connection fees. The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 239 million ($63.3 million). The hearing on the motion to certify the lawsuit as a class action is underway.

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In December 2007, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone, Cellcom and Partner. The plaintiffs claim that the defendants have exposed them to radiation from cellular antennae which were allegedly unlawfully established and as a result, have caused damage to their health. The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 1 billion ($377 million). The hearing on the motion to certify the lawsuit as a class action is underway.

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In April 2008, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone. The plaintiffs claim that Pelephone unlawfully collected amounts from it subscribers for calls to Pelephone’s service centers in connection with “dial-on” calls from the voice mail box and in excess of tariff plans. The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 60 million ($15.9 million). The hearing on the motion to certify the lawsuit as a class action is underway.

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In July 2008, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court. The plaintiffs are seeking the refund of amounts which they allege was unlawfully collected from Pelephone’s subscribers in connection with “dial-on” calls from Bezeq’s information service, late payments and for services provided at Pelephone’s service centers, in violation of Pelephone’s license. The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 240 million ($63.57 million). The hearing on the motion to certify the lawsuit as a class action is underway.

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In July 2009, a lawsuit and motion for certification as a class action were filed in the Central Region District Court. The plaintiffs are seeking declaratory relief that Pelephone unlawfully saves text messages sent via its network, an order that Pelephone delete the information, an injunction to prevent Pelephone from saving text messages in the future and monetary relief in an amount to be determined by the Court. The hearing on the motion to certify the lawsuit as a class action is underway.

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In July 2009, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone, Shamir Systems Ltd., or Shamir, and Unicell Advanced Cellular Solutions Ltd., or Unicell. The plaintiffs are seeking the refund of amounts allegedly unlawfully collected by the respondents (which are charged through the cellular bill issued by Pelephone) for data services provided by Shamir and Unicell. The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 200 million ($53 million). The plaintiffs are also seeking an order instructing the respondents to discontinue the collection of such amount. The hearing on the motion to certify the lawsuit as a class action is underway.

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In October 2009, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone. The plaintiff claims that Pelephone is in violation of its license in connection with benefits offered to customers and customer commitment periods. The plaintiff is seeking compensation in a total amount, if the lawsuit if certified as a class action, of approximately NIS 331 million ($87.7 million). The hearing on the motion to certify the lawsuit as a class action is underway.

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In December 2009, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone. The plaintiffs are seeking cancellation and a refund of the exit fee which Pelephone charges subscribers who wish to disconnect from the service during the commitment period. The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 50 million ($13.25 million). The hearing on the motion to certify the lawsuit as a class action is underway.

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In February 2010, a lawsuit and motion for certification as a class action were filed in the Jerusalem District Court against Pelephone. The plaintiffs are seeking the refund of amounts that Pelephone allegedly unlawfully collected as a full exit fee from customers who terminated their agreement during the commitment period instead of a proportionate exit fee. In addition, the plaintiffs are seeking the refund of amounts that Pelephone allegedly unlawfully collected for an exit fee for a basic television package over cellular despite the fact that the package was given to the plaintiff free of charge. The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 50 million ($13.25 million). The plaintiffs are also seeking an order instructing Bezeq to cease collecting such charges. The hearing on the motion to certify the lawsuit as a class action is underway.

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In March 2010, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Pelephone and Cellcom. The plaintiffs have asserted an adjust enrichment claim against Pelephone on the basis that in alleged violation of its license, Pelephone has allegedly failed to procure insurance covering liability for bodily harm caused by exposure to cellular radiation. The total amount sought in the lawsuit, if certified as a class action, is approximately NIS 4.2 billion ($1.11 million), of which NIS 2.1 billion is sought from Pelephone. The plaintiffs are also seeking an order instructing Pelephone to obtain such insurance. The hearing on the motion to certify the lawsuit as a class action is underway.

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In May 2010, a lawsuit and motion for certification as a class action were filed in the Central District Court against Pelephone and three other cellular operators. The plaintiffs claim that the defendants violated their duty to establish cellular antenna sites in the required amount and spread, that they violated their duty to test, repair and provide notice regarding levels of non-ionizing radiation emitted from cellular phones after they have been repaired, and also violated their duty to provide a warning with respect to the hazard involved in the holding of cellular phones. The plaintiffs are seeking aggregate compensation from Pelephone of approximately NIS 3.68 billion ($ 0.97 billion) and aggregate compensation from the defendants of approximately NIS 12 billion ($ 3.17 billion). The hearing on the motion to certify the lawsuit as a class action is underway.

●

In June 2010, a lawsuit and motion for certification as a class action were filed in the Central District Court against Pelephone. The plaintiff claims that Pelephone unlawfully charges its customers for several services that were not requested by the customers and transferred customers’ details to third party suppliers without their consent. The plaintiff is seeking compensation for personal damages in the amount of NIS 958 (approximately $252). The total amount of the lawsuit if certified as a class action was not indicated in the lawsuit, but the lawsuit estimates it would be hundreds of millions of NIS. The hearing on the motion to certify the lawsuit as a class action is underway.

Bezeq International

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The following four lawsuits and motions for certification as a class action were filed against Bezeq International by plaintiffs who claim that Bezeq International’s international calling cards to certain foreign destinations provide less than the amount of time indicated on the cards. The plaintiffs in each of the lawsuits also allege that Bezeq International unlawfully deducted the time spent when unsuccessfully attempting to call someone from the card and formed a cartel with other international communication companies that raised the prices of calling cards. The plaintiffs in each of the lawsuits also petitioned the Court to order Bezeq International to cease the foregoing acts. The hearing in the motions to certify the lawsuits as a class action is underway. The lawsuits are being heard together in the Tel Aviv District Court, although their proceedings have no t formally been consolidated.

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

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

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

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

●

In July 2008, two lawsuits and motions for certification as a class action were filed in the Tel Aviv District Court against Bezeq International by customers of Bezeq International. The plaintiffs claim that Bezeq International unlawfully charged customers who were being billed based on a dollar tariff on the basis of a higher dollar exchange rate than the representative dollar exchange rate. Since the facts and legal arguments in both cases are similar, with the consent of the parties, one of the lawsuits was withdrawn and the first lawsuit filed will be heard. The lawsuit does not specify the amount claimed, but the plaintiffs estimate the damages to be tens of millions of NIS. Following a preliminary hearing, the plaintiffs asked the Court to reduce the class action group to those customers of Bezeq International who were originally customers of “Bezeq Zahav.R 21; The hearing on the motion to certify the lawsuit as a class action is underway.

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On May 4, 2009, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against Bezeq International. The plaintiff is seeking reimbursement of excess amounts allegedly unlawfully collected by Bezeq International for services that the plaintiff claims he did not order and for the increase of the rate for Internet access after the first year. The plaintiff is seeking personal compensation in the amount of NIS 2,800 ($745) and if certified as a class action, in the amount of NIS 216 million ($58 million) for the entire class. The hearing on the motion to certify the lawsuit as a class action is underway.

●

On January 24, 2010, a lawsuit and motion for certification as a class action were filed in the Central Region District Court against Bezeq International and four other communication licensees. The plaintiffs are seeking reimbursement of the amounts allegedly unlawfully collection for call made to the technical support call centers. The total amount of the claim against Bezeq International, if certified as a class action, is NIS 105 million ($28 million). The hearing on the motion to certify the lawsuit as a class action is underway.

DBS

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On October 3, 2007, a lawsuit and motion for certification as a class action were filed in the Tel Aviv District Court against DBS. The plaintiff claims that due to reception disturbances in DBS’s broadcasts in September 2007, daily malfunctions and long interruptions in television broadcasts were caused to DBS’s subscribers and that DBS’s service center was not operational during such time. The plaintiffs are seeking aggregate compensation of approximately NIS 121 million ($32 million) in the lawsuit, if certified as a class action. The hearing on the motion to certify the lawsuit as a class action is underway.

Bezeq makes provisions in its financial statements for certain of its legal proceedings in which it is a party. These provisions are aggregated into groups based on the type of activity and claim. As of March 31, 2010, Bezeq has made an aggregate provision of NIS 358 million ($95 million) for its pending litigation. Bezeq believes that as of March 31, 2010, its aggregate additional exposure due to claims filed against companies within the Bezeq group that are unlikely to be realized, amounts to NIS 12.3 billion ($3.25 billion). In addition, Bezeq has not yet assessed additional outstanding claims in the aggregate amount of NIS 233 million ($61.72 million) as of such date. &# 160;The foregoing amounts do not include additional potential exposure that Bezeq may have attributable to pending motions to certify lawsuits as class actions that do not state the amount claimed if the motion is approved.

Dividend Distribution Policy

We have never paid cash dividends to our shareholders and do not currently have a dividend distribution policy in place. Our indirect wholly-owned subsidiary SP2, which directly holds Bezeq’s shares and our principal source of revenues and income, is subject to limitations on the payment of dividends under the terms of the financing agreements entered into in connection with its acquisition of the controlling interest in Bezeq.

According to the Israeli Companies Law, a company may distribute dividends out of its profits (as such term is defined in the Israeli Companies Law), provided that there is no reasonable concern that payment of the dividend will prevent the company from satisfying all its current and foreseeable obligations, as they become due. Notwithstanding the foregoing, dividends may be paid with the approval of a court, at the company’s request, provided that there is no reasonable concern that payment of the dividend will prevent the company from satisfying its current and foreseeable obligations, as they become due. In the event cash dividends are declared, such dividends will be paid in NIS.

B. Significant Changes

Except as otherwise disclosed in this annual report, no significant change has occurred since December 31, 2009.

ITEM 9. THE OFFER AND LISTING

A. Offer and Listing Details

Annual Stock Information

The following table sets forth, for each of the years indicated, the high and low market prices of our ordinary shares on the NASDAQ Global Market (from October, 2007) and the TASE (from November 14, 2007):

	NASDAQ Global Market				Tel Aviv Stock Exchange
Year	High		Low		High	Low
2007	$	13.11	$	11.53	NIS 52.64	NIS 46.59
2008	$	12.77	$	3.80	NIS 50.85	NIS 13.97
2009	$	22.63	$	4.96	NIS 85.47	NIS 18.78

Quarterly Stock Information

The following table sets forth, for each of the full financial quarters in the two most recent full financial years and any subsequent period, the high and low market prices of our ordinary shares on the NASDAQ Global Market and the TASE:

	NASDAQ Global Market				Tel Aviv Stock Exchange
	High		Low		High	Low
2008
First Quarter	$	12.77	$	9.02	NIS 50.85	NIS 30.39
Second Quarter	$	11.87	$	9.72	NIS 40.91	NIS 33.39
Third Quarter	$	9.95	$	7.29	NIS 35.69	NIS 25.07
Fourth Quarter r	$	7.51	$	3.80	NIS 25.06	NIS 13.97

2009
First Quarter	$	6.34	$	4.96	NIS 25.33	NIS 18.78
Second Quarter	$	9.04	$	5.49	NIS 36.56	NIS 22.79
Third Quarter	$	12.30	$	8.22	NIS 44.45	NIS 32.26
Fourth Quarter	$	22.63	$	10.43	NIS 85.47	NIS 38.93

2010
First Quarter	$	34.60	$	22.50	NIS 125.60	NIS 84.50
Second Quarter (through June 28)	$	34.99	$	24.81	NIS 127.90	NIS 97.80

Monthly Stock Information

The following table sets forth, for the most recent six months, the high and low market prices of our ordinary shares on the NASDAQ Global Market and the TASE:

	NASDAQ Global Market				Tel Aviv Stock Exchange
	High		Low		High	Low
December 2009	$	22.63	$	16.59	NIS 85.47	NIS 63.29
January 2010	$	25.39	$	22.50	NIS 95.03	NIS 84.50
February 2010	$	29.96	$	24.03	NIS 112.80	NIS 90.00
March 2010	$	34.60	$	29.26	NIS 125.60	NIS 110.00
April 2010	$	34.99	$	29.30	NIS 127.90	NIS 114.00
May 2010	$	30.39	$	24.91	NIS 114.40	NIS 98.04
June 2010 (through June 28)	$	27.91	$	24.81	NIS 107.60	NIS 97.80

B. Plan of Distribution

Not applicable.

C. Markets

Our ordinary shares were listed on the NASDAQ Global Market in connection with our initial public offering on October 30, 2007 and have been traded on the TASE since November 14, 2007.

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expense of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

Set out below is a description of certain provisions of our Articles of Association and of the Israeli Companies Law related to such provisions. This description is only a summary and does not purport to be complete and is qualified by reference to the full text of the Articles of Association, which are incorporated by reference as exhibits to this Annual Report, and to Israeli law.

Purposes and Objects of the Company

We are a public company registered under the Israel Companies Law, 1999-5759, or the Israeli Companies Law, as B Communications Ltd., registration number 512832742. Our objects and purposes, as provided by our Articles of Association, are to carry on any lawful activity.

The Powers of the Directors

Under the provisions of the Israeli Companies Law and our Articles of Association, a director cannot participate in a meeting nor vote on a proposal, arrangement or contract in which he or she is materially interested unless such proposal, arrangement or contract is in the ordinary course of business or the majority of directors are personally interested in such proposal, arrangement or contract. In the event the majority of the members of the board of directors have a personal interest in the proposed transaction, approval of our shareholders at a general meeting is required. In addition, our directors cannot vote compensation to themselves or any members of their body without the approval of our audit committee and our shareholders at a general meeting. See Item 6C. “Directors, Senior Management a nd Employees – Board Practices – Fiduciary Duties; Approval of Related Party Transactions Under Israeli Law.”

The authority of our directors to enter into borrowing arrangements on our behalf is not limited, except in the same manner as any other transaction by us.

Under our Articles of Association, retirement of directors from office is not subject to any age limitation and our directors are not required to own shares in our company in order to qualify to serve as directors.

Rights Attached to Shares

Our authorized share capital consists of 50,000,000 ordinary shares of a nominal value of NIS 0.1 each. All of our issued and outstanding ordinary shares are duly authorized, validly issued, fully paid and non-assessable. Our ordinary shares are not redeemable and do not have preemptive rights.

Dividend and Liquidation Rights. The holders of the ordinary shares will be entitled to their proportionate share of any cash dividend, share dividend or dividend in kind declared with respect to our ordinary shares. Our board of directors may declare a dividend to be paid to the holders of ordinary shares in proportion to the paid up capital attributable to the shares that they hold. Dividends may only be paid out of our profits and other surplus funds, as defined in the Israeli Companies Law, as of the end of the most recent fiscal year or as accrued over a period of two years, whichever is higher, provided that there is no reasonable concern that a payment of a dividend will prevent us from satisfying our existing and foreseeab le obligations as they become due. If we do not meet the profit requirement, we may seek the approval of the court to distribute a dividend. The court may approve our request if it is convinced that there is no reasonable risk that a distribution might prevent us from satisfying our existing and anticipated obligations as they become due.

Under the Israeli Companies Law, a dividend declaration must be approved by the board of directors and does not require the approval of the shareholders of a company unless the company’s articles of association provide otherwise. Our articles of association do not require shareholder approval of a dividend distribution.

In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to the paid up capital attributable to the shares that they hold. Dividend and liquidation rights may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.

Exceptional Holdings; Principal Shareholders. Under the Communications Order, no person may acquire, directly or indirectly, the ability to exercise “significant influence” over Bezeq or 5% or more of any particular class of means of control in Bezeq, nor may any person, together with any other person, appoint the general manager of Bezeq or cause the election or appointment of any director of Bezeq, without the prior written consent of the Prime Minister of Israel and the Israeli Minister of Communications. Subject to certain exceptions, prior written approval of such Ministers is also required to increase the holdings or other rights in excess of those determined in the initial approval, including by means of an agreement (incl uding a voting agreement). Furthermore, under the Communications Order, no person may transfer control, “significant influence” or means of control in Bezeq to another, if, as a result of the transfer, the holdings of the transferee would require approval pursuant to the Communications Law or Communications Order and the transferee is not in possession of the requisite approval. Any such unauthorized acquisition is referred to as “Exceptional Holdings.” For the foregoing purposes, “significant influence” means the ability to significantly influence the activity of a corporation, whether alone or together with or through others, directly or indirectly, as a result of holding means of control in that corporation or in another corporation, including ability derived from the corporation’s articles of association, a written, oral or other kind of agreement, or from any other source, excluding solely as a result of the performance of an off ice holder’s duties in the corporation. In this context, holding 25% of our means of control is presumed to confer significant influence. “Means of control” means the right to vote at a general meeting of the company, to appoint a director or general manager of the company, to participate in the profits of the company or a share of the remaining assets of the company after payment of its debts upon liquidation.

In compliance with the Communications Law and Communications Order following our acquisition of the controlling interest in Bezeq, our Articles of Association provide that Exceptional Holdings will not entitle the holder to any rights in respect of such holdings, unless and to the extent permitted under the Communications Order. Accordingly, Exceptional Holdings will not have any voting rights at a general meeting of shareholders. Each shareholder participating in a general meeting of shareholders will be required to certify to us prior to the vote or, if the shareholder is voting by a proxy or any similar instrument, on such proxy card or similar instrument, as to whether or not his or her holdings in our company or his or her vote require the approval of the Prime Minister of Israel and the Israeli Minister of Com munications, pursuant to the Communications Law and Communications Order. In addition, no director may be appointed, elected or removed from office by virtue of the vote of a holder of Exceptional Holdings. If a director is appointed, elected or removed from office by virtue of the vote of a holder of Exceptional Holdings, such appointment, election or removal from office will be void.

Under our Articles of Association, any person holding a number of our shares that requires approval under the Communications Order shall notify us, Bezeq, the Prime Minister of Israel and the Israeli Minister of Communications of such holdings in writing, no later than 48 hours from the date of acquiring such holdings.

Our Articles of Association include reporting requirements applicable to “Principal Shareholders,” meaning a holder, directly or indirectly, of 5% of our issued and outstanding share capital. Any person who, after acquiring, directly or indirectly, shares in our company becomes a “Principal Shareholder,” is required, no later than 48 hours after becoming a Principal Shareholder, to notify us in writing, specifying the number of our shares held by such shareholder and the date on which such shareholder became a Principal Shareholder. Any person who ceases to be a Principal Shareholder is required, no later than 48 hours thereafter, to notify us in writing of the date on which such person ceased to be a Principal Shareholder. In addition, a Principal Shareholder is required to notify us in writ ing of any aggregate change in its holdings of our shares in an aggregate amount equal to 1% or more of our outstanding share capital compared to the last notice of holdings submitted by such Principal Shareholder, no later than 48 hours after such change. In the event a Principal Shareholder fails to provide any required notice, as discussed above, then until such Principal Shareholder provides us with the requisite notice, the Principal Shareholder will not be entitled to any rights in respect of such shares and the provisions of the Communications Order with respect to the exercise of rights underlying Exceptional Holdings will apply, and the undisclosed holdings shall also be deemed “dormant shares,” as defined under the Israeli Companies Law.

Under our Articles of Associations, we are required to notify the Prime Minister of Israel and the Israeli Minister of Communications of any Exceptional Holdings immediately upon becoming aware of such event. We are also required to notify such Ministers in the event a shareholder becomes a Principal Shareholder and regarding any change in the holdings of a Principal Shareholder within 48 hours of becoming aware of such change.

Voting Rights. Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders, subject to the restrictions described above relating to Exceptional Holdings and Principal Shareholders. Such voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.

Ownership or Voting of Ordinary Shares by Non-Residents of Israel. Shares held by citizens of countries which are in a state of war with Israel will not confer any rights to their holders unless the Israeli Ministry of Finance consents otherwise.

Election of Directors

Our ordinary shares do not have cumulative rights for the election of directors. Rather, under our articles of association, our directors (other than the outside directors) are elected by a vote of the holders of a majority of the voting power represented and voting at our annual general meetings of shareholders, and hold office until the next annual general meeting of shareholders and until their successors have been elected. See Item 6C. “Directors, Senior Management and Employees - Board Practices - Election of Directors.” Internet Gold, our controlling shareholder, is able to elect all of our directors other than our outside directors. For information regarding the election of outside directors, see Item 6C. “Directors, Senior Management and Employees - Board Practices - O utside and Independent Directors - Outside Directors.” All the members of our Board of Directors (except the outside directors) may be reelected upon completion of their term of office.

Under our Articles of Association, provisions relating to the election and removal of directors who are not outside directors, within the meaning of the Israeli Companies Law, may not be modified without the prior written consent of the Israeli Minister of Communications.

Regulations promulgated under the Communications Law require that our chief executive officer, any member of our board of directors holding an executive role, as well as a majority of the members of the board of directors, be citizens and residents of the State of Israel.

Annual and Extraordinary Meetings

Under the Israeli Companies Law and our articles of association, our board of directors must convene an annual meeting of shareholders at least once every calendar year and within 15 months of the last annual meeting. Depending on the matter to be voted upon, and subject to the Israeli Companies Law and regulations thereunder, notice of at least 14 days or 21 days or 35 days prior to the date of the meeting is required. Our articles of association provide that notice of a general meeting of shareholders will be delivered to all eligible shareholders by publication in two daily Hebrew language newspapers in Israel that have a reasonably-sized readership. Our board of directors may, in its discretion, convene additional meetings as “special general meetings.” In addition, the board must convene a special general meeting upon the demand of: (a) two of the directors or 25% of the nominated directors, (b) one or more shareholders having at least 5% of the outstanding share capital and at least 1% of the voting power in the company, or (c) one or more shareholders having at least 5% of the voting power in the company. The chairman of the board of directors presides at each of our general meetings. The chairman of the board of directors is not entitled to a vote at a general meeting in his capacity as chairman.

Quorum

The quorum required for any general meeting is the presence, in person or by proxy, of shareholders holding or representing, in the aggregate, at least one third of the voting rights. No business shall be considered or determined at a general meeting, unless the requisite quorum is present within half an hour from the time designated for the general meeting. If within half an hour from the time designated for the general meeting a quorum is not present, the general meeting shall stand adjourned to the same day in the following week, at the same time and place, or to such other time as designated in the notice of such adjourned meeting. If within half an hour from the time designated for the adjourned meeting a quorum is not present, any number of shareholders present will constitute a quorum. H owever, if the general meeting was convened on the demand of shareholders, the adjourned meeting shall take place only if there are present at least the number of shareholders required to convene a general meeting under our articles of association (as discussed above).

An adjourned meeting that is convened on the demand of shareholders may take place only if there are present at least the number of shareholders required to convene such a meeting.

A general meeting in which a quorum is present may resolve to adjourn the meeting, the discussion or the vote on a matter included in the agenda to such other time and place as it may determine. Only matters that were on the agenda and in respect of which no resolution was passed shall be discussed at the adjourned meeting.

Resolutions

An ordinary resolution requires approval by the holders of a simple majority of the voting rights represented at the meeting, in person, by proxy or by written ballot, and voting on the resolution.

Under the Israeli Companies Law, unless otherwise provided in the articles of association or applicable law, all resolutions of the shareholders require a simple majority. A resolution for the voluntary winding up of the company requires approval by holders of 75% of the voting rights represented at the meeting, in person, by proxy or by written ballot and voting on the resolution.

Modification of Class Rights

Under the Israeli Companies Law and our articles of association, any amendment, conversion, cancellation, expansion, addition to or other change in the rights, preferences, privileges, restrictions or provisions attached to any particular class of shares issued to shareholders of our company, shall require the written consent of holders of all issued shares of such particular class, or authorization by an ordinary resolution adopted at an extraordinary meeting of such class.

Limitations on the Rights to Own Ordinary Shares in Our Company

None of our memorandum of association, our articles of association or the laws of the State of Israel restrict in any way the ownership or voting of ordinary shares by non-residents, except that shares held by citizens of countries which are in a state of war with Israel will not confer any rights to their holders unless the Ministry of Finance consents otherwise.

In addition, pursuant to the Communications Order, so long as we control Bezeq, any state, corporation controlled by a state or a governmental corporation or a corporation controlled by a governmental corporation cannot control our company. Ownership of our shares, directly or indirectly, by a governmental corporation requires the prior written approval of the Israeli Prime Minister. A “Hostile State,” as such term is defined in the Communications Order, a citizen or resident of a Hostile State, a corporation incorporated in a Hostile State or controlled by a resident or citizen of a Hostile State is not allowed to hold, directly or indirectly, 5% or more or a “significant influence” (as described above) in Bezeq. Ownership, directly or indirectly, of 5%or more of Bezeq’s out standing shares or a “significant influence” (as described above) in Bezeq requires the approval of the Prime Minister of Israel and the Israeli Minister of Communications as well as the consent of the Israeli Minister of Defense.

Anti-Takeover Provisions; Mergers and Acquisitions

Full Tender Offer. A person wishing to acquire shares, or any class of shares, of a publicly traded Israeli company and who would as a result hold over 90% of the company’s issued and outstanding share capital, or a class of shares which are listed, is required by the Israeli Companies Law to make a tender offer to all of the company’s shareholders for the purchase of all of the remaining issued and outstanding shares of the company, or any class of shares, as the case may be. If the shareholders who do not respond to the offer hold less than 5% of the issued share capital of the company, or of the relevant class of shares, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. Ho wever, the shareholders may petition the court within three months after receipt of the offer to alter the consideration for the acquisition. If the dissenting shareholders hold more than 5% of the issued and outstanding share capital of the company, the acquirer may not acquire additional shares of the company from shareholders who accepted the tender offer if following such acquisition the acquirer would then own over 90% of the company’s issued and outstanding share capital.

Special Tender Offer. The Israeli Companies Law provides that an acquisition of shares of a public company be made by means of a special tender offer if as a result of the acquisition the purchaser would hold 25% or more of the voting rights at the company’s general meeting, unless one of the exemptions described in the Israeli Companies Law are met. This rule does not apply if there is already another shareholder who holds 25% or more of the voting rights at the company’s general meeting. Our parent, Internet Gold, currently holds more than 25% of our outstanding ordinary shares as determined in accordance with the Israeli Companies Law. Similarly, the Israeli Companies Law provides that an acquisition of shares in a public c ompany must be made by means of a tender offer if as a result of the acquisition the purchaser would hold more than 45% of the voting rights of the company, if there is no other shareholder of the company who holds more than 45% of the voting rights in the company. A tender offer is not required in the following circumstances: (i) the purchase was made in a private placement that was approved by the shareholders as a private placement and was meant to grant the purchaser 25% or more of the voting rights of a company in which no other shareholder holds 25% or more of the voting rights, or to grant the purchaser more than 45% of the voting rights of a company in which no other shareholder holds more than 45% of the voting rights, (ii) the purchaser would hold 25% or more of the voting rights after purchasing shares from a person that held 25% or more of the voting rights, or (iii) the purchaser would hold more than 45% of the voting rights after purchasing shares from a person that he ld more than 45% of the voting rights.

Merger. The Israeli Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain requirements described under the Israeli Companies Law are met, the majority of each party’s shares voted on the proposed merger at a shareholders’ meeting called on at least 35 days’ prior notice. Under the Israeli Companies Law, if the approval of a general meeting of the shareholders is required, merger transactions may be approved by holders of a simple majority of the shares present, in person or by proxy, at a general meeting and voting on the transaction. In determining whether the required majority has approved the merger, if shares of the company are held by the other party to the merger, or by any pe rson holding at least 25% of the outstanding voting shares or 25% of the means of appointing directors of the other party to the merger, then a vote against the merger by holders of the majority of the shares present and voting, excluding shares held by the other party or by such person, or anyone acting on behalf of either of them, is sufficient to reject the merger transaction. If the transaction would have been approved but for the exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value of the parties to the merger and the consideration offered to the shareholders. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be un able to satisfy the obligations of any of the parties to the merger and the court may also provide instructions to assure the rights of creditors. In addition, a merger may not be completed unless at least 50 days have passed from the date that a proposal for approval of the merger was filed with the Israeli Registrar of Companies and 30 days from the date that shareholder approval of both merging companies was obtained.

Notwithstanding the foregoing, a merger is not subject to shareholders approval if (i) the target company is a wholly-owned subsidiary of the acquiring company and (ii) the acquiring company is issuing to the shareholders of the target company up to 20% of its share capital and no person will become, as a result of the merger, a controlling shareholder, subject to certain limitation relating to the continuing of the votes, at a meeting of the shareholders of a company that is a party to the merger, of any entity or person that is either the other party to the merger or a control person thereof.

C. Material Contracts

On October 25, 2009, we entered into a share purchase agreement to acquire the controlling interest in Bezeq, Israel’s largest telecommunications provider, from Ap.Sb.Ar. Holdings Ltd. (a consortium of Apax Partners, Saban Capital Group and Arkin Communications), for an aggregate cash purchase price of approximately NIS 6.5 billion (approximately $1.72 billion). On April 14, 2010, we completed the acquisition of 30.44% of Bezeq’s outstanding shares and became the controlling shareholder of Bezeq. In accordance with the terms of the transaction, effective as of the closing of the acquisition, we designated seven directors to replace the Apax-Saban-Arkin Group’s representatives on Bezeq’s Board of Directors, which numbers a total of 13 directors.

On November 16, 2009, as part of our acquisition of the controlling interest in Bezeq, we entered into an agreement to sell our legacy Communications Business to a wholly-owned subsidiary of Ampal for NIS 1.2 billion (approximately $318 million). The transferred assets include, among other things, all of our assets, properties, subsidiaries, inventories, contracts, intellectual property rights, licenses and permits related to and/or used in connection with our legacy Communications Business, excluding certain retained cash and other customary excluded assets and certain indebtedness and other liabilities. In addition, substantially all of our executive officers and employees employed by us in such business upon the effective date of the sale were hired by Ampal, and we assigned and transferred to Ampal all education funds (“keren hishtalmut”), managers’ insurance policies and/or pension funds, severance pay funds and any other funds that had been reserved or contributed to by us for such transferred employees. Regulatory approvals for the sale of our legacy Communications Business were obtained from the Israeli Ministry of Communications, Antitrust Commission, Income Tax Authority and the Israeli Court. The sale of our legacy Communications Business to Ampal was completed on January 31, 2010, effective as of January 1, 2010.

D. Exchange Controls

Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares. In May 1998, a new “general permit” was issued under the Israeli Currency Control Law, 1978, which removed most of the restrictions that previously existed under such law, and enabled Israeli citizens to freely invest outside of Israel and freely convert Israeli currency into non-Israeli currencies.

Non-residents of Israel who purchase our ordinary shares will be able to convert dividends, if any, thereon, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, into freely repatriable dollars, at the exchange rate prevailing at the time of conversion, provided that the Israeli income tax has been withheld (or paid) with respect to such amounts or an exemption has been obtained.

E. Taxation

The following description is not intended to constitute a complete analysis of all tax consequences relating to the ownership or disposition of our ordinary shares. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.

Israeli Tax Considerations

The following summary describes the current tax structure applicable to companies in Israel, with special reference to its effect on us. The following discussion also summarizes the material Israeli income tax consequences applicable to the purchase, ownership and disposition of our ordinary shares. This discussion does not address all of the tax consequences that may be relevant to purchasers of our ordinary shares in light of their particular circumstances, or certain types of purchasers of our ordinary shares subject to special tax treatment. Examples of this kind of investor include residents of Israel and traders in securities who are subject to special tax regimes not covered in this discussion. Each individual/entity should consult its own tax or legal advisor as to the Israeli tax consequences of the purchase, ownership and disposition of our ordinary shares. To the extent that part of the discussion is based on new tax legislation, which has not been subject to judicial or administrative interpretation, we cannot assure that the tax authorities or the courts will accept the views expressed in this section.

General Corporate Tax Structure

Generally, Israeli companies were subject to corporate tax at the rate of 26% of their taxable income in 2009. The corporate tax rate was reduced to 25% in 2010. Corporate tax rates applicable for 2007 and 2008 were 29% and 27%, respectively.

In addition, Israeli companies are subject to capital gains tax at a rate of 25% on capital gains (other than gains derived from the sale of listed securities that are taxed at the prevailing corporate tax rates) derived after January 1, 2003.

In July 2009, the Israeli Parliament passed the Law for Economic Efficiency (Amended Legislation for Implementing the Economic Plan for 2009 and 2010), 2009, which prescribes, among other things, an additional gradual reduction in the rates of the Israeli corporate tax and real capital gains tax starting in 2011 to the following tax rates: 2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and thereafter - 18%.

On February 26, 2008 the Israeli Parliament enacted the Income Tax Law (Adjustments for Inflation) (Amendment No. 20) (Restriction of Effective Period), 2008, in accordance with which the effective period of the Adjustments Law ceased at the end of the 2007 tax year and as of the 2008 tax year the provisions of the law are no longer applied, other than the transitional provisions intended at preventing distortions in the tax calculations. In accordance with the amendment, from the 2008 tax year, income for tax purposes are no longer adjusted to a real (net of inflation) measurement basis. Furthermore, the depreciation of inflation immune assets and carried forward tax losses is no longer linked to the consumer price index, so that these amounts were adjusted until the end of the 2007 tax year after which they ceased to be link ed to the consumer price index. The effect of the amendment is reflected in the calculation of current and deferred taxes from 2008.

On February 4, 2010, the Israeli Tax Authorities issued a Temporary Order for amendment to the Israeli Income Tax Ordinance for the 2007, 2008 and 2009 tax years, prescribing that accounting under IFRS rules cannot determine taxable income even though the IFRS applies in the financial statements. The amendment has no effect on our financial statements.

Taxation of Non-Israeli Shareholders

Taxation of Non-Israeli Shareholders on Receipt of Dividends

Non-residents of Israel are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 20%, which tax will be withheld at source, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence.

However, the tax rate on dividends paid to a “substantial shareholder” (a shareholder who alone, or together with another person, holds, directly or indirectly, at least 10% in one or all of any of the means of control in the corporation) is 25%.

Under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (within the meaning of the U.S.-Israel Tax Treaty) is 25%. Furthermore, the maximum rate of withholding tax on dividends that are paid to a U.S. corporation holding 10% or more of our outstanding voting capital during the part of the tax year that precedes the date of the payment of the dividend and during the whole of its prior tax year, is 12.5%. This reduced rate will not apply if more than 25% of the Israeli company’s gross income consists of interest or dividends, other than dividends or interest received from a subsidiary corporation 50% or more of the outstanding shares of the voting shares of which are owned by the company. Investors should consult the ir own tax advisors to determine if they are eligible for benefits under the U.S. Israel Tax Treaty.

A non-resident of Israel who receives dividends from which tax was fully paid is generally exempt from the duty to file returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by the taxpayer, and the taxpayer has no other taxable sources of income in Israel.

Capital Gains Taxes Applicable to Non-Israeli Shareholders

Israeli law imposes a capital gains tax on the sale of capital assets. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is the portion of the total capital gain that is equivalent to the increase of the relevant asset’s purchase price (net of depreciation) which is attributable to the increase in the Israeli consumer price index between the date of purchase and the date of sale. Foreign residents who purchased an asset in foreign currency may request that the inflationary surplus be computed on the basis of the depreciation of the NIS against such foreign currency. The real gain is the excess of the total capital gain over the inflationary surplus. The inflationary surplus accumulated from and after December 31, 1993, is exempt from any capital gains tax in Israel while the real gain is taxed at the applicable rate discussed above.

Dealers in securities in Israel are taxed at regular tax rates applicable to business income.

Under the convention between the United States and Israel concerning taxes on income, Israeli capital gains tax will not apply to the sale, exchange or disposition of ordinary shares by a person:

●

who qualifies as a resident of the United States within the meaning of the U.S.-Israel tax treaty; and

●

who is entitled to claim the benefits available to the person by the U.S.-Israel tax treaty.

However, this exemption does not apply, among other cases, if the gain is attributable to a permanent establishment of such person in Israel, or if the holder is a resident of the United States within the meaning of the U.S.-Israeli tax treaty who holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding the sale, exchange or disposition, subject to specified conditions. Under these circumstances, the sale, exchange or disposition would be subject to Israeli tax, to the extent applicable. However, under the U.S.-Israel tax treaty, a U.S. resident generally would be permitted to claim a credit for the Israeli taxes paid against the U.S. federal income tax imposed on the sale, exchange or disposition, subject to the limitations under U.S. law ap plicable to foreign tax credits. The U.S.-Israel tax treaty does not relate to U.S. state or local taxes.

Under Israeli law, the capital gain from the sale of shares by non Israeli residents is tax exempt in Israel as long as our shares are listed on the NASDAQ Global Market or any other stock exchange recognized by the Israeli Ministry of Finance, and provided certain other conditions are met, the most relevant of which are: (A) the capital gain is not attributed to the foreign resident’s permanent establishment in Israel, (B) the shares were acquired by the foreign resident after the company’s shares had been listed for trading on the foreign exchange, and (C) if the seller is a corporation, less than 25% of its means of control are held by Israeli residents.

United States Federal Income Tax Consequences

The following is a summary of certain material U.S. federal income tax consequences that apply to U.S. Holders who hold ordinary shares as capital assets. This summary is based on the United States Internal Revenue Code of 1986, as amended, or the Code, Treasury regulations promulgated thereunder, judicial and administrative interpretations thereof, and the U.S.-Israel Tax Treaty, all as in effect on the date hereof and all of which are subject to change either prospectively or retroactively. This summary does not address all tax considerations that may be relevant with respect to an investment in ordinary shares. This summary does not account for the specific circumstances of any particular investor, such as:

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broker-dealers,

●

financial institutions,

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certain insurance companies,

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regulated investment companies,

●

investors liable for alternative minimum tax,

●

tax-exempt organizations,

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non-resident aliens of the U.S. or taxpayers whose functional currency is not the U.S. dollar,

●

persons who hold the ordinary shares through partnerships or other pass-through entities,

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persons who acquired their ordinary shares through the exercise or cancellation of employee stock options or otherwise as compensation for services,

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certain expatriates or former long-term residents of the United States,

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investors that own or have owned, directly, indirectly or by attribution, 10 percent or more of our voting shares, and

●

investors holding ordinary shares as part of a straddle or appreciated financial position or a hedging or conversion transaction.

If a partnership or an entity treated as a partnership for U.S. federal income tax purposes owns ordinary shares, the U.S. federal income tax treatment of a partner in such a partnership will generally depend upon the status of the partner and the activities of the partnership. A partnership that owns ordinary shares and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of holding and disposing of ordinary shares.

This summary does not address the effect of any U.S. federal taxation other than U.S. federal income taxation. In addition, this summary does not include any discussion of state, local or foreign taxation.

You are urged to consult your tax advisors regarding the foreign and United States federal, state and local tax considerations of an investment in ordinary shares.

For purposes of this summary, a U.S. Holder is any beneficial owner of ordinary shares that is:

●

an individual who is a citizen or, for U.S. federal income tax purposes, a resident of the United States;

●

a corporation or other entity created or organized in or under the laws of the United States or any political subdivision thereof;

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an estate whose income is subject to U.S. federal income tax regardless of its source; or

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a trust that (a) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons or (b) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

Taxation of Dividends

Subject to the discussion below under the heading “Passive Foreign Investment Companies,” the gross amount of any distributions received with respect to ordinary shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividends for U.S. federal income tax purposes, to the extent of our current and accumulated earnings and profits as determined for U.S. federal income tax purposes. You will be required to include this amount of dividends in gross income as ordinary income. Distributions in excess of our earnings and profits will be treated as a non-taxable return of capital to the extent of your tax basis in the ordinary shares, and any amount in excess of your tax basis will be treated as gain from the sale of ordinary shares. Se e "--Disposition of Ordinary Shares" below for the discussion on the taxation of capital gains. Dividends will not qualify for the dividends-received deduction generally available to corporations under Section 243 of the Code.

Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day such dividends are received. A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate in effect on the day of receipt may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss. U.S. Holders should consult their own tax advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.

Subject to complex limitations, any Israeli withholding tax imposed on such dividends will be a foreign income tax eligible for credit against a U.S. Holder's U.S. federal income tax liability, subject to certain limitations set out in the Code (or, alternatively, for deduction against income in determining such tax liability). The limitations set out in the Code include computational rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income taxes otherwise payable with respect to each such class of income. Dividends generally will be treated as foreign-source passive category income or general category income for United States foreign tax credit purposes. A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on the ordinary shares to the extent such U.S. Holder has not held the ordinary shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date or to the extent such U.S. Holder is under an obligation to make related payments with respect to substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the ordinary shares are not counted toward meeting the 16-day holding period required by the statute. Further, there are special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to a reduced tax rate or from a passive foreign investment company, as discussed below. The rules relating to the determination of the foreign tax credit are complex, and you should consult with your personal tax advisors to determine whether and to what extent you would be entitled to this credit.

Subject to certain limitations, “qualified dividend income” received by a non-corporate U.S. Holder through 2010 will be subject to tax at a reduced maximum tax rate of 15 percent. The rate reduction does not apply to dividends received from passive foreign investment companies, see discussion below. Distributions taxable as dividends paid on the ordinary shares should qualify for the 15 percent rate provided that either: (i) we are entitled to benefits under the income tax treaty between the United States and Israel, or the Treaty, or (ii) the ordinary shares are readily tradable on an established securities market in the United States and certain other requirements are met. We believe that we are entitled to benefits under the Treaty and that the ordinary shares currently are readily tradable on an est ablished securities market in the United States. However, no assurance can be given that the ordinary shares will remain readily tradable. The rate reduction does not apply unless certain holding period requirements are satisfied. With respect to the ordinary shares, the U.S. Holder must have held such shares for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date. The rate reduction also does not apply in respect of certain hedged positions or in certain other situations. The legislation enacting the reduced tax rate contains special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to the reduced tax rate. U.S. Holders of ordinary shares should consult their own tax advisors regarding the effect of these rules in their particular circumstances.

Disposition of Ordinary Shares

If you sell or otherwise dispose of ordinary shares, you will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amounts realized on the sale or other disposition and the adjusted tax basis in ordinary shares. Subject to the discussion below under the heading “Passive Foreign Investment Companies,” such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if you have held the ordinary shares for more than one year at the time of the sale or other disposition. In general, any gain that you recognize on the sale or other disposition of ordinary shares will be U.S.-source for purposes of the foreign tax credit limitation; losses will generally be allocated against U.S. source income. Deduction of capital losses is subject to certain limitations under the Code.

In the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of ordinary shares, the amount realized will be based on the U.S. dollar value of the NIS received with respect to the ordinary shares as determined on the settlement date of such exchange. A U.S. Holder who receives payment in NIS and converts NIS into United States dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss.

An accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers with respect to a sale or disposition of ordinary shares, provided that the election is applied consistently from year to year. Such election may not be changed without the consent of the Internal Revenue Service. In the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder may have a foreign currency gain or loss for U.S. federal income tax purposes because of differences between the U.S. dollar value of the currency received prevailing on the trade date and the settlement date. Any such currency gain or loss would be treated as ordinary income or loss and would be in addition to gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such ordinary shares.

Passive Foreign Investment Companies

There is a risk that we may become a passive foreign investment company, or PFIC, for U.S. federal income tax purposes. Our treatment as a PFIC could result in a reduction in the after-tax return to the U.S. Holders of our ordinary shares and may cause a reduction in the value of such shares.

For U.S. federal income tax purposes, we will be classified as a PFIC for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, cash is considered to be an asset which produces passive income. Passive income generally includes dividends, interest, royalties, rents, annuities and the excess of gains over losses from the disposition of assets which produce passive income. As a result of our relatively substantial cash position at the time, we believe that we were a PFIC in certain periods in the past under a literal application of the asset test described above, which looks solely to the market value of our assets. We do not be lieve that we were a PFIC in 2009.

If we are a PFIC, dividends will not qualify for the reduced maximum tax rate, applicable to qualified dividend income, discussed above, and, unless you timely elect to “mark-to-market” your ordinary shares, as described below:

you will be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of ordinary shares ratably over the holding period for such ordinary shares,

the amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition would be subject to tax at the highest individual or corporate tax rate, as the case may be, in effect for that year and an interest charge would be imposed with respect to the resulting tax liability allocated to each such year,

the amount allocated to the current taxable year and any taxable year before we became a PFIC would be taxable as ordinary income in the current year, and

you will be required to make an annual return on IRS Form 8621.

In addition, holders of stock in a PFIC may not receive a “step-up” in basis on shares acquired from a decedent.

The PFIC provisions discussed above apply to U.S. persons who directly or indirectly hold stock in a PFIC. Generally, a U.S. person is considered an indirect shareholder of a PFIC if it is:

A direct or indirect owner of a pass-through entity, including a trust or estate, that is a direct or indirect shareholder of a PFIC,

A shareholder of a PFIC that is a shareholder of another PFIC, or

A 50%-or-more shareholder of a foreign corporation that is not a PFIC and that directly or indirectly owns stock of a PFIC.

An indirect shareholder may be taxed on a distribution paid to the direct owner of the PFIC and on a disposition of the stock indirectly owned. Indirect shareholders are strongly urged to consult their tax advisors regarding the application of these rules.

If we become a PFIC and cease to be a PFIC in a future year, a U.S. Holder may avoid the continued application of the tax treatment described above by electing to be treated as if it sold its ordinary shares on the last day of the last taxable year in which we were a PFIC. Any gain would be recognized and subject to tax under the rules described above. Loss would not be recognized. A U.S. Holder’s basis in its ordinary shares would be increased by the amount of gain, if any, recognized on the sale. A U.S. Holder would be required to treat its holding period for its ordinary shares as beginning on the day following the last day of the last taxable year in which we were a PFIC.

If the ordinary shares are considered “marketable stock” and if you elect to “mark-to-market” your ordinary shares, you would not be subject to the rules described above. Instead, you will generally include in income any excess of the fair market value of the ordinary shares at the close of each tax year over your adjusted basis in the ordinary shares. If the fair market value of the ordinary shares had depreciated below your adjusted basis at the close of the tax year, you may generally deduct the excess of the adjusted basis of the ordinary shares over its fair market value at that time. However, such deductions generally would be limited to the net mark-to-market gains, if any, that you included in income with respect to such ordinary shares in prior years. Income recognized and deductions allowed un der the mark-to-market provisions, as well as any gain or loss (to the extent of net mark-to-market gains) on the disposition of ordinary shares with respect to which the mark-to-market election is made, is treated as ordinary income or loss. Loss on a disposition, to the extent in excess of net mark-to-market gains, would be treated as capital loss. Gain or loss from the disposition of ordinary shares (as to which a “mark-to-market” election was made) in a year in which we are no longer a PFIC will be capital gain or loss. Loss on a disposition, to the extent in excess of net mark-to-market gains, would be treated as capital loss. Our ordinary shares should be considered “marketable stock” if they traded at least 15 days during each calendar quarter of the relevant calendar year in more than de minimis quantities.

A U.S. Holder of ordinary shares will not be able to avoid the tax consequences described above by electing to treat us as a qualified electing fund, or QEF, because we do not intend to prepare the information that U.S. Holders would need to make a QEF election.

Backup Withholding and Information Reporting

Payments in respect of ordinary shares may be subject to information reporting to the U.S. Internal Revenue Service and to U.S. backup withholding tax at a rate equal to the fourth lowest income tax rate applicable to individuals which, under current law, is 28%. Backup withholding will not apply, however, if you (i) are a corporation or come within certain exempt categories, and demonstrate the fact when so required, or (ii) furnish a correct taxpayer identification number and make any other required certification.

Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder’s U.S. tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS.

Any U.S. Holder who holds 10% or more in vote or value of our ordinary shares will be subject to certain additional United States information reporting requirements.

U.S. Gift and Estate Tax

An individual U.S. Holder of ordinary shares will be subject to U.S. gift and estate taxes with respect to ordinary shares in the same manner and to the same extent as with respect to other types of personal property.

F. Dividends and Paying Agents

Not applicable.

G. Statement by Experts

Not applicable.

H. Documents on Display

We are subject to certain of the reporting requirements of the Securities and Exchange Act of 1934, as amended, or the Exchange Act, as applicable to “foreign private issuers” as defined in Rule 3b-4 under the Exchange Act. As a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our proxy solicitations are not subject to the disclosure and procedural requirements of Regulation 14A under the Exchange Act, and transactions in our equity securities by our officers and directors are exempt from reporting and the “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements as frequently or as promptly as U.S. comp anies whose securities are registered under the Exchange Act. However, we file with the Securities and Exchange Commission an annual report on Form 20-F containing financial statements audited by an independent accounting firm. We also submit to the Securities and Exchange Commission reports on Form 6-K containing (among other things) press releases and unaudited financial information. We post our annual report on Form 20-F on our website (www.bcommunications.co.il) promptly following the filing of our annual report with the Securities and Exchange Commission. The information on our website is not incorporated by reference into this annual report.

This annual report and the exhibits thereto and any other document we file pursuant to the Exchange Act may be inspected without charge and copied at prescribed rates at the Securities and Exchange Commission public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the Securities and Exchange Commission’s public reference room in Washington, D.C. by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Exchange Act file number for our Securities and Exchange Commission filings is 001-33773.

The Securities and Exchange Commission maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the Securities and Exchange Commission using its EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system.

The documents concerning our company referred to in this annual report may also be inspected at our offices located at 2 Dov Friedman Street, Ramat Gan 52503, Israel.

I. Subsidiary Information

Not applicable.

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

We are exposed to a variety of risks, including foreign currency fluctuations and changes in interest rates. We regularly assess currency and interest rate risks to minimize any adverse effects on our business as a result of those factors.

Effects of Currency Fluctuations

Bezeq is exposed to foreign currency effects mainly due to dollar-linked and euro-linked payments for purchases of terminal equipment and property, plant and equipment. In addition, it provides services for customers and receives services from suppliers worldwide for which it is paid and it pays in foreign currency, mainly the U.S. dollar. The Bezeq group has surplus liabilities over assets in foreign currency. To hedge its exposure, the Bezeq group makes forward transactions and purchases options against the U.S. dollar. The duration of the hedging transactions is the same as or shorter than the duration of the hedged exposures.

Effects of Changes in Interest Rates and the Israeli Consumer Price Index

We pay interest on our short-term credit lines and on our shareholders loan based on the Israeli Prime Rate. As of December 31, 2009, our outstanding short-term debt consisted of loans from our parent company Internet Gold in the amount of NIS 326 million ($86 million), bearing an average interest rate of 1.52% and short term bank credit in the amount of 448 million ($119 million) bearing an average interest rate of 2.05%. As a result, changes in the general level of interest rates directly affect the amount of interest payable by us under these facilities. Each increase or decrease of one percent in the Israeli Prime Rate will increase or decrease our yearly interest expense by NIS 1 million ($265,000).

In addition, our Series A Debentures (including current maturities) are linked to the Israeli consumer price index. Each increase or decrease of one percent in the Israeli consumer price index will result in an increase or decrease in our yearly financial expense by NIS 3.2 million ($0.8 million). We also have marketable securities that are linked to the Israeli consumer price index.

As a result of the NIS 4.4 billion ($1.16 billion) debt we incurred in connection with our acquisition of the controlling interest in Bezeq, of which NIS 2.6 billion ($690 million) is subject to variable interest rates, NIS 1.4 billion ($370 million) is subject to changes in the Israeli consumer price index and NIS 400 million ($106 million) is not subject to variable interest rates or changes in the Israeli consumer price index, and the consolidation of Bezeq’s financial statements beginning in the 2010 second quarter, changes in interest rates and the Israeli consumer price index will have a greater impact on our financial statements.

As of March 31, 2010, Bezeq had debt of NIS 3.48 billion ($920 million) that is subject to variable interest rates and NIS 400 million ($106 million) that is subject to changes in the Israeli consumer price index.

Bezeq’s Exposure to Market Risks

Bezeq is exposed to market risks, mainly as a result of changes in interest rates, exchange rates, inflation, the prices of raw materials and equipment, and the prices of securities. In 2009, Bezeq acted in accordance with a financial exposure management policy adopted by its Board of Directors. Pursuant to that policy, Bezeq takes partial hedging actions depending on the circumstances and its own judgment, primarily for reducing its exposure to changes in the Israeli consumer price index and foreign currency exchange rates. Bezeq monitors and reviews the Bezeq group’s exposure management every month, including, when necessary, making recommendations for change, if required, in the exposure management.

Bezeq has a significant surplus of liabilities for consumer price index linked assets, and the bulk of its financial exposure stems from the risk of a rise in inflation. The rate of inflation also affects Bezeq’s operating income and operating expenses in the course of the year. In addition, Bezeq’s tariff updating mechanism, which is subject to government regulation, is reviewed once a year and is influenced by the consumer price index. As a result, the annual rate of inflation and its distribution during the year can have a material influence on the erosion of Bezeq’s tariffs and its revenues and expenses during the year.

Bezeq’s exposure to change in the interest rate largely depends on the character of its financial liabilities and assets as well as future financing needs. Most of Bezeq’s debt bears fixed interest, and therefore a change in the interest rate will affect its fair value rather than its carrying value.

Bezeq has investments in negotiable bonds that are stated in its books at their market value. This market value is influenced by changes in the interest rates in the economy. In addition, a change in the NIS exchange rate constitutes economic exposure that can affect Bezeq’s future profit and cash flows, mainly the repayment of currency-linked liabilities and payments for currency-linked purchases of equipment and raw materials.

The cash flow generated by Bezeq’s operations is used partially for investment in equipment. The prices of the equipment are affected by the indices to which they are linked, including industry price indices, exchange rates and global prices. Bezeq does not hedge against this exposure. Bezeq is also exposed to changes in copper prices that result in a change in the residual value of its copper cable infrastructure. In deploying its new generation network, Bezeq removes copper cables previously used to provide its services and sells the cooper from such cables, and the prices received are subject to the volatility of the copper market.

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Material Modifications to the Rights of Security Holders

None.

Use of Proceeds

We sold 6,990,000 of our ordinary shares in our initial public offering on October 30, 2007. The aggregate offering price of the shares sold was $83.9 million. The total expenses of the offering were approximately $8.0 million. None of such expenses were paid directly or indirectly to directors, officers, persons owning 10% or more of any class of equity securities of our company or to our affiliates. The net public offering proceeds to us, after deducting the total expenses were approximately $77.7 million. Such proceeds were initially used to repay $24.3 million of short-term debt and the payment of $262,000 to a former minority shareholder as contingent purchase price consideration. As of December 31, 2009, we had NIS 1,038 million ($275 million) in cash, cash equivalen ts and short-term investments.

ITEM 15. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our chief executive officer and chief financial officer to allow timely decisions regarding required disclosure. Our management, including our chief executive officer and chief financial officer, conducted an evaluation of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e), as of the end of the period covered by this annual report on Form 20-F. Based upon that evaluation, our chief executive officer and chief financial officer have co ncluded that, as of such date, our disclosure controls and procedures were effective.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management, including our chief executive officer and chief financial officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transaction s are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In conducting its assessment of internal control over financial reporting, management based its evaluation on the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations, or the COSO, of the Treadway Commission. Based on that assessment, our management has concluded that our internal control over financial reporting was effective as of December 31, 2009.

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial report. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

There was no change in our internal controls over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that Ms. Anat Winner, an independent director, meets the definition of an audit committee financial expert, as defined by rules of the Securities and Exchange Commission. For a brief listing of Ms. Winner’s relevant experience, see Item 6.A. “Directors, Senior Management and Employees - Directors and Senior Management.”

ITEM 16B. CODE OF ETHICS

We have adopted a code of ethics that applies to our chief executive officer and all senior financial officers of our company, including the chief financial officer, chief accounting officer or controller, or persons performing similar functions. Our code of ethics is available for viewing on our website at www.bcommunications.co.il. Written copies are available upon request. If we make any substantive amendment to the code of ethics or grant any waivers, including any implicit waiver, from a provision of the codes of ethics, we will disclose the nature of such amendment or waiver on our website.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees Billed by Independent Public Accountants

The following table sets forth, for the years ended December 31, 2008 and 2009, the fees billed to us by our principal independent registered public accounting firm. All of such fees were pre-approved by our Audit Committee.

	Year Ended December 31,
Services Rendered	2008		2009
	(NIS in thousands)
Audit (1)		924		1,482
Tax		-		-
Total		924		1,482

______________

(1)

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

Pre-Approval Policies and Procedures

Our audit committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent registered public accountants, Somekh Chaikin, a member firm of KPMG International. Pre-approval of an audit or non-audit service may be given as a general pre-approval, as part of the audit committee’s approval of the scope of the engagement of our independent auditor, or on an individual basis. Any proposed services exceeding general pre-approved levels also require specific pre-approval by our audit committee. The policy prohibits retention of the independent public accountants to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act or the rules of the Securities and Exchange Committee, and also requires the audit committee to consider whether proposed services are compatible with the independence of the public accountants.

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

In December 2008, our Board of Directors authorized the repurchase of up to NIS 38 million or $10 million of our ordinary shares in the open market from time to time at prevailing market prices. We did not repurchase any of our ordinary shares in 2008. As of December 31, 2009, we had repurchased 19,230 ordinary shares under the program at a total purchase price $114,743, or an average price of $6.00 per share.

The following table sets forth, for each of the months indicated, the total number of shares purchased by us, the average price paid per share, the number of shares purchased as part of our publicly announced repurchase program, the maximum number of shares that may yet be purchased under the program.

Period in 2009	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
January		4,430	$	5.44		4,430		9,975,901
February		800	$	5.89		5,230		9,971,189
March		3,300	$	5.20		8,530		9,954,029
April		3,800	$	6.15		12,330		9,930,659
May		6,900	$	6.58		19,230		9,885,257

ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT

None.

ITEM 16G. CORPORATE GOVERNANCE

NASDAQ Exemptions for a Controlled Company

We are a controlled company within the meaning of NASDAQ Listing Rule 5615(c)(1), since Internet Gold holds more than 50% of our voting power. Under NASDAQ Listing Rule 5615(c)(2), a controlled company is exempt from the following requirements of NASDAQ Listing Rule 5605:

●

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

●

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

●

The requirement that director nominees either be selected or recommended for the board of directors’ selection, either by (a) a majority of independent directors or (b) a nominations committee comprised solely of independent directors. Instead, we follow Israeli law and practice, in accordance with which directors may be recommended by our board of directors for election by our shareholders;

If the “controlled company” exemptions cease to be available to us under the NASDAQ Listing Rules, we may instead elect to follow Israeli law instead of the foregoing NASDAQ requirements, as described below.

NASDAQ Listing Rules and Home Country Practice

Under NASDAQ Listing Rule 5615(a)(3), foreign private issuers, such as our company, are permitted to follow certain home country corporate governance practices instead of certain provisions of the NASDAQ Listing Rules. As a foreign private issuer listed on the NASDAQ Global Market, we may follow home country practice with regard to, among other things, the composition of the board of directors, compensation of officers, director nomination process and quorum at shareholders’ meetings. In addition, we may follow home country practice instead of the NASDAQ requirement to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity-based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company). A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws. In addition, a foreign private issuer must disclose in its annual reports filed with the Securities and Exchange Commission each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.

PART III

ITEM 17. FINANCIAL STATEMENTS

We have elected to furnish financial statements and related information specified in Item 18.

ITEM 18. FINANCIAL STATEMENTS

Consolidated Financial Statements
Index to Consolidated Financial Statements	F-1
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Financial Position	F-3
Consolidated Statements of Income	F- 5
Consolidated Statements of Comprehensive Income	F- 6
Consolidated Statements of Changes in Equity	F- 7
Consolidated Statements of Cash Flows	F- 8
Notes to the Consolidated Financial Statements	F- 10

ITEM 19. EXHIBITS

Index to Exhibits

Exhibit Description

1.1

Memorandum of Association of the Registrant. (1)

1.2

Amended and Restated Articles of Association of the Registrant

2.1

Specimen of Ordinary Share Certificate. (1)

4.1

Trust Deed between the Registrant and Shiff Hezenfortz Trustees (2004) Ltd. dated March 8, 2007. (1)

4.2

Form of Smile.Communications Series A Debenture Certificate for Notes issued in March and May 2007 (1)

4.3

Form of Registration Rights Agreement among the Registrant, Internet Gold-Golden Lines Ltd. and Eurocom Communications Ltd. (1)

4.4

Share Purchase Agreement dated October 25, 2009, between the Registrant and Ap.Sb.Ar. Holdings Ltd.

4.5

First Amendment to the Share Purchase Agreement dated as of March 28, 2010, between B Communications (SP2) Ltd. and Ap.Sb.Ar. Holdings Ltd.

4.6

Asset Purchase Agreement dated November 16, 2009, between Ampal Communication 2010 Ltd., the Registrant and Merhav Ampal Energy Ltd., as Guarantor (2)

4.7

English translation of Bezeq Control Permit issued by the Prime Minister of Israel and Israeli Minister of Communication to members of the Eurocom Group on April 13, 2010

4.8

English translation of Credit Agreement dated February 11, 2010 between B Communications (SP2) Ltd. and Bank Hapoalim Ltd. (as Lender, Facility Agent and Security Trustee), Bank Leumi le-Israel BM, Amitim (Senior Pension Funds), Israel Discount Bank Ltd., Mizrahi Tefahot Bank Ltd., HSBC Bank PLC, First International Bank of Israel Ltd. and Union Bank of Israel (as Lenders)

4.9

English translation of Loan Agreement dated February 18, 2010, between B Communications (SP1) Ltd. and entities within the Migdal Insurance and Financial Holdings Ltd. group

4.10

English translation of Addendum and Amendment No. 1 the Credit Agreement dated February 11, 2010, dated April 14, 2010, between B Communications (SP2) Ltd. and Bank Hapoalim Ltd. (as Lender, Facility Agent and Security Trustee), Bank Leumi le-Israel BM, Israel Discount Bank Ltd., Mizrahi Tefahot Bank Ltd., HSBC Bank PLC, First International Bank of Israel Ltd., Union Bank of Israel, Central Benefits Fund of Histadrut Employees Ltd. (under special management), Makefet Fund Pension and Provident Center - AS Ltd. Pension Fund, Makefet Fund Pension and Provident Center - AS Ltd. (under special management) – Other-Purpose Funds, Mivtachim The Workers Social Insurance Fund Ltd. (under special management) - Pension Fund, Mivtachim The Workers Social Insurance Fund Ltd. (under special management) Illness and Accident Provident Fund, Hadassa Employees Pension Fund Ltd. (under special management), “Egged” M embers Pension Fund Ltd. (under special management) – Pension Track and “Egged” Members Pension Fund Ltd. (under special management) – Full Pension Track (as Lenders)

4.11	English translation of Addendum and Amendment No. 1 the Loan Agreement dated February 18, 2010, dated April 14, 2010, between B Communications (SP1) Ltd. and entities within the Migdal Insurance and Financial Holdings Ltd. group

4.12	2007 Equity Incentive Plan. (1)

8.1	List of Subsidiaries of the Registrant

12.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

12.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act 1934, as amended

13.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002

13.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002

15.1	Consent of Somekh Chaikin, a member firm of KPMG International, Independent Registered Public Accounting Firm

_________________

(1)

Filed as an exhibit to the Registrant’s Registration Statement on Form F-1, Registration Number 333-146645, filed with the Securities and Exchange Commission, and incorporated herein by reference.

(2)

Previously filed as Exhibit 99.2 to Registrant’s Report on Form 6-K for the month of May 2010 submitted to Securities and Exchange Commission on May 24, 2010, and incorporated herein by reference

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Consolidated Financial Statements

Contents

	Page

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Statements of Financial Position	F-3

Consolidated Statements of Income	F-5

Consolidated Statements of Comprehensive Income	F-6

Consolidated Statements of Changes in Equity	F-7

Consolidated Statements of Cash Flows	F-8

Notes to the Consolidated Financial Statements	F-10

F - 1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

B Communications Ltd. (formerly: 012 Smile.Communications Ltd.):

We have audited the accompanying consolidated statements of financial position of B Communications Ltd. (formerly: 012 Smile.Communications Ltd.) and its subsidiary (hereinafter - “the Company”) as at January 1, 2008, December 31, 2008 and 2009 and the consolidated statements of income, consolidated statements of comprehensive income, consolidated changes in equity and consolidated cash flows, for the years ended December 31, 2008 and 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as at January 1, 2008, December 31, 2008 and 2009, and its consolidated results of operations and cash flows, for the years ended December 31, 2008 and 2009 in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

The Company’s annual consolidated financial statements for 2008 were previously prepared in conformity with U.S. generally accepted accounting principles. As more fully described in Note 2A to the consolidated financial statements, the Company elected in 2009, to change the basis of accounting used in preparing its financial statements for it to be in conformity with IFRS as issued by the IASB. Consequently, the Company’s annual prior year financial statements for 2008, referred to above, are now being presented in accordance with IFRS as issued by the IASB.

The accompanying consolidated financial statements as of and for the year ended December 31, 2009 have been translated into United States dollars (“dollars”) solely for the convenience of the reader. We have audited the translation and, in our opinion, the consolidated financial statements expressed in New Israeli Shekels (“NIS”) have been translated into dollars on the basis set forth in Note 2E to the consolidated financial statements.

/s/ Somekh Chaikin

Somekh Chaikin

Certified Public Accountants (Isr.)

Member Firm of KPMG International

Tel Aviv, Israel

June 30, 2010

F - 2

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Consolidated Statements of Financial Position as at

(In thousands)

									Convenience
									translation into
									U.S. dollars
			January 1		December 31				(Note 2)
			2008		2008		2009		2009
	Note		NIS		NIS		NIS		US$
Assets
Cash and cash equivalents		7		229,895		60,652		939,668		248,919
Marketable securities		8		-		76,742		98,641		26,130
Trade receivables		9		194,964		203,009		-		-
Parent company receivable		27		6,553		-		769		204
Related parties receivables		27		2,161		-		3,552		941
Other receivables		9		19,804		23,038		3,682		974
Assets classified as held-for-sale		6		-		-		1,362,279		360,869

Total current assets				453,377		363,441		2,408,591		638,037

Long-term trade receivables		9		3,460		6,350		-		-
Marketable securities		8		-		152,020		-		-
Property and equipment		10		134,112		137,407		-		-
Intangible assets		11		644,621		625,937		-		-
Employee benefit assets		18		12,311		10,034		-		-
Deferred expenses		12		288,653		284,581		-		-
Deferred tax assets		19		-		1,271		924		245

Total non-current assets				1,083,157		1,217,600		924		245

Total assets				1,536,534		1,581,041		2,409,515		638,282

The accompanying notes are an integral part of these consolidated financial statements.

F - 3

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Consolidated Statement of Financial Position as at (cont’d)

(In thousands)

											Convenience
											translation into
											U.S. dollars
			January 1		December 31						(Note 2)
			2008		2008			2009			2009
	Note		NIS		NIS			NIS			US$
Liabilities
Current maturities of long-term liabilities and short-term bank credit		13		5,965		2,797			447,679			118,590
Current maturities of debentures		15		-		96,498			72,208			19,128
Loans from parent company		27		105,733		111,344			325,569			86,243
Trade payables		14		164,535		141,055			-			-
Other payables		14		58,688		65,848			2,600			689
Parent company payables		27		1,103		1,410			3,676			974
Related parties payables		27		-		2,228			-			-
Current tax liabilities				26,527		22,182			24,052			6,371
Deferred income				3,833		3,742			-			-
Liabilities classified as held-for-sale		6		-		-			270,394			71,628
Total current liabilities				366,384		447,104			1,146,178			303,623

Debentures		15		435,496		384,287			342,180			90,644
Long-term liabilities				23,291		143			-			-
Deferred tax liabilities		19		629		-			-			-
Total non-current liabilities				459,416		384,430			342,180			90,644

Total liabilities				825,800		831,534			1,488,358			394,267

Equity		21
Share capital				2,536		2,536			2,536			672
Share premium				611,615		611,615			617,865			163,673
Treasury shares				-		-			(468	)		(124	)
Capital reserve for financial assets available-for-sale				-		(13,549	)		990			262
Retained earnings				96,583		148,905			300,234			79,532
Total equity				710,734		749,507			921,157			244,015

Total liabilities and equity				1,536,534		1,581,041			2,409,515			638,282

/s/ Stella Handler

Stella Handler

Chief Executive Officer

(Until January 31, 2010)

/s/ Doron Ilan

Doron Ilan

Chief Financial Officer

(Until January 31, 2010)

Date of approval of the financial statements: June 30, 2010

The accompanying notes are an integral part of these consolidated financial statements.

F - 4

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Consolidated Statements of Income for the Year Ended December 31

(In thousands, except share data)

									Convenience
									translation into
									U.S. dollars
									(Note 2)
			2008			2009			2009
	Note		NIS			NIS			US$

Revenues				1,106,203			1,173,094			310,753

Cost and expenses
Depreciation and amortization				112,027			97,367			25,793
Salaries		23		161,556			157,876			41,821
General and operating expenses		24		693,773			748,915			198,388
Other operating expenses				6,705			2,448			648

				974,061			1,006,606			266,650

Operating income				132,142			166,488			44,103

Finance expense				65,083			48,800			12,927
Finance income				(8,039	)		(84,827	)		(22,470	)

Finance expense (income), net		25		57,044			(36,027	)		(9,543	)

Income before income tax				75,098			202,515			53,646
Income tax		19		22,333			55,215			14,626

Net income for the year				52,765			147,300			39,020


Earnings per share
Basic and diluted earnings per share		26		2.08			5.81			1.54

The accompanying notes are an integral part of these consolidated financial statements.

F - 5

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Consolidated Statements of Comprehensive Income for the year ended December 31

(In thousands)

									Convenience
									translation into
									U.S. dollars
									(Note 2)
			2008			2009			2009
	Note		NIS			NIS			US$
Net income for the year				52,765			147,300			39,020
Net change in fair value of available-for- sale financial assets				(20,633	)		53,990			14,302
Net change in fair value of available-for-sale financial assets transferred to profit or loss				2,568			(34,604	)		(9,166	)
Defined benefit plan actuarial losses, net		18		(5,163	)		(1,237	)		(328	)
Income tax on other comprehensive income		19		5,807			(4,537	)		(1,202	)

Total comprehensive income for the year				35,344			160,912			42,626

The accompanying notes are an integral part of these consolidated financial statements.

F - 6

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Consolidated Statements of Changes in Equity

(in thousands except share data)

	Share capital
											Capital									Convenience
											reserve for									translation
											financial assets									into
	Number of Shares(1)			Amount		Share premium		Treasury Shares			available-- for-sale			Retained earnings			Total			US dollars (Note 2)
	NIS 0.1 par
	value			NIS		NIS		NIS			NIS			NIS			NIS			US$

Balance as at January 1, 2008		25,360,000			2,536		611,615		-			-			96,583			710,734

Changes during 2008:
Share-based compensation		-			-		-		-			-			3,429			3,429
Other comprehensive income		-			-		-		-			(13,549	)		(3,872	)		(17,421	)
Net income for the year		-			-		-		-			-			52,765			52,765
Balance as at December 31, 2008		25,360,000			2,536		611,615		-			(13,549	)		148,905			749,507


Balance as at January 1, 2009		25,360,000			2,536		611,615		-			(13,549	)		148,905			749,507			198,545

Changes during 2009:
Share-based compensation		-			-		-		-			-			4,956			4,956			1,313
Treasury shares at cost		(19,230	)		-		-		(468	)		-			-			(468	)		(124	)
Contributions by parent company and ultimate parent company		-			-		6,250		-			-			-			6,250			1,656
Other comprehensive income		-			-		-		-			14,539			(927	)		13,612			3,605
Net income for the year		-			-		-		-			-			147,300			147,300			39,020
Balance as at December 31, 2009		25,340,770			2,536		617,865		(468	)		990			300,234			921,157			244,015

(1) Net of shares held by the Company.

The accompanying notes are an integral part of these consolidated financial statements.

F - 7

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Consolidated Statements of Cash Flows for the Year Ended December 31

(In thousands)

							Convenience
							translation into
							U.S. dollars
							(Note 2)
	2008			2009			2009
	NIS			NIS			US$
Cash flows from operating activities
Net income for the year		52,765			147,300			39,020

Adjustments for:
Depreciation		43,095			32,478			8,603
Amortization of intangible assets		42,299			40,746			10,794
Amortization of deferred expenses		26,633			24,143			6,395
Gain on redemption of Company’s debentures		(3,052	)		-			-
Finance expenses (income), net		74,882			(40,714	)		(10,785	)
Share-based compensation		3,429			4,956			1,313
Changes in employee benefits		(2,886	)		(4,281	)		(1,134	)
Income tax expense		22,333			55,214			14,626
		206,733			112,542			29,812
Changes in operating assets and liabilities:
Increase in trade receivables		(10,935	)		(13,881	)		(3,677	)
Increase (decrease) in other receivables		(3,234	)		11,218			2,972
Increase (decrease) in trade payables		(22,702	)		15,343			4,064
Decrease in other payables		7,159			5,708			1,512
Parent company payables and related parties, net		11,249			674			179
Changes in deferred income		(91	)		352			93
Income tax paid, net		(23,301	)		(29,971	)		(7,939	)
		(41,855	)		(10,557	)		(2,796	)

Net cash provided by operating activities		217,643			249,285			66,036

Cash flows from investing activities
Purchase of property and equipment		(47,167	)		(45,626	)		(12,086	)
Investment in intangible assets and deferred expenses		(46,176	)		(112,466	)		(29,792	)
Investment in marketable securities		(358,224	)		(236,844	)		(62,740	)
Proceeds from sales of marketable securities		100,417			451,202			119,524
Interest received		5,890			6,992			1,852

Net cash (used in) provided by investing activities		(345,260	)		63,258			16,758

The accompanying notes are an integral part of these consolidated financial statements.

F - 8

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Consolidated Statements of Cash Flows for the Year Ended December 31 (cont’d)

(In thousands)

							Convenience
							translation into
							U.S. dollars
							(Note 2)
	2008			2009			2009
	NIS			NIS			US$
Cash flows from financing activities
Short-term bank credit, net		(2,407	)		447,679			118,590
Redemption of Company’s debentures		(15,913	)		-			-
Loans from parent company		-			217,500			57,616
Repayment of debentures		-			(54,635	)		(14,473	)
Payment of long-term liabilities		(3,274	)		(3,133	)		(830	)
Interest paid		-			(45,325	)		(12,007	)
Purchase of treasury shares		-			(468	)		(124	)

Net cash (used in) provided by financing activities		(21,594	)		561,618			148,772

Net increase (decrease) in cash and cash equivalents		(149,211	)		874,161			231,566
Cash and cash equivalents as at the beginning of the year		229,895			60,652			16,067
Effect of exchange rate fluctuations on cash and
cash equivalents		(20,032	)		5,789			1,533

Cash and cash equivalents as at the end of the year (1)		60,652			940,602			249,166

(1)

As at December 31, 2009, NIS 934 is presented under assets classified as held-for-sale.

The accompanying notes are an integral part of these consolidated financial statements.

F - 9

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 1 - Reporting Entity

B Communications Ltd. (Formerly: 012 Smile Communications Ltd.) (hereinafter - the Company) is an Israeli resident company incorporated in Israel. The address of the Company’s registered office is 2 Dov Friedman Street, Ramat-Gan, Israel. The consolidated financial statements of the Company as at and for the year ended December 31, 2009 comprise the Company and its subsidiary (together referred to as the Group). The Company is a directly held subsidiary of Internet Gold - Golden Lines Ltd. (hereinafter - IGLD, Internet-Gold or the Parent Company) and its indirect controlling shareholder is Eurocom Communications Ltd. (hereinafter - Eurocom). As at December 31, 2009, the Group was a communications service provider in Israel, focused on offering broadband and traditional voice services to residential and business custome rs, as well as to domestic and international communications services providers or carriers. The securities of the Company are registered for trade on the NASDAQ Global Market and on the Tel Aviv Stock Exchange.

In January 2010, the Company completed the sale of its legacy communication business to a wholly-owned subsidiary of Ampal-American Israel Corporation (hereinafter - Ampal), which sale was effective as at January 1, 2010. For more details see Note 6.

On April 14, 2010, the Company completed the acquisition of 30.44% of the outstanding shares of Bezeq The Israel Telecommunications Corp. Ltd.’s (hereinafter - Bezeq) outstanding shares and became the controlling shareholder of Bezeq. For more details see Note 30.

Note 2 - Basis of Preparation

A. Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs), as issued by the IASB. These are the Company’s first consolidated financial statements prepared in accordance with IFRSs and IFRS 1, “First-time Adoption of International Financial Reporting Standards”, has been applied. An explanation of how the transition to IFRSs has affected the reported financial position, financial performance and cash flows of the Company is provided in Note 29.

The consolidated financial statements were authorized for issue by the Company’s Board of Directors on June 30, 2010.

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

As from January 1, 2008 the Company early adopted the amendment to IAS 1, Presentation of Financial Statements, which was issued in the framework of annual improvements to IFRSs 2010, pursuant to which the Company presents in the statement of changes in shareholders’ equity, for each component of equity, a reconciliation between the carrying amount at the beginning of the period and the carrying amount at its end, and provides separate disclosure for each change resulting from profit or loss, comprehensive income, and transactions with the owners in their capacity as owners. The Company provides disclosure for the said reconciliation with separate disclosure for each change resulting from each component of comprehensive income as part of the notes to the annual consolidated financial statements.

F - 10

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 2 - Basis of Preparation (cont’d)

C. Functional and presentation currency

These consolidated financial statements are presented in NIS, which is the Company’s functional currency, and have been rounded to the nearest thousand.

D. Basis of measurement

The consolidated financial statements have been prepared on the historical cost basis except for derivative financial instruments, financial instruments at fair value through profit or loss and financial instruments at fair value classified as available-for-sale.

The Company’s net obligation in respect of a defined benefit plan for post-retirement benefits is recognized as the net total of the present value of the defined benefit obligation, less the fair value of the plan assets and less the cost past service cost not yet recognized.

The Company’s held-for-sale assets are stated at the lower of carrying amount and fair value less estimated selling costs.

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

For the convenience of the reader, the reported NIS figures as at December 31, 2009, have been presented in dollars, translated at the representative rate of exchange as at December 31, 2009 (NIS 3.775 = US$ 1.00). The dollar amounts presented in these financial statements are merely supplementary information and should not be construed as complying with IFRSs translation method or as representing amounts that are receivable or payable in dollars or convertible into dollars, unless otherwise indicated.

F. Use of estimates and judgments

The preparation of the consolidated financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

Information about critical estimates and judgments in applying accounting policies that have the most significant effect on amounts recognized in the consolidated financial statements are described:

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

The Company determines the discount rate at every year-end. The discount rate is used to discount the future anticipated cash flows for the settlement of the liability. In determining the discount rate, the Company takes into consideration the interest rates of Israeli Government bonds that have maturity dates approximating the terms of the Company’s obligations.

F - 11

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 2 - Basis of Preparation (cont’d)

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

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

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

—

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

—

Share based compensation - Options granted to employees are measured using a Black-Sholes model. The expected life used on the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioral considerations. The amount recognized as an expense is adjusted to reflect the actual number of share options that vest. See also Note 22.

—

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

F - 12

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 3 - Significant Accounting Policies

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements and in preparing an opening IFRS statement of financial position as at January 1, 2008 for the purposes of the transition to IFRSs, as required by IFRS 1, unless otherwise indicated.

A. Basis of consolidation

These consolidated financial statements include consolidation of the Company and its fully owned subsidiary 012 Telecom Ltd. All intercompany transactions and balances were eliminated upon consolidation.

In respect of acquisition prior to January 1, 2008, goodwill represents the amount recognized under the Company’s previous GAAP (US GAAP).

B. Foreign currency transactions

Transactions in foreign currencies are translated to the NIS at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to NIS at the exchange rate at that date.

Financial instruments

Financial instruments are recognized when the Company enters into the contractual terms of the instruments. Financial instruments are initially measured at fair value. Financial assets are derecognized when the contractual rights of rights of the Company to the cash flows deriving from the financial asset expire, or when the Company transfers the financial asset to others without retaining control in the assets, or transfers all the risks and rewards deriving from the asset. Sales and acquisitions of financial instruments are recognized on the transaction date, that is the date in which the Company is obligated to sell or purchase the asset. Financial liabilities are derecognized when the Company’s contractual obligations expire, or when it is settled or cancelled.

(1) Non-derivative financial assets

Non-derivative financial assets are comprised of financial assets at fair value through profit or loss, loans and receivables and available-for-sale securities.

F - 13

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 3 - Significant Accounting Policies (cont’d)

C. Financial instruments (cont’d)

(1) Non-derivative financial assets (cont’d)

The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Company is recognised as a separate asset or liability.

Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when the Company has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.

Financial assets at fair value through profit or loss

A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company’s documented risk management or investment strategy. Upon initial recognition attributable transaction costs are recognised in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss.

Loans and receivables

Loans and receivables are financial assets with fixed or determinable payments that are not traded on an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. After initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses.

Cash and cash equivalents comprise cash balances available for immediate use and call deposits with original maturities of three months or less.

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are designated as available-for-sale and that are not classified in any of the previous categories. The Company’s investments in equity securities and certain debt securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses, are recognized in other comprehensive income and presented within equity in the fair value reserve. When an investment is derecognized, the cumulative gain or loss in other comprehensive income is transferred to profit or loss.

F - 14

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 3 - Significant Accounting Policies (cont’d)

C. Financial instruments (cont’d)

(2) Non-derivative financial liabilities

The Company initially recognizes debt securities issued and subordinated liabilities on the date that they are originated. All other financial liabilities are recognized initially on the trade date at which the Company becomes a party to the contractual provisions of the instrument.

The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire.

The Company’s non-derivative financial liabilities are comprised of debentures, long-term liabilities, trade and other payables.

Such financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method.

(3) Derivative financial instruments

The Company holds derivative financial instruments which were not designated in a qualifying hedge relationship to hedge its foreign currency exposures.

Derivatives are recognized initially at fair value; attributable transaction costs are recognized in profit or loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognized in profit or loss.

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

The value of CPI-linked financial assets and liabilities, which are not measured at fair value, are remeasured every period in accordance with the actual increase in the CPI.

(5) Share capital

Ordinary shares

Incremental costs directly attributable to the issue of ordinary shares are recognized as a deduction from equity.

Treasury shares

When share capital recognized as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, and is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase in equity, and the resulting surplus or deficit on the transaction is carried to share premium.

F - 15

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 3 - Significant Accounting Policies (cont’d)

Property and equipment

(1) Recognition and measurement

Property and equipment items are measured at cost less accumulated depreciation and accumulated impairment losses.

Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of direct labor, any other costs directly attributable to bringing the assets to a working condition for their intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.

When major parts of a property and equipment item (including costs of major periodic inspections) have different useful lives, they are accounted for as separate items (major components) of property and equipment.

Gains and losses on disposal of an item of property and equipment items are determined by comparing the proceeds from disposal with the carrying amount of the property and equipment, and are recognized net within other income in profit or loss.

(2) Subsequent costs

The cost of replacing part of a property and equipment item is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of day-to-day servicing are recognized in profit or loss as incurred.

(3) Depreciation

The estimated useful lives for the current and comparative periods are as follows:

	%
— Network equipment and computers	15-33
— Furniture and office equipment	7-15
— Motor vehicles	15
— Leasehold improvements	shorter of the lease term or the useful lives of the assets (mainly 10 years)

Depreciation methods, useful lives and residual values are reviewed at each reporting date.

F - 16

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 3 - Significant Accounting Policies (cont’d)

E. Intangible assets

(1) Goodwill and brand name

Goodwill and brand name arises upon the acquisition of 012 Golden Lines Ltd., on December 31, 2006.

In respect of acquisitions prior to January 1, 2008 (the date of transition to IFRS), goodwill and brand name represent their deemed costs which represent the amounts recorded under previous GAAP.

Subsequent recognition

Goodwill and brand name are measured at cost less accumulated impairment losses.

(2) Other intangible assets

Other intangible assets that are acquired by the Company and have infinite useful lives are measured at cost less accumulated amortization and accumulated impairment losses.

(3) Subsequent expenditure

Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognized in profit or loss as incurred.

(4) Amortization

Amortization is recognized in profit or loss on a straight-line basis, (except customer relationship), over the estimated useful lives of the intangible assets, other than goodwill and brand name, from the date they are available for use. Customer relationships are amortized according to the economic benefit expected from those customers each period, which results in accelerated amortization during the early years of the relationship.

The estimated useful lives for the current and comparative periods are as follows:

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

The estimates regarding the amortization method and useful life are reassessed at each reporting date and adjusted if appropriate.

The Company examines the useful life of an intangible asset that is not periodically amortized in order to determine whether events and circumstances continue to support the decision that the intangible asset has an indefinite useful life.

F - 17

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 3 - Significant Accounting Policies (cont’d)

F. Deferred expenses

Deferred expenses consist of right of use (ROU) of international fiber optic cables and are amortized on a straight-line basis over the relevant term of the service agreement which range from 15-20 years.

G. Impairment

(1) Financial assets (including receivables)

A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial assets is impaired if objective evidence indicates that a loss has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably.

Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Company on terms that the Company would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment.

An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale financial asset is calculated by reference to its fair value.

Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively.

All impairment losses are recognized in profit or loss. Any cumulative loss in respect of an available-for-sale financial asset recognized previously in equity is transferred to profit or loss.

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For financial assets measured at amortized cost and available-for-sale financial assets that are debt securities, the reversal is recognized in profit or loss. For available-for-sale financial assets that are equity securities, the reversal is recognized directly in equity.

(2) Non-financial assets

The carrying amounts of the Company’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and brand name that have indefinite useful lives, the recoverable amounts are estimated each year and on the same date.

F - 18

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 3 - Significant Accounting Policies (cont’d)

G. Impairment (cont’d)

(2) Non-financial assets (cont’d)

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its net selling price (fair value less costs to sell). In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or group of assets (the “cash-generating unit”). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units that are expected to bene fit from the synergies of the combination.

An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the unit on a pro rata basis.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

H. Non-current assets held-for-sale

Non-current assets (or a group of assets and liabilities held for disposal) that are expected to be recovered primarily through sale rather than through continuing use are classified as held-for-sale. Immediately before classification as held-for-sale, the assets (or components of a disposal group) are remeasured in accordance with the Company’s accounting policies. Thereafter the assets (or disposal group) are measured at the lower of their carrying amount and fair value less cost to sell. Any impairment loss on a disposal group first is allocated to goodwill, and then to remaining assets and liabilities on pro rata basis. No losses are allocated to financial assets, deferred tax assets and employee benefit assets, which continue to be measured in accordance with the Company’s accounting policies. Impairment losses on ini tial classification as held-for-sale and subsequent gains or losses on remeasurement are recognized in profit or loss. Gains are not recognized in excess of any cumulative impairment loss.

F - 19

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 3 - Significant Accounting Policies (cont’d)

I. Employee benefits

(1) Post-employment benefits

The Company has a number of post-employment benefit plans. The plans are usually financed by deposits with insurance companies or with funds managed by a trustee, and they are classified as defined contribution plans and as defined benefit plans.

(a) Defined contribution plans

A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an expense in profit or loss in the periods during which services are rendered by employees.

(b) Defined benefit plans

A defined benefit plan is a post-employment benefit plan other than a defined contribution plan. The Company’s net obligation in respect of defined benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value, and the fair value of any plan assets is deducted. The discount rate is the yield at the reporting date on Government bonds denominated in the same currency, that have maturity dates approximating the terms of the Company’s obligations. The calculation is performed annually by a qualified actuary using the projected unit credit method.

When the calculation results in benefit for the Company, the recognized assets is limited up to total of any unrecognized past service cost and the present value of economic benefits available in the form of a refunds from the plan or reductions in future contributions to the plan. In order to calculate the present value of economic benefits, consideration is given to any minimum funding requirements that apply to any Company plan. An economic benefit is available to the Company if it is realizable during the life of the plan, or on settlement of the plan liabilities.

When in the framework of a minimum contribution requirement, there is an obligation to pay additional amounts for services that were provided in the past, the Company recognizes an additional obligation (increases the net liability or decreases the net asset), if such amounts are not available as an economic benefit in the form of a refund from the plan or the reduction of future contributions.

When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognized in profit or loss on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognized immediately in profit or loss.

The Company recognizes all actuarial gains and losses arising from defined benefit plans directly in retained earnings.

F - 20

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 3 - Significant Accounting Policies (cont’d)

I. Employee benefits

(2) Short-term employee benefits

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 under short-term cash bonus or profit-sharing plans if the Company 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.

(3) Share-based payment transactions

The grant date fair value of options granted to employees is recognized as a salary expense, with a corresponding increase in equity, 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 are expected to vest.

J. Provisions

A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability.

Legal claims

A provision for claims is recognized if, as a result of a past event, the Company has a present legal or constructive obligation 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. When the value of time is material, the provision is measured at its present value.

K. Revenue

Revenue derived from usage of the Company’s networks, including business, residential and carrier long distance traffic, data and Internet traffic services. Revenue is recognized when the services are provided, the amount of revenue can be measured reliably and recovery of the consideration is probable.

For traditional voice services, revenue is earned based on the number of minutes of a call and is recorded upon completion of a call. Revenue for a period is calculated based on information received through the Company’s network switches. Revenue on prepaid calling cards is recognized as service is provided until expiration when all unused minutes, which are no longer available to customers, are recognized as revenue.

F - 21

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 3 - Significant Accounting Policies (cont’d)

K. Revenue (cont’d)

For broadband and data services, revenue is earned on a fixed monthly fee basis for the provision of services. Broadband and data services include monthly fees collected for the provision of dedicated and dial-up access at various speeds and bandwidths, and also web and server hosting. These fees are recognized as services are provided. The Company records payments received in advance for services and services to be provided under contractual agreements, such as Internet broadband, as deferred income until such related services are provided.

The Company also offers value-added services including web faxing services, anti-spam and anti-virus protection. 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. Revenues from enhanced features and optional services are recognized when earned.

Revenues from sales of equipment such as routers, that are not contingent upon the delivery of additional products or services are recognized when products are delivered to and accepted by customers and all other revenue recognition criteria are met.

In revenue arrangements including more than one deliverable, the arrangement consideration is allocated to each deliverable based on the fair value of the individual element. The Company determines the fair value of the individual elements based on prices at which the deliverable is regularly sold on a stand alone basis.

L. Lease payments

Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense on a straight-line basis, over the term of the lease.

At inception of an arrangement, the Company determines whether such an arrangement is or contains a lease. A specific asset is the subject of a lease if fulfillment of the arrangement is dependent on the use of that specified asset. An arrangement conveys the right to use the asset if the arrangement conveys to the Company the right to control the use of the underlying asset.

M. Finance income and expenses

Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividend income, gains on the disposal of available-for-sale financial assets, and changes in the fair value of financial assets at fair value through profit or loss. Interest income is recognized as it accrues in profit or loss, using the effective interest method. Dividend income is recognized in profit or loss on the date that the Company’s right to receive payment is established, which in the case of quoted securities is the ex-dividend date.

Changes in fair value of financial assets that are presented in fair value through profit or loss include dividends and interest income.

F - 22

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 3 - Significant Accounting Policies (cont’d)

M. Finance income and expenses (cont’d)

Finance expenses comprise interest expense on borrowings, changes in time value of provisions, changes in the fair value of financial assets at fair value through profit or loss, and impairment losses recognized on financial assets. All borrowing costs, which are not discounted, are recognized in profit or loss using the effective interest method. Foreign currency gains and losses are reported on a net basis.

N. Income tax

Income tax expense is comprised of current and deferred tax. Current and deferred tax expenses are recognized in profit or loss except to the extent that it relates to items recognized directly in equity or in other comprehensive income.

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

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.

O. Earnings per share

The Company presents basic and diluted earnings per share (hereinafter - 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 or 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 from share options granted to employees.

P. Segment reporting

An operating segment is a component of the Company that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Company’s other components. All operating segments’ operating results are reviewed regularly by the Company’s Chief Operating Decision Maker (hereinafter - CODM) to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

F - 23

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 3 - Significant Accounting Policies (cont’d)

P. Segment reporting (cont’d)

The Company has decided to early adopt the amendment to IFRS 8, operating segments, which was published as part of the 2009 Improvements to IFRSs project, according to which information about segments assets is required only if such information is reported regularly to the Company’s CODM.

Q. Transactions with controlling shareholder

Assets and liabilities included in a transaction with a controlling shareholder are measured at fair value on the date of the transaction. The difference between the fair value and the consideration from the transaction was recorded against share premium.

R. New standards and interpretations not yet adopted

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

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

IFRS 9, Financial Instruments. This standard is the first part of a comprehensive project to replace IAS 39 Financial Instruments: Recognition and Measurement (hereinafter - IAS 39) and it replaces the requirements included in IAS 39 regarding the classification and measurement of financial assets. In accordance with the Standard, there are two principal categories for measuring financial assets: amortized cost and fair value, with the basis of classification for debt instruments being the entity’s business model for managing financial assets and the contractual cash flow characteristics of the financial asset. In accordance with the Standard, an investment in a debt instrument will be measured at amortized cost if the objective of the entity’s business model is to hold assets in order to collect contractual cash flows and the contractual terms give rise, on specific dates, to cash flows that are sol ely payments of principal and interest. All other financial assets are measured at fair value through profit or loss. Furthermore, embedded derivatives are no longer separated from hybrid contracts that have a financial asset host.

F - 24

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 3 - Significant Accounting Policies (cont’d)

R. New standards and interpretation not yet adopted (cont’d)

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 measured through other comprehensive income are recognized in profit or loss unless they clearly constitute a return on an initial investment. The Standard removes financial liabilities from its scope.

The Standard is effective for annual periods beginning on or after January 1, 2013 but may be applied earlier, subject to providing disclosure and at the same time adopting other IFRS amendments as specified in the Standard. The Standard is to be applied retrospectively other than in a number of exceptions as indicated in the transitional provisions included in the Standard. In particular, if an entity adopts the Standard for reporting periods beginning before January 1, 2012 it is not required to restate prior periods. The Standard is expected to impact the classification and measurement of financial assets. The extent of the impact has not yet been determined.

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

F - 25

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 4 - Determination of Fair Values

A number of the Company’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. Marketable securities

Equity and debt securities classified as available-for-sale are measured using quoted market prices at the reporting date.

B 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.

C. Derivatives

The fair value of foreign currency forward contracts is based on quoted prices and market observable data of similar instruments.

The fair value of derivative option contracts to receive loans at “risk free” or lower rates from IGLD and Eurocom (see Note 27 for further details) are based on valuation performed by an external valuation services firm. The value of the options was calculated according to Black-76 model which is log-normal forward model.

D. 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, except for debenture that are stated for disclosure purpose at quoted market price at the reporting date.

E. Share-based payment transactions

The fair value of employee share options is measured using the Black-Scholes model. 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).

F - 26

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 5 - Segment Reporting

The Company has two reportable segments, as described below. The following summary describes the operations in each of the Company’s reportable segments:

Broadband services - include broadband Internet access with a suite of value-added services, specialized data services, local telephony via VoB, server hosting and a WiFi network of hotspots across Israel.

Traditional voice services - include incoming international telephony, hubbing services for international carriers, roaming and signaling services for cellular operators and calling card services.

The majority of the Company's property and equipment is utilized by both segments and therefore is not allocated between these segments.

Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit before income tax, as included in the internal management reports that are reviewed by the CODM. Segment profit is used to measure performance as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries.

Unallocated expenses represent sales, marketing, general and administrative expenses that are utilized by both segments and therefore are not allocated between the segments.

Year ended December 31, 2009

								Convenience
								translation into
			Traditional					U.S dollars
	Broadband		Voice		Total			(Note 2)
	NIS		NIS		NIS			US $
Total revenue		609,327		563,767		1,173,094			310,753

Segment profit		273,686		95,661		369,347			97,840

Unallocated expenses						202,859			53,737
Operating income						166,488			44,103

Finance expenses						48,800			12,927
Finance income						(84,827	)		(22,470	)


Income before income taxes						202,515			53,646

F - 27

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 5 - Segment Reporting (cont'd)

Year ended December 31, 2008

			Traditional
	Broadband		Voice		Total
	NIS		NIS		NIS
Total revenue		548,979		557,224		1,106,203

Segment profit		241,083		113,482		354,565

Unallocated expenses						222,423
Operating income						132,142

Finance expenses						65,083
Finance income						(8,039	)


Income before income taxes						75,098

Note 6 - Assets and Liabilities Classified as Held-for-Sale

On October 25, 2009, the Company entered into a share purchase agreement to acquire the controlling interest in Bezeq, Israel’s largest telecommunications provider, from Ap.Sb.Ar. Holdings Ltd. (a consortium of Apax Partners, Saban Capital Group and Arkin Communications), for an aggregate cash purchase price of NIS 6.5 billion.

As part of the Company's decision to acquire the control share in Bezeq, and as a result of Israeli regulatory requirements, the Company has determined to sell its communications business. Such decision was made independently without relation to whether to Bezeq transaction would be completed.

As a result of the abovementioned, as from October 25, 2009, the Company's legacy communications business has been classified as "held-for-sale ".

On November 16, 2009, the Company entered into an agreement to sell its legacy communications business to a subsidiary of Ampal for NIS 1.2 billion. The transferred assets include, among other things, all of its assets, properties, subsidiary, contracts, intellectual property rights, licenses and permits related to and/or used in connection with its legacy communications business. In addition, substantially all of its executive officers and employees employed in such business, upon the effective date of the sale were hired by Ampal.

Regulatory approvals for the sale of its legacy communications business obtained from the Israeli Ministry of Communications, Antitrust Commission, Income Tax Authority and the Israeli Court. The Company completed the sale of its legacy communications business to Ampal, effective as at January 1, 2010.

F - 28

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 6 - Assets and Liabilities Classified as Held-for-Sale (cont’d)

Assets classified as held-for-sale:

					Convenience
					translation into
			December 31		U.S dollars
	Note		2009		(Note 2)
			NIS		US $
Cash and cash equivalents		7		934		247
Trade and other receivables		9		225,118		59,634
Long-term trade receivables		9		6,260		1,658
Property and equipment		10		158,794		42,065
Intangible assets		11		631,145		167,191
Employee benefits		18		13,078		3,464
Deferred expenses		12		326,950		86,610

				1,362,279		360,869

Liabilities classified as held-for-sale:

					Convenience
					translation into
			December 31		U.S dollars
	Note		2009		(Note 2)
			NIS		US $
Trade and other payables		14		233,593		61,879
Deferred income				4,094		1,085
Related parties payables				2,422		641
Current maturities of long-term liabilities				149		40
Deferred tax liabilities		19		30,136		7,983

				270,394		71,628

Note 7 - Cash and Cash Equivalents

							Convenience
							translation into
							US dollars
	January 1		December 31				(Note 2)
	2008		2008		2009		2009
	NIS		NIS		NIS		US$
Bank balances		23,644		9,101		7,962		2,109
Demand deposits		206,251		51,551		932,640		247,057

Cash and cash equivalents (1)		229,895		60,652		940,602		249,166

(1) As at December 31, 2009 NIS 934 presented under assets classified as held-for-sale.

The Company’s exposure to interest rate and currency risks and a sensitivity analysis for financial assets and liabilities are disclosed in Note 17.

F - 29

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 8 - Marketable Securities

Breakdown according to category of financial asset

					Convenience
					translation into
					US dollars
	December 31				(Note 2)
	2008		2009		2009
	NIS		NIS		US$
Current investments
Investments held for trading:
Corporate debt securities		76,742		37,694		9,985
Governmental debt securities		-		41,928		11,107
Available-for-sale financial assets:
Corporate debt securities		-		19,019		5,038

		76,742		98,641		26,130

Non-current investments
Available-for-sale financial assets:
Corporate debt securities		105,830		-		-
Equity securities		46,190		-		-

		152,020		-		-

		228,762		98,641		26,130

The Company’s exposure to credit, currency and interest rate risks is also disclosed in Note 17.

F - 30

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 9 - Trade and Other Receivables

A. Composition of trade and other receivables

							Convenience
							translation into
							US dollars
	January 1		December 31				(Note 2)
	2008		2008		2009		2009
	NIS		NIS		NIS		US$
Trade receivables
Outstanding debts, net		91,169		103,289		95,146		25,204
Credit cards and checks receivables		46,925		37,908		60,446		16,012
Income receivable		56,870		61,812		61,388		16,262
Total trade receivables (1)		194,964		203,009		216,980		57,478

Other receivables
Prepaid expenses		11,186		13,249		5,090		1,348
Other receivables		8,618		9,789		6,730		1,783
Total other receivables (2)		19,804		23,038		11,820		3,131

Long-term trade receivables (1)		3,460		6,350		6,260		1,658

		218,228		232,397		235,060		62,268

(1)

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

(2)

As at December 31, 2009 presented under assets classified as held-for-sale, except for NIS 3,682 presented under other receivables.

B. Change in provision for doubtful debts during the year

							Convenience
							translation into
							US dollars
	December 31						(Note 2)
	2008			2009			2009
	NIS			NIS			US$
Balance at January 1		12,294			12,730			3,372

Provision		5,714			6,456			1,711

Recognition of bad debts		(5,278	)		(4,147	)		(1,099	)

Balance at December 31 (1)		12,730			15,039			3,984

(1)

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

F - 31

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 10 - Property and Equipment


																Convenience
				Network												translation
				equipment			Furniture									into
	Motor			and			and office			Leasehold						U.S. dollars
	vehicles			computers			equipment			improvements			Total			(Note 2)
	NIS			NIS			NIS			NIS			NIS			US$
Cost as
at January 1, 2008		848			204,130			33,273			39,518			277,769
Additions		-			40,562			1,014			4,814			46,390
Balance as at
December 31, 2008		848			244,692			34,287			44,332			324,159

Balance as at
January 1, 2009		848			244,692			34,287			44,332			324,159			85,870
Additions		-			50,533			2,696			636			53,865			14,269
Transfer to assets
classified as
held-for-sale (1)		(848	)		(295,225	)		(36,983	)		(44,968	)		(378,024	)		(100,139	)

Balance as at
December 31, 2009		-			-			-			-			-			-

(1)	See Note 6.

F - 32

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 10 - Property and Equipment (cont’d)


																Convenience
				Network												translation
				equipment			Furniture									into
	Motor			and			and office			Leasehold						U.S. dollars
	vehicles			computers			equipment			improvements			Total			(Note 2)
	NIS			NIS			NIS			NIS			NIS			US$
Depreciation and
impairment losses
Balance as at
January 1, 2008		328			108,655			22,495			12,179			143,657
Depreciation for the
year		90			37,530			1,367			4,108			43,095
Balance as at
December 31, 2008		418			146,185			23,862			16,287			186,752
Balance as at
January 1, 2009		418			146,185			23,862			16,287			186,752			49,471
Depreciation for the
year		66			26,469			1,718			4,225			32,478			8,603
Transfer to assets
classified as
held-for-sale (1)		(484	)		(172,654	)		(25,580	)		(20,512	)		(219,230	)		(58,074	)

Balance as at December 31, 2009		-			-			-			-			-			-

Carrying amounts
As at January 1, 2008		520			95,475			10,778			27,339			134,112

As at December 31, 2008		430			98,507			10,425			28,045			137,407

As at December 31, 2009 (1)		-			-			-			-			-			-

(1)	See Note 6.

Acquisition of Property and equipment on credit

During the year ended December 31, 2009, the Company acquired property and equipment on credit in the amount of NIS 20,525 (2008: NIS 12,286).

F - 33

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 11 - Intangible Assets

																									Convenience
										Subscribers															translation
							Customer			acquisition			Computer												into US dollars
	Goodwill			Brand name			relationship			costs			software			Licenses			Other			Total			(Note 2)
	NIS			NIS			NIS			NIS			NIS			NIS			NIS			NIS			US$
Cost
Balance as at January 1, 2008		411,171			90,213			144,859			-			35,821			4,031			12,392			698,487
Additions		-			-			-			3,815			16,764			-			3,036			23,615
Balance as at December 31, 2008		411,171			90,213			144,859			3,815			52,585			4,031			15,428			722,102

Balance as at January 1, 2009		411,171			90,213			144,859			3,815			52,585			4,031			15,428			722,102			191,285
Additions		-			-			-			30,480			15,436			-			38			45,954			12,173
Transfer to assets classified as held-for-sale (1)		(411,171	)		(90,213	)		(144,859	)		(34,295	)		(68,021	)		(4,031	)		(15,466	)		(768,056	)		(203,458	)
Balance as at December 31, 2009		-			-			-			-			-			-			-			-			-

(1)

See Note 6.

F - 34

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 11 - Intangible Assets (cont’d)

																							Convenience
								Subscribers															transslation
					Customer			acquisition			Computer												into US dollars
	Goodwill		Brand name		relationship			costs			software			Licenses			Other			Total			(Note 2)
	NIS		NIS		NIS			NIS			NIS			NIS			NIS			NIS			US$
Amortization and impairment losses

Balance as at January 1, 2008		-		-		32,696			-			9,722			624			10,824			53,866
Amortization for the year		-		-		27,736			1,669			10,864			275			1,755			42,299
Balance as at December 31, 2008		-		-		60,432			1,669			20,586			899			12,579			96,165

Balance as at January 1, 2009		-		-		60,432			1,669			20,586			899			12,579			96,165			25,474
Amortization for the year		-		-		19,135			8,415			12,229			263			704			40,746			10,794
Transfer to assets classified as held-for-sale (1)		-		-		(79,567	)		(10,084	)		(32,815	)		(1,162	)		(13,283	)		(136,911	)		(36,268	)
Balance as at December 31, 2009		-		-		-			-			-			-			-			-			-

Carrying amounts
As at January 1, 2008		411,171		90,213		112,163			-			26,099			3,407			1,568			644,621
As at December 31, 2008		411,171		90,213		84,427			2,146			31,999			3,132			2,849			625,937
As at December 31, 2009 (1)		-		-		-			-			-			-			-			-			-

(1)

See Note 6.

F - 35

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 11 - Intangible Assets (cont’d)

Impairment testing for cash-generating units containing goodwill

For the purpose of impairment testing, goodwill is allocated to the Company’s cash generating units (hereinafter - “CGU”) which represent the lowest level within the Company at which the goodwill is monitored for internal management purposes.

The aggregate carrying amounts of goodwill allocated to each unit are as follows:

	January 1		December 31
	2008		2008		2009
	NIS		NIS		NIS
Traditional voice		114,131		114,131		114,131
Broadband		297,040		297,040		297,040

Total (1)		411,171		411,171		411,171

(1)

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

The recoverable amount of traditional voice and broadband CGUs was based on its value in use and was determined with the assistance of independent valuations firms. The recoverable amount of each CGU was determined to be higher than their carrying amount and no impairment charges were recorded during all periods presented.

The recoverable amount of each CGU was based on the Discounted Cash Flow (DCF) method under the Income Approach. Value in use of traditional voice and broadband CGUs was determined by discounting the future cash flows generated from the continuing use of the CGUs and was based on the following key assumptions:

Traditional voice -

—

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

—

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

—

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

F - 36

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 11 - Intangible Assets (cont’d)

Impairment testing for cash-generating units containing goodwill (cont’d)

Broadband -

—

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

—

The anticipated annual revenue growth included in the cash flow projections varied from about 3.3% to about 2% for the years 2011 to 2013.

—

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

The values assigned to the key assumptions represent management’s assessment of future trends in the industry and are based on both external sources and internal sources (historical data).

Note 12 - Deferred Expenses

							Convenience
							translation into
							US dollars
	January 1		December 31				(Note 2)
	2008		2008		2009		2009
	NIS		NIS		NIS		US$
ROU of international fiber optic cables		340,030		362,591		429,103		113,670

Less - accumulated amortization		51,377		78,010		102,153		27,060

Total deferred expenses (1)		288,653		284,581		326,950		86,610

(1)

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

For the years ended December 2008 and 2009, the Company recorded NIS 26,633 and NIS 24,143 of amortization expenses, respectively.

F - 37

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 13 - Current Maturities of Long-term Liabilities and Short-Term Bank Credit

							Convenience
							translation into
							US dollars
	January 1		December 31				(Note 2)
	2008		2008		2009		2009
	NIS		NIS		NIS		US$
Short-term bank credit (1)		2,407		-		447,679		118,590
Current maturities of long-term liabilities (2)		3,558		2,797		149		40

		5,965		2,797		447,828		118,630

(1)

Annual interest rates as at December 31, 2009 are 1.9%-2.34%.

(2)

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

Note 14 - Trade and Other Payables

							Convenience
							translation into
							US dollars
	January 1		December 31				(Note 2)
	2008		2008		2009		2009
	NIS		NIS		NIS		US$
Trade payables
Outstanding debts		164,208		140,787		164,335		43,532
Notes payable		327		268		302		80

Total trade payables (1)		164,535		141,055		164,637		43,612

Other payables
Liabilities to employees and other liabilities for salaries		20,046		17,580		18,241		4,832
Institutions		4,394		3,826		2,914		772
Accrued expenses and other payables		34,248		44,442		50,401		13,352

Total other payables (1)		58,688		65,848		71,556		18,956

(1)

Total trade and other payables as at December 31, 2009 presented under liabilities classified as held-for-sale, except for NIS 2,600 other payables presented under short-term other payables.

The Company’s exposure to interest rate and currency risks and a sensitivity analysis for financial assets and liabilities are disclosed in Note 17 on financial instruments.

F - 38

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 15 - Debentures

A. Issuance of debentures

During the period from March 2007 to May 2007, the Company issued a total of NIS 425 million par value Series A debentures to institutional investors at par value. The debentures, together with the accrued interest, are payable in eight equal payments on March 15 of each year starting from March 15, 2009 and are linked to the Israeli CPI. The debentures bear annual interest at the rate of 4.75%.

The debentures have the following terms:

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

The Company is prohibited from creating any liens on the Company’s assets without the prior approval of the general meeting of the debentures holders.

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

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

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

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

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

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

Breach of a material provision of the debentures.

As at the date of these financial statements the Company was in compliance with the financial covenants of the debentures. The debentures were listed for trading on TASE on November 28, 2007.

B. Debentures buyback program

On November 25, 2008, the Company’s Board of Directors announced that it had authorized the repurchase of up to NIS 100 million of the Company’s Series A debentures. As at December 31, 2009, the Company repurchased approximately NIS 16 million of these debentures. These transactions generated a gain of approximately NIS 3.1 million which has been recorded in the year ended December 31, 2008.

F - 39

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 16 - Financial Risk Management

The Company is exposed to the following risks from its use of financial instruments:

Credit risk

Liquidity risk

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

The Company's risk management policies are established to identify and monitor risks and minimize the possible influence that results from these exposures, according to its evaluations and expectations of the parameters that affect the risks. The Company uses derivative instruments in order to partially hedge its exposure to foreign currency.

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's receivables from customers and investment securities.

Trade and other receivables

Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. The Company conducts credit evaluations on receivables over a certain amount, and requires financial guaranties against them. Management monitors outstanding receivable balances and the financial statements include appropriate allowances for estimated irrecoverable amounts. For all reported periods, no single customer accounted for more than 10% of the Company’s revenues or accounts receivables.

Investments

The Company’s marketable securities consist of corporate debt securities and equity securities. The Company’s investment policy, approved by the Investment Committee, that was established by the Company's Board of Directors, limits the amount the Company may invest in any one type of investment or issuer, thereby reducing credit risk concentrations.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company'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 Company's reputation.

The Company's policy is to ensure that it has sufficient cash and cash equivalents to meet expected operational expenses, including financial obligations. In addition, as at December 31, 2009, the Company has a NIS 450 million overdraft facility that is unsecured.

F - 40

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 16 - Financial Risk Management (cont’d)

Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Company'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 Company is exposed to fluctuations in the interest rate, including changes in the CPI, as the debentures are linked to the CPI. As part of its risk management policy the Company has invested in bonds that are linked to the CPI in order to partially hedge the exposure to changes in the CPI.

Currency risk

The Company's operating income and cash flows are exposed to currency risk, mainly due to trade receivables and payables denominated in foreign currency, mainly the US dollar. The Company also manages bank accounts that are denominated in a currency other than its respective functional currency, primarily US dollar. As part of its risk management policy the Company uses forward and option contracts to partially hedge the exposure to fluctuations in foreign exchange rates.

Capital management

The Company's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Company has never distributed dividends since inception.

Note 17 - Financial Instruments

A. Credit risk

Exposure to credit risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date is described in the table below:

					Convenience
					translation into
					US dollars
	December 31				(Note 2)
	2008		2009		2009
	NIS		NIS		US$
Cash and cash equivalents		60,652		939,668		248,919
Available-for-sale marketable securities		105,830		19,019		5,038
Marketable securities held for trading		76,742		79,622		21,092
Trade receivables		209,359		-		-
Parent company receivables		-		769		204
Related parties receivables		-		3,552		941
Other receivables		1,798		-		-
Derivative contracts		-		3,565		944

		454,381		1,046,195		277,138

F - 41

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 17 - Financial Instruments (cont'd)

B. Liquidity risk

The following are the contractual maturities of financial liabilities, including estimated interest payments:

	December 31, 2008
	Carrying		Contractual		6 months						More than
	amount		cash flows		or less		1-3 years		3-5 years		5 years
	NIS
Non-derivative financial liabilities
Current maturities of long-term liabilities and short-term bank credit		2,797		2,797		2,797		-		-		-
Loan from the parent company		111,344		111,344		111,344		-		-		-
Trade payables		141,055		141,055		141,055		-		-		-
Other payables		35,788		35,788		35,788		-		-		-
Parent company payables		1,410		1,410		1,410		-		-		-
Related company payables		2,228		2,228		2,228		-		-		-
Debentures		480,785		558,706		100,733		143,907		133,461		180,605
Long-term liabilities		143		143		-		143		-		-
Total		775,407		853,471		395,355		144,050		133,461		180,605
Derivative financial liabilities
Forward exchange contracts		1,055		1,055		1,055		-		-		-

	December 31, 2009
	Carrying		Contractual		6 months						More than
	amount		cash flows		or less		1-3 years		3-5 years		5 years
	NIS
Non-derivative financial liabilities
Short term bank credit		447,679		447,679		447,679		-		-		-
Loans from the parent company		325,569		331,655		331,655		-		-		-
Other payables		2,600		2,600		2,600		-		-		-
Parent company
payables		3,676		3,676		3,676		-		-		-
Debentures		414,388		475,451		76,055		143,977		133,132		122,287
Total		1,193,912		1,261,061		861,665		143,977		133,132		122,287

F - 42

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 17 - Financial Instruments (cont'd)

C. Linkage and foreign currency risks

(1) The exposure to linkage and foreign currency risk

The Company’s exposure to linkage and foreign currency risk was as follows based on notional amounts:

	December 31, 2008

							Foreign
							currency linked
	Unlinked			CPI-linked			(mainly U.S dollar)		Total
	NIS			NIS			NIS		NIS
Cash and cash equivalents		4,947			-			55,705		60,652
Marketable securities		46,190			182,572			-		228,762
Trade receivables		172,923			-			30,086		203,009
Other receivables		1,798			-			-		1,798
Long-term trade receivables		6,350			-			-		6,350
Total assets		232,208			182,572			85,791		500,571

Current maturities of debentures		-			96,498			-		96,498
Current maturities of long-term liabilities		-			-			2,797		2,797
Loans from parent company		111,344			-			-		111,344
Trade payables		66,235			-			74,820		141,055
Other payables		35,788			-			1,055		36,843
Parent company payables		1,410			-			-		1,410
Related party payables		2,228			-			-		2,228
Debentures		-			384,287			-		384,287
Long-term liabilities		-			-			143		143
Total liabilities		217,005			480,785			78,815		776,605
Total exposure in the statement of financial position		15,203			(298,213	)		6,976		(276,034	)
Currency futures transactions
Dollar/NIS forward transactions		(256,090	)		-			256,090		-

F - 43

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 17 - Financial Instruments (cont'd)

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

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

	December 31, 2009

						Foreign
						currency linked
	Unlinked		CPI-linked			(mainly U.S dollar)			Total			Total
	NIS		NIS			NIS			NIS			US$
Cash and cash equivalents		935,402		-			4,266			939,668			248,919
Marketable securities		-		98,641			-			98,641			26,130
Parent company receivable		769		-			-			769			204
Related party receivables		3,552					-			3,552			941
Other receivables		3,565		-			-			3,565			944
Assets classified as held-for-sale		198,021		-			26,157			224,178			59,385
Total assets		1,141,309		98,641			30,423			1,270,373			336,523

Current liabilities

Current maturities of long- term liabilities and short term bank credit		447,679		-			-			447,679			118,590
Current maturities of debentures		-		72,208			-			72,208			19,128
Loans from parent company		325,569		-			-			325,569			86,243
Other payables		2,600		-			-			2,600			689
Parent company payables		3,676		-			-			3,676			974
Liabilities classified as held-for-sale		128,093		-			83,116			211,209			55,949
Debentures		-		342,180			-			342,180			90,644
Total liabilities		907,617		414,388			83,116			1,405,121			372,217


Total exposure in the statement of financial position		233,692		(315,747	)		(52,693	)		(134,748	)		(35,694	)

The Group’s exposure to CPI and foreign currency risks for derivative financial instruments:

	December 31, 2008
	Currency/linkage	Currency/linkage		Par value
	receivable	payable	Expiry date	(currency)	Fair value

Instruments not used for hedging:
Forward exchange contracts	USD	NIS	2009	67,000	1,055

F - 44

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 17 - Financial Instruments (cont'd)

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

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

Information regarding the CPI and significant exchange rates:



	Year ended December 31						December 31
	2008			2009			2008		2009
	Rate of change						Reporting date spot rate
	%			%			NIS		NIS
1 US dollar		(1.14	)		(0.71	)		3.802		3.775
1 euro		(6.39	)		2.73			5.297		5.442
CPI in points		3.80			3.92			125.50		130.42

(2) Sensitivity analysis

A strengthening of the NIS against the following currencies as at December 31, 2009 and 2008 and an increase in the CPI would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes is based on the assumption that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2008.

				Convenience
				translation into
				US dollars
	Equity/profit			(Note 2)
	or loss			2009
	NIS			US$
December 31, 2009
1 US dollar - 10% strengthening of the shekel against the dollar		5,269			1,396
CPI - 10% strengthening beyond the inflation forecast (*)
(inflation forecast of 2% per year)		(6,946	)		(1,840	)

December 31, 2008
1 US dollar - 10% strengthening of the shekel against the dollar		(25,123	)		(6,655	)
CPI - 10% strengthening beyond the inflation forecast (*)
(inflation forecast of 2% per year)		(6,561	)		(1,738	)

(*)

Sensitivity rates are determined according to assessments based on variable conditions in the economy.

A weakening of the NIS against the above currencies and a decrease in the CPI as at December 31 would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.

F - 45

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 17 - Financial Instruments (cont'd)

D. Interest rate risk

(1) Profile

At the reporting date the interest rate profile of the Company’s interest-bearing financial instruments was:

							Convenience
							translation into
							US dollars
	December 31						(Note 2)
	2008			2009			2009
	NIS			NIS			US$
Fixed rate instruments
Financial assets		234,123			1,017,588			269,560
Financial liabilities		(480,785	)		(1,073,769	)		(284,442	)
		(246,662	)		(56,181	)		(14,882	)
Variable rate instruments
Financial assets		-			13,692			3,627
Financial liabilities		(111,344	)		(113,867	)		(30,163	)
		(111,344	)		(100,175	)		(26,536	)

(2) Fair value sensitivity analysis for fixed rate financial liabilities and derivatives

The Company does not account for any fixed rate financial liabilities at fair value through profit or loss, and the Company does not designate derivatives as hedging instruments under a fair value hedge accounting model. Therefore a change in interest rates at the reporting date would not affect profit or loss.

(3) Sensitivity analysis of cash flow for instruments at variable interest

An increase of 100 basis points in the interest rates would have decreased equity and profit or loss by NIS 1 million (2008: NIS 1.1 million).

F - 46

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 17 - Financial Instruments (cont'd)

E. Fair value

(1)

Fair values versus carrying amounts

The table below shows the difference between the carrying amount and the fair value of debentures. The carrying amount of other financial instruments does not differ significantly from their fair value.

	December 31, 2008		December 31, 2009
	Carrying		Carrying
	amount	Fair value	amount	Fair value
	NIS	NIS	NIS	NIS
Debentures
CPI-linked	480,785	434,607	414,388	435,087

The methods used to estimate the fair values of financial instruments are described in Note 4.

(2) Fair value hierarchy

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

—

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

—

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

—

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

All investments in trading and available-for-sale securities in the amount of NIS 98,641 (2008: NIS 228,762) are measured at fair value on a recurring basis using Level 1 inputs. Derivatives financial instruments as at December 31, 2008, in the amount of NIS 1,055 were measured using Level 2 inputs.

Note 18 - Employee Benefits

Employee benefits include post-employment benefits, termination benefits, short-term benefits and share-based payments.

As regards post-employment benefits, the Company has defined benefit plans for which it makes contributions to appropriate insurance policies. The defined benefit plans provide the entitled employees with a lump-sum amount based on legal requirements and personal employment contract. The Company also has a defined contribution plan for some of its employees who are subject to Section 14 of the Severance Pay Law - 1963.

F - 47

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 18 - Employee Benefits (cont'd)

As regards share-based payments see Note 22 on share-based payments.

										Convenience
										translation into
										US dollars
	January 1			December 31			December 31			(Note 2)
	2008			2008			2009			2009
	NIS			NIS			NIS			US$
Present value of unfunded obligations		34			72			72			19
Present value of funded obligations		5,125			6,110			7,101			1,881
Total present value of obligations		5,159			6,182			7,173			1,900
Fair value of plan assets		(17,470	)		(16,216	)		(20,251	)		(5,364	)

Total employee benefits (1)		(12,311	)		(10,034	)		(13,078	)		(3,464	)

(1)

Presented under long-term employee benefits assets, except for total employee benefits as at December 31, 2009 presented under assets classified as held-for-sale.

A. Post-employment benefit plans - defined benefit plan

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

							Convenience
							translation into
							US dollars
							(Note 2)
	2008			2009			2009
	NIS			NIS			US$
Defined benefit obligation as at January 1		5,159			6,182			1,637
Benefits paid		(4,482	)		(4,221	)		(1,118	)
Current service costs and interest costs		2,075			2,197			582
Actuarial losses recognized in equity		3,430			3,015			799

Defined benefit obligation as at December 31		6,182			7,173			1,900

F - 48

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 18 - Employee Benefits (cont’d)

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

(2) Movement in the present value of plan assets

							Convenience
							translation into
							US dollars
							(Note 2)
	2008			2009			2009
	NIS			NIS			US$
Fair value of plan assets as at January 1		17,470			16,216			4,296
Contributions paid into the plan		3,588			4,047			1,072
Benefits paid by the plan		(3,756	)		(2,258	)		(598	)
Expected return on plan assets		647			468			123
Actuarial gains (losses) recognized in equity		(1,733	)		1,778			471

Fair value of plan assets as at December 31		16,216			20,251			5,364

(3) Expense recognized in profit or loss

							Convenience
							translation into
							US dollars
	Year ended December 31						(Note 2)
	2008			2009			2009
	NIS			NIS			US$
Current service costs		1,828			1,921			509
Interest costs		248			276			73
Expected return on plan assets		(647	)		(468	)		(124	)
Termination benefits		1,613			-			-

		3,042			1,729			458

The expense is recognized in the following line items in the income statement:

							Convenience
							translation into
							US dollars
	Year ended December 31						(Note 2)
	2008			2009			2009
	NIS			NIS			US$
Salaries		3,441			1,921			509
Finance expense		(399	)		(192	)		(51	)

		3,042			1,729			458

F - 49

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 18 - Employee Benefits (cont’d)

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

(4) Actual return:

	Year ended					Convenience translation into US dollars
	December 31			December 31		(Note 2
	2008			2009		2009
	NIS			NIS		US$

Actual return on plan assets		(1,086	)		2,246		595

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

					Convenience
					translation into
					US dollars
					(Note 2)
	2008		2009		2009
	NIS		NIS		US$
Cumulative amount as at January 1		-		5,163		1,367
Recognized amount during the period		5,163		1,237		328

Cumulative amounts as at December 31		5,163		6,400		1,695

(6) Actuarial assumptions

Principal actuarial assumptions at the reporting date (expressed as weighted averages):

	2008		2009
	%		%
Discount rate as at December 31		5.49		5.69
Expected return on plan assets as at January 1		3.70		2.88
Future salary increases (*):
Headquarters and Management		2		2
Private and business services		1.5		1.5

Assumptions regarding future mortality are based on published statistics and mortality tables.

(*)

Future salary increases were determined on the basis of the past experience of the Company, distinguishing between different employee population.

F - 50

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 18 - Employee Benefits (cont’d)

B. Post-employment benefit plans – defined contribution plan

			Convenience
			translation into
			US dollars
	Year ended December 31		(Note 2)
	2008	2009	2009
	NIS	NIS	US$

Amount recognized as expense in respect of defined contribution plan	611	2,314	613

Note 19 - Income Tax

A. Details regarding the tax environment of the Company

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

On July 25, 2005, the Israeli Parliament passed the Law for the Amendment of the Income Tax Ordinance (No. 147 and Temporary Order) - 2005. This Amendment provides for a gradual reduction in the company tax rate in the following manner: in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and from 2010 onward the tax rate will be 25%. Furthermore, as from 2010, upon reduction of the company tax rate to 25%, real capital gains will be subject to tax of 25%.

On July 14, 2009, the Knesset passed the Economic Efficiency Law (Legislation Amendments for Implementation of the 2009 and 2010 Economic Plan) - 2009, which provided, inter alia, an additional gradual reduction in the Company tax rate to 18% as from 2016 tax year. In accordance with the aforementioned amendments, the Company tax rates applicable as from the 2009 tax year are as follows: In the 2009 tax year - 26%, in the 2010 tax year - 25%, in the 2011 tax year - 24%, in the 2012 tax year - 23%, in the 2013 tax year - 22%, in the 2014 tax year - 21%, in the 2015 tax year - 20% and as from the 2016 tax year the Company tax rate will be 18%.

Current and deferred tax balances for the periods reported in these financial statements are calculated in accordance with the new tax rates specified in the Economic Efficiency Law.

(2) Taxation under inflation

The Income Tax Law (Adjustments for Inflation) - 1985 (hereinafter - the Law) is effective as from the 1985 tax year. The Law introduced the concept of measurement of results for tax purposes on a real (net of inflation) basis. The various adjustments required by the aforesaid Law are designed to achieve taxation of income on a real basis. However, since the financial statements are not adjusted to the CPI from the date Israel is no longer considered a hyperinflationary economy, there are differences between the reported income in the financial statements and the adjusted income for tax purposes, and as a result also temporary differences between the values of assets and liabilities in the financial statements and their tax basis.

F - 51

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 19 - Income Tax (cont’d)

A. Details regarding the tax environment of the Company (cont’d)

(2) Taxation under inflation (cont’d)

On February 26, 2008 the Knesset enacted the Income Tax Law (Adjustments for Inflation) (Amendment No. 20) (Restriction of Effective Period) - 2008 (hereinafter - the Amendment). In accordance with the Amendment, the effective period of the Adjustments Law ceased at the end of the 2007 tax year and as from the 2008 tax year the provisions of the law are no longer applied, other than the transitional provisions intended at preventing distortions in the tax calculations.

In accordance with the Amendment, as from the 2008 tax year, income for tax purposes are no longer adjusted to a real (net of inflation) measurement basis. Furthermore, the depreciation of inflation immune assets and carried forward tax losses is no longer linked to the CPI, so that these amounts were adjusted until the end of the 2007 tax year after which they ceased to be linked to the CPI. The effect of the Amendment to the Adjustments Law is reflected in the calculation of current and deferred taxes as from 2008.

(3)

On February 4, 2010, the Tax Authorities issued a Temporary Order for amendment to the Income Tax Ordinance for the 2007, 2008 and 2009 Tax Years, prescribing that accounting under IFRSs rules cannot determine taxable income even though the IFRS applies in the financial statements. The amendment has no effect on the Company’s financial statements.

B. Composition of income tax expenses (income)

					Convenience
					translation into
					U.S. dollars
	Year ended December 31				(Note 2)
	2008		2009		2009
	NIS		NIS		US$
Current tax expenses
Current period		17,965		30,960		8,201
Adjustments for prior periods, net		461		392		104
		18,426		31,352		8,305


Deferred tax expenses		3,907		23,863		6,321

		22,333		55,215		14,626

F - 52

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 19 - Income Tax (cont’d)

C. Income tax recognized in equity

	Year ended December 31																Convenience
	2008							2009									translation
			Tax								Tax						into
	Before		expenses			Net of		Before			expenses			Net of			US dollars
	tax		(benefit)			tax		tax			(benefit)			tax			(Note 2)
	NIS																US$
Available-for-sale		18,065		(4,516	)		13,549		(19,386	)		4,846			(14,540	)		1,284
Defined benefit plan actuarial losses, net		5,163		(1,291	)		3,872		1,236			(309	)		927			(82	)
Contribution by parent company and ultimateparent company		-		-			-		(8,333	)		2,083			(6,250	)		552
		23,228		(5,807	)		17,421		(26,483	)		6,620			(19,863	)		1,754

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

							Convenience
							translation into
							U.S. dollars
	Year ended December 31						(Note 2)
	2008			2009			2009
	NIS			NIS			US$
Income before income tax		75,098			202,515			53,646

Statutory tax rate of the Company		27	%		26	%		26	%

Tax calculated according to statutory tax rate		20,276			52,654			13,948

Additional tax (tax saving) in respect of:

Non-deductible expenses		241			663			176
Share-based compensation		926			1,289			341
Utilization of tax losses and benefits from prior years for which deferred taxes were not created		-			3,218			852

Differences between the definition of capital and assets for Israeli tax purposes and other differences		(1,731	)		(3,982	)		(1,055	)
Current year tax losses and benefits for which deferred taxes were not created		1,550			647			171
Taxes in respect of previous years		461			392			105
Effect of change in tax rate		610			334			88

Income tax expenses (income)		22,333			55,215			14,626

F - 53

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 19 - Income Tax (cont’d)

E. Deferred tax assets and liabilities

(1) Recognized deferred tax assets and liabilities

Deferred taxes are calculated according to the tax rate anticipated to be in effect on the date of reversal as stated above.

Deferred tax assets and liabilities are attributable to the following items:

																						Convenience
	Property,									Carry-			Unrealized									translation
	equipment						Allowance			forward tax			losses on									into US
	and intangible			Employee			for doubtful			losses and			marketable									dollars
	assets			benefits			debts			deductions			securities			Other			Total			(Note 2)
	NIS			NIS			NIS			NIS			NIS			NIS			NIS			US$
Balance of deferred tax assets (liability) as at January 1, 2008		(21,593	)		(761	)		5,025			14,648			-			2,052			(629	)
Recognized in profit or loss		(3,785	)		(1,495	)		(70	)		(1,224	)		2,743			(76	)		(3,907	)
Recognized in equity		-			1,291			-			-			4,516			-			5,807
Balance of deferred tax asset (liability) as at December 31, 2008		(25,378	)		(965	)		4,955			13,424			7,259			1,976			1,271			337
Recognized in profit or loss		(9,366	)		(1,028	)		387			(10,205	)		(4,012	)		361			(23,863	)
Recognized in equity		-			309			-			-			(4,846	)		(2,083	)		(6,620	)		(1,754	)
Transfer to assets and liabilities classified as held-for-sale		34,744			1,684			(5,342	)		-			-			(950	)		30,136			7,983
Balance of deferred tax asset (liability) as at December 31, 2009		-			-			-			3,219			(1,599	)		(696	)		924			245

F - 54

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 19 - Income Tax (cont’d)

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

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

As at December 31, 2009, the Company has tax losses carry-forwards in the amount of NIS 25,746 (2008: NIS 52,620). In addition, the Company's subsidiary has tax losses carry-forwards in the amount of NIS 27,800 (2008: NIS 25,200).

Deferred taxes in respect of losses carry-forward losses were not recognized in cases where future taxable income against which they can be utilized is not foreseen. Under existing tax laws, there is no time limit on utilizing tax losses or on utilizing deductible temporary differences.

As a result, as at December 31, 2009, deferred taxes were not created on carryforward losses of the Company in the amount of NIS 12,900 and on carryforward losses of a subsidiary in the amount of NIS 27,800 (2008: NIS 25,200).

Tax assessments

The Company and its subsidiary have tax assessments that consider to be final up to and including the tax year ended December 31, 2005.

Note 20 - Commitments and Contingencies

A. Contingent liabilities

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

F - 55

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 20 - Commitments and Contingencies (cont’d)

A. Contingent liabilities (cont’d)

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

Representatives of the Ministry and the Company met during July 2008 in order to discuss this dispute. Recent exchanges with representatives of the Ministry indicate that the Ministry would be willing to settle this dispute if an amount of approximately NIS 700,000 will be paid to it.

As part of the agreement with Ampal, as described in Note 6, all of the legal proceedings which related to the Company's legacy communication business, including the legal proceedings mentioned in this financial report, were fully assumed by Ampal.

B. Commitments

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

Note 21 - Capital and Reserves

A. Share Capital

In September 2007 and on October 10, 2007, the Company's shareholders approved the following:

Reorganizing the share capital so that each ordinary share of NIS 1 par value would be split into 10 ordinary shares of NIS 0.1 par value.

Increasing the authorized share capital from 13,800,000 ordinary shares of NIS 0.1 par value to 50,000,000 ordinary shares of NIS 0.1 par value.

Issuing 17,815,860 fully paid shares of NIS 0.1 par value to the Parent Company in respect of the contribution of the assets and liabilities of the Communication Business which were not previously owned by the Company.

Allotting 554,140 fully paid dividend shares of NIS 0.1 par value to the Parent Company.

Following the consummation of the above transactions, the Company had 18,370,000 ordinary shares of NIS 0.1 par value issued and fully paid.

During November 2007, the Company consummated an initial public offering in which it sold 6,675,000 ordinary shares at a price of $12 per share. In December 2007, the underwriters exercised their over allotment option for the purchase of an additional 315,000 ordinary shares. Net proceeds to the Company from the IPO, including sale of the additional shares to the underwriters, net of commissions and expenses was $77,838.

F - 56

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 21 - Capital and Reserves (cont’d)

B. Treasury shares

On December 30, 2008, the Company's Board of Directors announced a share buyback program under which management is authorized to re-purchase up to $10 million of the Company's Ordinary shares.

As at December 31, 2009, 19,230 shares have been purchased.

C. Reserve for available-for-sale financial assets

The reserve comprises the cumulative net change in the fair value of available-for-sale financial assets until the investments are derecognized or impaired.

Note 22 - Share-Based Payments

2007 Equity Incentive Plan

In February 2008, the Company's Board of Directors approved a share based incentive plan for its employees, directors and service providers. Under its equity incentive plan, the Company may grant its directors, officers and employees restricted shares, restricted share units and options to purchase its ordinary shares. The total number of ordinary shares available for grant under the plan is 2,250,000, which will be reduced by two shares for each restricted share unit or restricted share that the Company grants under the plan with a per share or unit purchase price lower than 100% of fair market value of its ordinary shares on the date of grant and by one share for each option that the Company grants under the plan.

Restricted shares, restricted share units and options granted under the equity incentive plan will generally vest over four years from the grant date. Any option not exercised within seven years of the grant date will expire. If the Company terminates the employment of an employee for cause, all of his or her vested and unvested options expire immediately and all unvested restricted shares and unvested restricted share units expire immediately. If the Company terminates the employment of an employee for any other reason, the employee may exercise his or her vested options within 60 days of the date of termination and shall be entitled to any rights upon vested restricted shares and vested restricted share units to be delivered to the employee to the extent that they were vested prior to the date his or her employment terminates.

At December 31, 2009 and 2008, there were 1,150,000 ordinary shares available for future grants. The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that used the weighted average assumptions in the following table. Since the Company’s shares did not have enough trading history at grant date, expected volatility was computed based on the average historical volatility of similar entities with publicly traded shares.

F - 57

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 22 - Share-Based Payments (cont’d)

2007 Equity Incentive Plan (cont’d)

The risk-free rate for the expected term of the option is based on the Israeli treasury yield curve in effect at the time of grant.

	February 2008
Valuation assumptions:
Fair value of option at grant date	NIS 18.03
Share price at grant date	NIS 36.64
Exercise price	NIS 36.64
Expected dividend yield		0	%
Expected volatility		52	%
Expected term (years)		5
Risk-free interest rate		5.2	%

Stock option activity during the periods indicated is as follows:

					Weighted
			Weighted		average
			average		remaining
	Number of		exercise		contractual
	of shares		price		term
			NIS
Balance at January 1, 2008		-		-
Granted		1,100,000		36.34
Exercised		-		-
Forfeited		-		-
Expired		-		-
Balance at December 31, 2008		1,100,000		36.34		6.25
Balance at December 31, 2009		1,100,000		36.34		5.25
Exercisable at December 31, 2008 and 2009		-		-		-

The total grant date fair value of options granted during the year 2008 was NIS 19,831.

During 2009 an amount of NIS 4,958 was recognized in profit or loss with relation to share-based compensation arrangements granted under the Plan (2008 – NIS 3,429).

Subsequent to balance sheet date all options became fully vested. For more details see Note 30(C).

F - 58

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 23 - Salaries

					Convenience
					translation into
					US dollars
	Year ended December 31				(Note 2)
	2008		2009		2009
	NIS		NIS		US$
Salaries and incidentals:
Operating		142,379		141,440		37,467
General and administrative		22,248		22,065		5,845
Share-based compensation		3,429		4,956		1,313

Total salaries and incidentals		168,056		168,461		44,625
Less - salaries recognized in
intangible assets		6,500		10,585		2,804

		161,556		157,876		41,821

Note 24 - General and Operating Expenses

					Convenience
					translation into
					US dollars
	Year ended December 31				(Note 2)
	2008		2009		2009
	NIS		NIS		US$
General expenses		654,273		703,269		186,296
Office maintenance		10,100		11,800		3,126
Services and maintenance by sub-contractors		13,900		21,100		5,589
Vehicle maintenance expenses		5,800		4,300		1,139
Royalties to the State of Israel		4,400		3,046		807
Collection fees		5,300		5,400		1,431

		693,773		748,915		198,388

F - 59

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 25 - Finance Expenses (Income)

							Convenience
							translation into
							US dollars
	Year ended December 31						(Note 2)
	2008			2009			2009
	NIS			NIS			US$

Interest income on bank deposits		(6,625	)		(5,520	)		(1,462	)
Income on marketable securities		-			(71,840	)		(19,030	)
Foreign exchange differences		(1,015	)		(7,275	)		(1,927	)
Other finance income		(399	)		(192	)		(51	)

Total financing income		(8,039	)		(84,827	)		(22,470	)

Interest expenses on financial liabilities		42,773			36,873			9,767

Finance expenses in respect of transactions with shareholders		5,610			2,524			669
Foreign exchange differences		9,282			7,750			2,053
Change in fair value of financial assets measured
at fair value through profit or loss		5,088			-			-
Other finance expenses		2,330			1,653			438

Total finance expenses		65,083			48,800			12,927

Finance expense (income) recognized in profit or loss, net (1)		57,044			(36,027	)		(9,543	)

(1)

Less amounts recognized directly in other comprehensive income.

Note 26 - Earnings Per Share

Basic and Diluted earnings per share

The calculation of basic and diluted earnings per share as at December 31, 2009 and 2008 was based on the profit attributable to ordinary shareholders of NIS 147,300 (2008: NIS 52,765) divided by a weighted average number of ordinary shares outstanding of 25,346 thousand (2008: 25,360), calculated as follows:

	Year ended December 31
	2008		2009
	Thousands of		Thousands of
	shares of NIS 1		shares of NIS 1
	par value		par value
Balance as at January 1		25,360		25,360
Effect of own shares held by the Company		-		(14	)

Weighted average number of ordinary shares at December 31		25,360		25,346

F - 60

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 27 - Related Parties

A. Key management personnel compensation (including directors)

In addition to their salaries, the Company also provides non-cash benefits to directors and executive officers (such as a car, medical insurance, etc.).

Executive officers also participate in the Company’s share option program (see Note 22 regarding share-based payments).

Key management personnel compensation comprised:

					Convenience
	Year ended December 31				translation into
	2008		2009		US dollars
					(Note 2)
	Amount		Amount		2009
	NIS		NIS		US$
Employee benefits		7,972		8,973		2,377

Share-based payments		3,429		4,958		1,313

		11,401		13,931		3,690

					Convenience
					translation into
	Year ended December 31				US dollars
					(Note 2)
	2008		2009		2009
	NIS		NIS		US$

Total compensation to director not employed by the Company		238		265		70

Total compensation to key management personnel employed by the Company		11,401		13,931		3,690

		11,639		14,196		3,760

F - 61

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 27 - Related Parties (cont’d)

B. Transactions with related and interested parties

					Convenience
					translation into
					US dollars
	Year ended December 31				(Note 2)
	2008		2009		2009
	Value of transactions
	NIS		NIS		US$
Revenues		6,848		11,818		3,131

Operating expenses		14,726		16,988		4,500

Finance expenses		5,610		2,238		593

							Convenience
							translation into
							US dollars
	January 1,		Year ended December 31				(Note 2)
	2008		2008		2009		2009
	Value of transactions
	NIS		NIS		NIS		US$
Current assets (1)		8,714		-		4,321		1,145

Current liabilities (2)		106,836		114,982		329,245		87,217

F - 62

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 27 - Related Parties (cont’d)

B. Transactions with related and interested parties (cont’d)

(1)

As at December 31, 2009, current assets balance includes NIS 2,534 with respect to options to demand loans from parent company and indirect controlling shareholder, as described hereinafter:

On October 29, 2009 the Company approved the receipt of a loan of up to NIS 250 million from IGLD, in support of its acquisition of a controlling interest in Bezeq The Israel Telecommunications Corp., Ltd.

The Company partially exercised this option. For more details see section (2)b below.

For the purpose of financing the acquisition of the controlling interest in Bezeq The Israel Telecommunications Corp., Ltd. (for more details see Note 30A), the Company received an undertaking by Eurocom, whereby Eurocom granted the Company an option to require it to provide upon the Company demand at any time after 120 days a loan of up to NIS 1.2 billion, bearing interest at the “risk-free” or lower rate and subordinated to any committed third-party financing for the abovementioned acquisition.

The Company did not exercise this option

Financing expenses in the amount of NIS 126 thousand were recognized in respect of the option in 2009.

(2)

Current liabilities balance includes loans from parent company, as describe hereinafter:

On March 31, 2007, the parent company, Internet Gold provided the Company with a long-term loan of NIS 100.6 million, bearing the prime interest rate published from time to time by the Bank of Israel.

Internet Gold and the Company agreed that the due date would not be prior to October 1, 2008.

As at December 31, 2008 and 2009, the loan is payable upon Internet Gold's demand.

In November 2009, the Company exercised partially the option granted by Internet Gold (see section 1 (a) above). Internet Gold provided the Company a NIS 217.5 million loan to the Company, which bears interest at a rate equal to the yield on Israel Government Bonds with an average maturity that is closest to the maturity date of the loan, as such yield is reflected in the average closing price of Israel Government Bonds for the seven trade days preceding the grant of the loan.

According to the option terms, the loan will be repayable in full, plus accrued interest, nine months following the grant of the loan, the payment of which may be accelerated or extended by mutual written consent.

F - 63

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 27 - Related Parties (cont’d)

B. Transactions with related and interested parties (cont’d)

The Balance of outstanding loans from parent company as at December 31, 2009 and 2008 and January 1, 2008 is as follows:

				Convenience
				translation into
				US dollars
	January 1	December 31		(Note 2)
	2008	2008	2009	2009
	NIS	NIS	NIS	US$
Loans from Parent Company	105,733	111,344	325,569	86,243

Financing expenses in the amount of NIS 2,399 were recognized in respect of the option and loans in 2009 (NIS 5,610 in 2008).

After the balance sheet date, the aforementioned loans were fully repaid. For more details, see Note 30C.

Note 28 - Company Entities

	Country of	Ownership
	incorporation	interest
		2009			2008
012 Telecom Ltd.	Israel		100	%		100	%

Note 29 - Explanation of Transition to IFRSs

A. General

As stated in Note 2A, these are the Company’s first consolidated annual financial statements prepared in accordance with IFRSs.

The accounting policies set out in Note 3 have been applied in preparing the consolidated financial statements for the year ended December 31, 2009, the comparative information presented in these financial statements for the year ended December 31, 2008 and in the preparation of an opening IFRS statement of financial position as at January 1, 2008 (the Company’s date of transition).

In preparing its opening IFRS statement of financial position, the Company has adjusted amounts reported previously in financial statements prepared in accordance with US GAAP. An explanation of how the transition from US GAAP to IFRSs has affected the Company’s financial position, financial performance and cash flows is set out in the following tables and the notes that accompany the tables.

F - 64

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 29 - Explanation of Transition to IFRSs (cont’d)

B. Reconciliation of equity

					Effect of the							Effect of the
					transition to							transition to
			U.S. GAAP		IFRS			IFRS		U.S. GAAP		IFRS			IFRS
			January 1, 2008							December 31, 2008
	Note		NIS		NIS			NIS		NIS		NIS			NIS
Assets
Cash and cash equivalents				229,895		-			229,895		60,652		-			60,652
Marketable securities				-		-			-		76,742		-			76,742
Trade receivables				194,964		-			194,964		203,009		-			203,009
Parent company receivable				6,553		-			6,553		-		-			-
Related parties receivables				2,161		-			2,161		-		-			-
Other receivables				19,804		-			19,804		23,038		-			23,038
Deferred tax assets		4, 13		9,396		(9,396	)		-		17,838		(17,838	)		-
Total current assets				462,773		(9,396	)		453,377		381,279		(17,838	)		363,441
Long-term trade receivables				3,460		-			3,460		6,350		-			6,350
Marketable securities				-		-			-		152,020		-			152,020
Employee benefit assets		1		18,453		(6,142	)		12,311		16,499		(6,465	)		10,034
Property and equipment		5		160,211		(26,099	)		134,112		169,406		(31,999	)		137,407
Other assets		6, 7, 12		295,592		(295,592	)		-		291,607		(291,607	)		-
Intangible assets		2, 5, 7, 9		202,376		442,245			644,621		174,640		451,297			625,937
Goodwill		9		411,171		(411,171	)		-		411,171		(411,171	)		-
Deferred expenses		6		-		288,653			288,653		-		284,581			284,581
Deferred tax assets		4, 13		-		-			-		-		1,271			1,271
Total non-current assets				1,091,263		(8,106	)		1,083,157		1,221,693		(4,093	)		1,217,600
Total assets				1,554,036		(17,502	)		1,536,534		1,602,972		(21,931	)		1,581,041

F - 65

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 29 - Explanation of Transition to IFRSs (cont’d)

B. Reconciliation of equity (cont’d)

					Effect of the								Effect of the
					transition to								transition to
			U.S. GAAP		IFRS			IFRS		U.S. GAAP			IFRS			IFRS
			January 1, 2008							December 31, 2008
	Note		NIS		NIS			NIS		NIS			NIS			NIS

Liabilities
Current maturities of long-term liabilities and short -term bank credit				5,965		-			5,965		2,797			-			2,797
Current maturities of debentures				-		-			-		96,498			-			96,498
Loan from parent company				105,733		-			105,733		111,344			-			111,344
Trade payables				164,535		-			164,535		141,055			-			141,055
Other payables and accrued expenses		4,8		100,558		(100,558	)		-		115,339			(115,339	)		-
Other payables				-		58,688			58,688		-			65,848			65,848
Parent company payable				1,103		-			1,103		1,410			-			1,410
Related party payables				-		-			-		2,228			-			2,228
Current tax liabilities		4		-		26,527			26,527		-			22,182			22,182
Deferred income		8		-		3,833			3,833		-			3,742			3,742
Total current liabilities				377,894		(11,510	)		366,384		470,671			(23,567	)		447,104
Debentures		12		437,460		(1,964	)		435,496		385,919			(1,632	)		384,287
Long-term liabilities				23,294		-			23,294		143			-			143
Deferred tax liabilities		4, 8		29,027		(28,401	)		626		25,535			(25,535	)		-
Liabilities for employee severance benefits		1		32,318		(32,318	)		-		32,430			(32,430	)		-
Total non-current liabilities				522,099		(62,683	)		459,416		444,027			(59,597	)		384,430
Total liabilities				899,993		(74,193	)		825,800		914,698			(83,164	)		831,534
Equity
Share capital				2,536		-			2,536		2,536			-			2,536
Share premium		2,10		611,615		-			611,615		612,009			(394	)		611,615
Capital reserve for financial assets available-for-sale		3		-		-			-		-			(13,549	)		(13,549	)
Accumulated other comprehensive loss		3		-		-			-		(14,645	)		14,645			-
Retained earnings		10, 14		39,892		56,691			96,583		88,374			60,531			148,905
Total equity				654,043		56,691			710,734		688,274			61,233			749,507
Total liabilities and equity				1,554,036		(17,502	)		1,536,534		1,602,972			(21,931	)		1,581,041

F - 66

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 29 - Explanation of Transition to IFRSs (cont’d)

C. Reconciliation of statement of income

			Year ended December 31, 2008
						Effect of
			US			transition to
			GAAP			IFRS			IFRS
	Note		NIS			NIS			NIS
Revenues				1,106,203			-			1,106,203
Cost of revenues		11		753,416			(753,416	)		-
Selling and marketing		11		162,274			(162,274	)		-
General and administrative		11		55,913			(55,913	)		-
Depreciation and amortization		2, 11		-			112,027			112,027
Salaries		1, 11		-			161,556			161,556
General and operating expenses		11		-			693,773			693,773
Other operating expenses				6,705			-			6,705
Operating income				127,895			4,247			132,142

Finance expense		3, 4		64,879			204			65,083
Finance income		1		7,640			399			8,039
Net finance expense				57,239			(195	)		57,044

Income before income tax				70,656			4,442			75,098
Income tax		4, 14		22,174			159			22,333

Net income for the year				48,482			4,283			52,765

Other Comprehensive income:

Net income for the year				48,482			4,283			52,765
Net change in fair value of available-for-
Sale financial assets				(19,527	)		(1,106	)		(20,633	)
Net change in fair value of available-for-
Sale financial assets transferred to profit or loss				-			2,568			2,568
Defined benefit plan actuarial losses, net				-			(5,163	)		(5,163	)

Income tax on other comprehensiveincome				4,882			925			5,807

Total comprehensive income for the year				33,837			1,507			35,344
Earnings per share
Basic and diluted earnings per share (in NIS)				1.91			0.17			2.08

F - 67

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 29 - Explanation of Transition to IFRSs (cont’d)

(1) Employee benefits

Under US GAAP, the liability for employee severance benefits was measured by multiplying the years of tenure by the last monthly salary of the employee (i.e. one monthly salary for each year of tenure) at each balance sheet date, and the amount funded for severance pay that has been accumulated for the liability is measured based on redemption values at each balance sheet date. In addition, under US GAAP, amounts funded with severance pay funds were presented as long term assets. On the date of transition to IFRS, all the net liabilities in respect of post-employment benefits of employees and other long-term benefit plans are measured in accordance with the provisions of IAS 19, Employee Benefits, on the basis of actuarial estimates and discounted amounts and takes into account, among other things, future salary rises and turnover. In addition, the amount funded is measured at its fair value. The said amounts funded comprise “plan assets” as defined in IAS 19, and hence, were set off from the liability for employee rights upon retirement for the purpose of statement of financial position.

The Company elected as its accounting policy to recognize actuarial gains or losses directly in retained earnings, according to the alternatives provided in IAS 19, since this alternative reflects the proper fair value of the net liabilities to the employees on the cutoff date. Furthermore, under this alternative the statements of income reflect more appropriately reflects the results of operations of the Company, thus preventing fluctuations in respect of actuarial gains and losses.

(2) Acquisition of assets from IGLD

In June 2008, the Company acquired the international communication agreements of UUNET from IGLD for the consideration of NIS 3,035. Under US GAAP, assets acquired were recorded at IGLD’s historical cost basis determined under U.S. GAAP in accordance with the guidance of Staff Accounting Bulletin 5G, “Transfer of Non-Monetary Assets by Promoters or Shareholders”, which was zero. The consideration paid by the Company was recorded against additional paid-in capital as a capital contribution from a controlling shareholder. In accordance with IFRS, the assets acquired were recorded at fair value which is the amount of consideration paid and are amortized over their useful life. As a result, amortization expenses of NIS 306 for the year ended December 31, 2008 were charged to the income statements.

(3) Available-for-sale corporate debt securities

Under US GAAP, and in accordance with EITF 96-12, the effective interest rate of available-for-sale debt securities indexed to the CPI is re-calculated at the end of each reporting period, to reflect movements in the CPI. Under IFRS, the Company recalculates the carrying amount by computing the present value of estimated future cash flows at the financial instrument’s original effective interest rate and the adjustment is recognized in profit or loss for the period as income or expense.

F - 68

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 29 - Explanation of Transition to IFRSs (cont’d)

(4) Current tax liabilities

Under US GAAP, the benefits of uncertain tax positions are recognized only if it is more likely than not that the positions will be sustainable based on their technical merits. Under IFRS, uncertain tax positions are recognized based on the Company’s best estimate of the tax amount expected to be paid.

In addition, under US GAAP, current tax liabilities has been presented under “other payables and accrued expenses” line item. Under IFRS, current tax liabilities are presented separately on the statement of financial position. As a result, current tax liabilities of NIS 26,527 and NIS 22,182 as at January 1, 2008 and December 31, 2008, respectively, were presented separately.

(5) Classification of software costs

Under US GAAP, computer software is classified within property and equipment. Under IFRS, computer software and capitalized software development costs which are not an integral part of the hardware attributed to them, are treated as intangible assets. As a result, NIS 26,099 and NIS 31,999, as at January 1, 2008 and December 31, 2008, respectively, relating to computer software and to capitalized software development costs, were reclassified from the “Property and equipment” line item to the “intangible assets” line item.

(6) Deferred expenses

Under US GAAP, payments in respect right-of-use (ROU) of international fiber optic cables were classified within “Other assets” line item. Under IFRS, such payments were classified as deferred expenses. As a result, NIS 288,653 and NIS 284,581 as at January 1, 2008 and December 31, 2008, respectively, relating to such payments, were reclassified from the “Other assets” line item to the “Deferred expenses” line item.

(7) Licenses for telecom-communication services and other

Under US GAAP, licenses for telecom-communication services were classified within the “Other assets” line item. Under IFRS, such licenses and other are treated as intangible assets. As a result, NIS 4,975 and NIS 5,981 as at January 1, 2008 and December 31, 2008, respectively, relating to such licenses, were reclassified from the “Other assets” line item to the “Intangible assets” line item.

(8) Deferred income

Under US GAAP, deferred income was classified within “Other payables and accrued expenses” line item. Under IFRS, such deferred income is presented within a separate line item in the statement of financial position. As a result, NIS 3,833 and NIS 3,742 as at January 1, 2008 and December 31, 2008, respectively, relating to such deferred income, were reclassified from the “Other payables and accrued expenses” line item to the “Deferred income” line item.

F - 69

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 29 - Explanation of Transition to IFRSs (cont’d)

(9) Goodwill

Under US GAAP, goodwill is required to be presented separately on the balance sheet. Under IFRS, goodwill can be included within intangible assets and is not required to be presented separately. As a result, goodwill of NIS 411,171 as at January 1, 2008 and December 31, 2008 was reclassified from “Goodwill” line item to “Intangible assets” line item.

(10) Share based compensation expenses

Under US GAAP, share based compensation expenses were charged to profit or loss through corresponding increase to additional paid-in capital. Under IFRS, and on the basis of the accounting policy applied by the Company, the Company has reclassified NIS 3,429 thousand as at December 31, 2008 to capital reserve for share-based payments.

(11) Cost and expenses

Under US GAAP, expenses in the statements of income were classified according to their function (e.g., cost of sales, selling and marketing and administrative etc.), whereas under IFRS, the Company chose to classify expenses in the statements of income according to their nature (e.g., depreciation and amortization, salaries etc.), as permitted under IFRS.

(12) Issuance expenses on debentures

Under US GAAP issuance expenses on debentures were presented as “Other asset” whereas under IFRS such expenses are presented net of the debentures issued and are part of the effective interest rate of the debentures. As a result NIS 1,964 and NIS 1,632 as at January 1, 2008 and December 31, 2008, respectively, reclassified from the “Other assets” line item to the “Debentures” line item.

(13) Deferred taxes

Under US GAAP, deferred taxes were classified as current assets or liabilities and non-current assets or liabilities based on the classification of the assets or liabilities to which they relate. Under IFRS, deferred taxes are classified as non-current assets or liabilities even if it is anticipated that they will be realized in the short term. As a result, deferred tax assets in the amount of NIS 9,396 and NIS 17,838 as at January 1, 2008 and December 31, 2008, respectively, were reclassified from current assets to non-current assets or liabilities.

The deferred taxes as presented hereunder have changed based on the aforementioned changes. The changes in the deferred taxes were calculated on the basis of tax rates that are expected to be in effect when the temporary differences reverse.

	January 1			December 31
	2008			2008
	NIS			NIS
Intangible assets		(25,548	)		(15,458	)
Employee benefits		6,544			6,491
Decrease in deferred tax liability		(19,004	)		(8,967	)

F - 70

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 29 - Explanation of Transition to IFRSs (cont’d)

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

	January 1		December 31
	2008		2008
	NIS		NIS
Intangible assets		-		(306	)
Marketable securities available-for-sale		-		(1,096	)
Employee benefits		26,176		25,965
Deferred taxes		19,004		8,967
Current tax liabilities		11,511		23,572
Share-based compensation		-		3,429

Total equity adjustments		56,691		60,531

Note 30 - Subsequent Events

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

The acquisition was funded with the proceeds that the Company received from the sale of its legacy communications business and the following loans:

(1)

On the closing date of the acquisition of the Bezeq interest, SP2, which holds the Bezeq interest, received a bank loan from certain banking and financial institutions led by Bank Hapoalim Ltd., or Bank Hapoalim, in a total principal amount of NIS 4.6 billion (approximately $1.24 billion). SP2 also issued to the lenders phantom stock option agreements, under which the lenders received option units, which reflect, in the aggregate, 2% of Bezeq’s share equity (subject to adjustments in certain instances). The “base price” of each unit is NIS 8.62. However, the total amount that SP2 will pay the lenders under all the phantom stock options together is limited to NIS 125 million (NIS 2.3367 per option unit). The option units are exercisable by the lenders until May 30, 2017, but are due for payment in certain installments. The Bezeq shares that were purchased by SP2 on the closing date, a nd all of SP2’s other rights and assets (except additional shares of Bezeq that it may acquire in the future) have been pledged to the lenders as security of SP2’s obligations under the loan agreement. In addition, the Company’s wholly-owned subsidiary SP1, the direct parent company of SP2, has pledged to the lenders the entire equity it holds in SP2 and the debt owed to it by SP2 (other than the amounts that SP2 will pay SP1 according to the terms and the conditions of the loan agreement).

The Loan included a “bullet” floating rate loan, in the amount of NIS 700 million (approximately $185.4 million); with principal and interest payable on November 30, 2010. SP2 repaid this loan in full following our receipt of a dividend from Bezeq on May 3, 2010.

F - 71

B Communications Ltd.

(Formerly: 012 Smile Communications Ltd.)

Notes to the Consolidated Financial Statements

(All amounts are in thousands except where otherwise stated)

Note 30 - Subsequent Events (cont’d)

(2)

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

On March 24, 2010, the Company completed a private placement of 3,478,000 of its ordinary shares to Israeli institutional investors and its parent company, IGLD.

The offering price of NIS 116 per ordinary share was determined by means of a tender by third party, institutional investors.

Based on IGLD’s irrevocable undertaking to subscribe for approximately 75% of the offering on the same terms and conditions negotiated with the third-party institutional investors, IGLD purchased 2,599,310 ordinary shares, which represent approximately 75% of the shares sold in the private placement.

The private placement proceeds from IGLD were paid to the Company on March 24, 2010 by way of early repayments of shareholders loans:

(a) NIS 83.2 million from the “March 2007 loan”.

(b) NIS 218.3 million from the “November 2009 loan” (the loan was fully repaid).

As at May 12, 2010, the remaining outstanding balance of the “March 2007 loan” was fully repaid (NIS 31.5 million).

As a result of the sale of the Company’s legacy telecommunications business to a wholly-owned subsidiary of Ampal, which triggered a change of control event, all of the Company’s options became fully vested. On May 9, 2010, IGLD purchased 1,100,000 Ordinary Shares of the Company in a private transaction with former employees of the Company who had exercised the options to purchase the 1,100,000 Ordinary Shares. The purchase price for such 1,100,000 Ordinary shares was NIS 109 per share (approximately US$ 28.91 per share) or NIS 119.9 million in the aggregate (approximately US$ 31.8 million).

F - 72

S I G N A T U R E S

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

	B COMMUNICATIONS LTD.

	By:	/s/ Eli Holtzman
		Eli Holtzman
		Chief Executive Officer

	By:	/s/ Doron Turgeman
		Doron Turgeman
		Chief Financial Officer

Dated: June 30, 2010

EX-1.2 2 exhibit_1-2.htm EXHIBIT 1.2 exhibit_1-2.htm

Exhibit 1.2

B Communications Ltd.

Articles of Association

of a Public Company

INDEX

1.	Interpretation

2.	Company purposes

3.	Limitation of liability

4.	Articles of Association

5.	Share capital

6.	Recapitalization; change in rights

7.	Ownership of shares

8.	Share certificates

9.	Transfer and transmission of shares

10.	Rights attached to shares

11.	Corporate bodies of the Company

12.	The general meeting and its powers

13.	Annual general meetings

14.	Extraordinary meetings

15.	Notices of general meeting

16.	Proceedings at the general meeting

17.	Chairman of the general meeting

18.	Voting at the general meeting

19.	Resolutions at the general meeting

20.	Number and appointment of directors

21.	Remuneration of directors

22.	Powers of the board of directors

23.	Chairman of the board of directors

24.	Convening the board of directors

25.	Meeting of the board of directors

26.	Voting at the board of directors

27.	Committees of the board of directors

28.	Audit committee

29.	General manager

30.	Officers of the company

31.	Liability insurance, indemnification and exemption

32.	Internal auditor and auditor

33.	Distribution, dividend distribution and bonus shares

34.	Calls of shares

35.	Forfeiture

36.	Register of Shareholders

37.	Register of substantial shareholders and additional register of shareholders outside Israel

38.	Stamp, seal and signature rights

39.

Accounts

40.	Charitable contributions

41.

Minutes

42.

Notices

43.	Liquidation

44.	Exceptional Holdings; Compliance with the Communications Order

Public Company Limited by Shares

Companies Law, 5759-1999

Articles of Association

B Communications Ltd.

1.	Interpretation

Unless the context otherwise requires, in these Articles the following terms shall have the meaning ascribed to them below:

	“These Articles” or “the Articles”		Shall mean these Articles of Association as set forth herein or as amended by the shareholders from time to time;

	The “Company”		Shall mean B Communications Ltd.

	The “Board of Directors”		Shall mean the Board of Directors of the Company, appointed in accordance with the provisions of these Articles;

	The “Companies Law” or the “Law”		The Companies Law 5759-1999, as amended from time to time;

	The “Companies Ordinance” or the “Ordinance”		Those provisions of the Companies Ordinance [New Version] 5743-1983 that have not been canceled, as amended from time to time;

	The "Communications Law"		The Israeli Communications Law (Telecommunications and Broadcasting), 1982

	The "Communications Order"		The Israeli Communications Order (Telecommunication and Broadcasting) (Determination of Essential Service Provided by "BEZEQ" - the Israel Telecommunication Corp., Limited), 5757-1997, issued by the Israeli Minister of Communications, as amended from time to time

	The “Securities Law”		Shall mean the Securities Law, 5728-1968;

	The “Office”		Shall mean the office of the Company, as registered from time to time;

	The “Shareholders Register”		Shall mean the shareholders register that should be maintained in accordance with the Law and the provisions of these Articles;

	“Writing”		Shall mean print, photocopy, telegram, telex, facsimile, email and any other form of writing, creation or imprint of words in a visible form;

	“Ordinary Resolution”		A resolution adopted at a general meeting (whether annual or extraordinary) by a majority of the voters (without taking into account abstentions);

	"Bezeq"		"Bezeq" the Israeli Telecommunications Corporation Ltd.;

	“Exceptional Holdings (or Excess Holdings)” (Hakhzakot Khorgot)		Shall have the meaning assigned to such term in the Communications Order, for so long as the Communications Order applies to the Company;

	“Means of Control”		Any of the following: (1) the right to vote at a General Meeting of the Company; (2) the right to appoint a Director or General Manager of the Company; (3) the right to participate in the profits of the Company; or (4) the right to a share of the remaining assets of the Company after payment of its debts upon liquidation.

	The "Ministers"		Shall have the meaning assigned to such term in the Communications Order;

	"Principal Shareholder"		A Person holding, directly or indirectly, 5% or more of the issued share capital of the Company.

Unless the context otherwise requires and subject to the provisions of this Article, terms defined in the Companies Law shall have the meaning ascribed to them therein; words and expressions importing the singular shall include the plural and vice versa; words and expressions importing the masculine gender shall include the feminine gender; and words referring to individuals shall include corporate entities.

2.	Company Purposes

The Company may engage in any lawful activity.

3.	Limitation of Liability

(a)

The liability of a shareholder of the Company shall be limited to the amount due by such holder in respect of his shares, and in any event no less than the nominal value of each of such holder’s shares.

(b)

In the event that the Company issues shares for a consideration lower than their nominal value, as stipulated in Section 304 of the Law (the “Reduced Consideration”), the holder of such shares shall only be liable for payment of the Reduced Consideration with respect to shares issued to him as mentioned above.

4.	Articles of Association

(a)

The Company may amend the Articles by an Ordinary Resolution at the general meeting of the Company, subject to Article 20(l).

(b)

Any amendment of the Articles abrogating the rights of any particular class of shares shall require consent of the meeting of shareholders of such class. Notwithstanding the provisions of this section, an alteration of the Articles requiring a shareholder to purchase further shares or to increase the scope of his liability shall not bind the shareholder without his consent.

5.	Share Capital

(a)

The registered share capital of the Company is NIS 5,000,000, divided into 50,000,000 ordinary shares, nominal value NIS 0.1 each (the “Shares” or “Ordinary Shares”).

(b)

All Ordinary Shares rank pari passu with one another for all intents and purposes, and each Ordinary Share confers upon its holder the following rights:

[1]

The right to be invited to and participate in the general meetings of shareholders of the Company, and the right to one vote with respect to every Ordinary Share at each general meeting of the Company in which the holder participates;

[2]

The right to receive dividends and bonus shares if and when distributed, pro rata to the nominal value of the Shares, and regardless of any premium paid with respect thereto;

[3]

The right to participate in the distribution of the Company’s assets after liquidation, according to such holder’s pro rata holding out of the Company’s issued and outstanding share capital;

(c)

Notwithstanding the above, the Company may create shares of different classes as provided in these Articles and in accordance with the law.

6.	Recapitalization; Change in Rights

(a)

The general meeting of shareholders of the Company may, by an Ordinary Resolution, and subject to the provisions of Section 46B of the Securities Law and subject to any other applicable law:

[1]

Increase its share capital by an amount as may be resolved, by the creation of new shares, under the terms and which will confer the rights as may be resolved. Such a resolution may be adopted regardless of whether all the existing shares have been issued or resolved to have been issued.

Unless otherwise resolved in the resolution of the general meeting to increase the share capital, any new share capital shall be deemed part of the Company’s original share capital and shall be subject to the same Articles with regard to calls on shares, liens, transfer, ownership, forfeiture or any other provisions governing the original share capital;

[2]

To consolidate any or all of the share capital of the Company and to divide it into shares of larger nominal value, and if the Shares have no nominal value – into a smaller number of Shares, provided however that this does not alter the proportion of the holdings of issued share capital;

[3]

To divide any or all of the share capital of the Company into Shares of smaller nominal value, and if the Shares have no nominal value – into a smaller number of Shares, provided however that this does not alter the proportion of the holdings of issued share capital;

[4]

Change, cancel, convert, extend, add to or otherwise alter the rights, preferences, privileges, restrictions and provisions, whether attached at such time to Company Shares or not;

[5]

Cancel unissued registered share capital, provided that there is no obligation by the Company, including a conditional obligation, to issue any of these Shares;

[6]

To reduce the share capital in the manner, under the terms and subject to the authorizations as required by the Law;

(b)

The creation or issuance of additional Shares of the same class shall not be deemed an abrogation or change of the rights of such particular class of Shares, except as provided in the terms of issuance of such Shares.

(c)

Any amendment, conversion, cancellation, expansion, addition to or other change in the rights, preferences, privileges, restrictions or provisions attached to any particular class of shares issued to shareholders of the Company, shall require the written consent of holders of all issued shares of such particular class, or authorization by an Ordinary Resolution adopted at an Extraordinary Meeting of such class.

(d)

The provisions of these Articles relating to general meetings shall, mutatis mutandis, apply to any general meeting of the holders of a particular class of shares.

(e)

In order to effectuate any such resolution, the Board of Directors may settle any difficulty that may arise, at its discretion. Without derogating from the powers of the Board of Directors as mentioned above, in the event that a capital consolidation creates fractional shares, the Board of Directors may:

[1]

Sell all the fractional shares, and for this purpose appoint a trustee in whose name the share certificates with respect to such fractional shares shall be issued and who will sell these shares, and the proceeds of the sale, less commission and expenses, shall be divided among the entitled shareholders;

[2]

To issue to each shareholder who would have, after the consolidation, been entitled to a fractional share, paid-up shares of the class that such holder had prior to the consolidation, in such number that together with the fractional share, will create one whole share, and such issuance shall be deemed to have been effected immediately prior to the consolidation;

[3]

To determine that the shareholders shall not be entitled to receive a consolidated share with respect to a fractional consolidated share arising from the consolidation of half (or less) the number of shares whose consolidation creates one whole consolidated share, and that they shall be entitled to receive a consolidated share with respect to a fractional consolidated share arising from the consolidation of more than half of the number of shares whose consolidation creates one whole consolidated share;

[4]

In the event that action in accordance with Sections (2) or (3) above requires the issuance of additional shares, the payment with respect to such shares shall be effected in the same manner as the payment of bonus shares. Consolidation and subdivision as stated above shall not be deemed alteration of the rights attached to the consolidated or subdivided shares.

(f)

In the event of consolidation of shares into shares of greater nominal value, the Board of Directors may determine arrangements in order to settle any difficulty that may arise in connection with such consolidation, and in particular may determine which shares shall be consolidated into any particular share, and in the event of consolidation of shares that are owned by several holders, the Board of Directors may determine the arrangements for the sale of the consolidated share, the method of sale and the method in which the net proceeds shall be divided, and to appoint a person who will effect the transfer, and any action carried out by such person shall have full force and effect and may not be challenged.

(g)

The Board of Directors shall be responsible for the securities of the Company and may issue or grant such securities at its discretion, subject to the law and the provisions of these Articles. The Board of Directors may:

[1]

Issue or grant shares and other securities, convertible or exercisable into shares, up to the Company’s registered share capital, including the issuance (or otherwise handle them) for cash or non-cash consideration, subject to such conditions and terms, and whether at a premium, nominal value or discount, and at such dates as the Board of Directors may see fit;

[2]

Resolve to issue a series of debentures, as part of the power of the Board of Directors to take loans on behalf of the Company, and up to the limit of such power;

(h)

Unless the Company otherwise resolves in an Ordinary Resolution, in the event that a private placement is offered to a shareholder of the Company, there is no obligation to make a similar offer to all other shareholders of the Company. The Board of Directors may offer securities of the Company to any person at its discretion, whether or not any or all of the Offerees are holders of securities of the Company, and all in accordance with the provisions of the law, these Articles and the agreements by which the Company is bound at the time of such issuance.

(i)

Upon issuance of shares, the Board of Directors may designate different terms for different shareholders with respect to the consideration, the calls on shares and/or the dates of payment.

7.	Ownership of Shares

(a)

The Company shall be entitled to treat the person registered as the holder of any share, as the absolute owner thereof, and accordingly, shall not be bound to acknowledge any trust or other right, whether at law or in equity, of any other person to or in respect of such share, except subject to an order by a competent court or as otherwise required by law. The foregoing shall not apply to a nominee company, as defined by law.

(b)

In the event that the Company receives an application to be registered as a shareholder from a person who has shares registered to his name with a member of the stock exchange, and such shares are registered in the Register of Shareholders in the name of a nominee company, the Company shall register such person in the Register of Shareholders subject to all of the following conditions:

[1]

The applicant provided the Company with an undertaking from such stock exchange member to notify the Company of the applicant’s new holdings immediately upon performance of any action that alters his holdings in the relevant shares;

[2]

The applicant has provided the Company with a written undertaking to notify the Company of any such actions;

(c)

If two or more persons are registered together as holders of a share, each one of them shall be permitted to give receipts binding all the joint holders for dividends, shares, bonus shares, share certificates, debentures, warrants or other monies or rights received from the Company in connection with the share, even if such dividends, shares, bonus shares, share certificates, debentures, warrants or other monies or rights were delivered to another of the joint holders.

(d)

The Company may at any time pay commission to any person with respect to his conditional or unconditional signature or agreement sign on any share, debenture or series of debentures of the Company or with respect to his conditional or unconditional consent to cause any third party to sign any share, debenture or series of debentures of the Company, all in accordance with the provisions of the law.

(e)

[1]

The executors or administrators of a deceased shareholder, or in the absence of same, his entitled heirs, shall be the only persons recognized by the Company as having any title to or interest in the shares registered in the name of such holder.

[2]

In case of a share jointly registered to several holders, then, subject to the provisions of the law, the surviving joint holders alone shall be recognized by the Company as having any title to or interest in the share.

[3]

A joint holder may transfer his joint-ownership in accordance with the provisions of these Articles.

[4]

In case of a shareholder that is a corporate entity under receivership or liquidation, the Company may recognize the receiver or liquidator of such shareholder as having title or interest in such holder’s shares, and in the case of a legally incompetent, the Company may recognize his guardian, or, if such person who is in bankruptcy, his trustee.

(f)

Any person becoming entitled to a share in consequence of the death of a shareholder, upon producing evidence of the grant of probate or letters of administration or declaration of succession, demonstrating that such person is entitled to the shares of the deceased shareholder, may elect either to be registered himself as the holder of the share or, subject to Board of Directors approval in accordance with these Articles, transfer such shares.

8.	Share Certificates

(a)

Each share certificate issued by the Company shall bear the seal of the Company and the signatures of two directors, or the signature of the general manager of the Company and one director or such other person as the Board of Directors may designate.

(b)

Each shareholder shall be entitled to receive from the Company, within six months from the date of issuance or registration of transfer, one share certificate in respect of all of the shares registered in his name and fully paid up, or, if approved by the Board of Directors, several share certificates, each for one or more of such shares.

(c)

Each share certificate shall denote the serial numbers of the shares represented thereby and any other detail that the Board of Directors may deem important or that must be denoted in accordance with the law.

(d)

A share certificate denoting two or more persons as joint owners of the shares represented thereby shall be delivered to the person first named on the Register of Shareholders in respect of such joint ownership, and the Company shall not be obligated to issue more than one certificate to all joint holders; a certificate delivered to any one of the joint holders shall be deemed to have been delivered to all of them.

(e)

A share certificate defaced, lost or destroyed may be replaced upon furnishing of evidence to the satisfaction of the Board of Directors, proving such defacement, loss or destruction and subject to the submission to the Company of securities against all possible damages as the Board of Directors may think fit, and all against payment, if imposed.

(f)

The Company may issue share warrants in place of registered shares. Where a share warrant is issued in place of a share registered under a person’s name, the share shall be registered in the Register of Shareholders as a bearer share, and the name of the shareholder shall be removed from the Register of Shareholders.

(g)

A shareholder in lawful possession of a share warrant may return the warrant to the Company for the purpose of its cancellation and conversion into a share registered under his name; upon cancellation, the name of the shareholder shall be entered in the Register of Shareholders, noting the number of shares registered under his name.

9.	Transfer and Transmission of Shares

(a)

No transfer of shares of the Company shall be entered in the Register of Shareholders except subject to one of the alternatives stipulated in Section 299 of the Companies Law, as provided in Article 36(d) herein.

(b)

A deed of transfer with respect to a share of the Company shall be signed by the transferor and the transferee, and the transferor shall be deemed the shareholder as long as the transferee has not been entered in the Register of Shareholders with respect to the transferred share.

(c)

The deed of transfer shall be in the following form or in any form as similar to the following as possible, or in any other form as may be approved by the Board of Directors:

I, , of (“Transferor”), in consideration of the sum of NIS , do hereby transfer to the (“Transferee”) 0; shares, nominal value NIS each, numbered to , inclusive, of B Communications Ltd.., to hold unto the transferee, his executors, administrators and assigns, subject to the several conditions on which I held the same immediately before the execution hereof; and I the transferee do hereby agree to take the said shares subject to the conditions aforesaid.

As witness our hands, this day of .


	Transferor				Transferee

	Witness				Witness

(d)

Together with the deed of transfer, the Company should also receive any other document (including the certificate of the transferred share) as the Board of Directors may require for this purpose. In the event that the transfer is approved, all such documents shall remain with the Company.

(e)

A transfer of shares that have not been fully paid up shall have no effect unless authorized by the Board of Directors. The Board of Directors may, at its absolute discretion and without being required to provide any explanation, withhold its consent to a transfer of shares that have not been fully paid up.

(f)

Every deed of transfer shall be submitted to the Office for registration. Registered deeds of transfer shall remain in the hands of the Company; deeds of transfer that the Board of Directors shall refuse to register due to reasons stipulated in these Articles or by law, shall be returned, upon demand, to the person that submitted them, together with the share certificate (if submitted).

10.	Rights Attached to Shares

In addition to the rights of shareholders as stipulated in Article 5(b) above, each shareholder of the Company shall be entitled to the following:

(a)

Shareholders shall have the right to inspect the following documents of the Company:

[1]

Minutes of the general meetings;

[2]

The Register of Shareholders and the register of substantial shareholders of the Company;

[3]

These Articles, as amended from time to time;

[4]

Any document which the company is required to file under the Law and under any law with the Companies Registry or the Securities Authority, available for public inspection at the Companies Registry or the Securities Authority, as the case may be;

(b)

A shareholder shall be entitled to require from the Company inspection of any document in its possession, indicating for what purpose, in event that the document relates to an act or transaction requiring the consent of the general meeting under the provisions of sections 255 and 268 to 275 of the Law.

(c)

The Company may refuse the request of the shareholder if in its opinion the request was not made in good faith or the documents requested contain a commercial secret or a patent, or disclosure of the documents could prejudice the best interest of the Company in some other way.

11.	Corporate bodies of the Company

(a)

The corporate bodies of the Company are:

[1]

The general meeting of shareholders;

[2]

The Board of Directors;

[3]

The general manager;

The acts and intentions of a company’s corporate body shall be the acts and intentions of the Company.

(b)

The corporate bodies of the Company shall have the following powers:

[1]

The general meeting shall have the powers stipulated in Article 12 herein.

[2]

The Board of Directors shall have the powers stipulated in Article 22 herein.

[3]

The general manager shall have the powers stipulated in Article 29 herein.

(c)

Unless otherwise expressly stated in these Articles, the Board of Directors may delegate any power of the Company that is not assigned to the Board by law or by these Articles, to any other corporate body of the Company.

(d)

The general meeting may assume powers conferred on the Board of Directors and/or any other corporate body of the Company with respect to any matter that is essential for the proper management of the Company and/or any action that in the discretion of the general meeting is required for the best interest of the Company and/or any matter whatsoever provided that such powers are assumed for a period not to exceed one year, and with respect to any matter in accordance with Section 52 of the Companies Law.

(e)

The Board of Directors may assume powers conferred on the general manager with respect to any matter that is essential for the proper management of the Company and/or any action that in the discretion of the Board of Directors is required for the best interest of the Company and/or any matter whatsoever provided that such powers are assumed for a period not to exceed one year, and with respect to any matter in accordance with Sections 51-52 of the Companies Law.

General Meetings

12.	The General Meeting and its Powers

(a)

Resolutions of the company in respect of the following matters shall be passed by the general meeting:

	[1]	Revisions of the Articles, as provided in Article 4 above;
	[2]	Exercise of the powers of the Board of Directors in the event that the Board of Directors is unable to exercise such powers, as provided in Section 52(a) of the Companies Law;

[3]

Appointment of the Company’s auditor, the terms under which he shall be retained and termination of his appointment in accordance with the provisions of Article 32 herein;

[4]

Appointment of outside directors in accordance with the provisions of Section 239 of the Companies Law and Article 20(i) herein;

[5]

Approval of actions and transactions requiring approval of the general meeting in accordance with the law;

[6]

Increase or reduction of the registered share capital, as provided in Article 6 above;

[7]

Merger, in accordance with Section 320(a) of the Companies Law;

(b)

The provisions of the law with respect to the dates on which the general meeting should convene, the method by which it should be convened, the business to be considered at a general meeting, quorum, notices, voting, minutes, etc., shall apply to general meetings, extraordinary meetings and class meetings, unless otherwise expressly stated in these Articles, and in accordance with the provisions of the law.

13.	Annual General Meeting

(a)

The Company shall hold an annual general meeting every year no later than on the expiry of fifteen months from the previous annual general meeting.

(b)

The agenda at an annual general meeting shall include:

[1]

a discussion of the financial reports and of the report of the Board of Directors;

[2]

appointment of directors and setting their remuneration;

[3]

appointment of an auditor;

[4]

any matter included in the agenda by the Board of Directors;

[5]

Any matter that the Board of Directors was requested to include in the agenda by one or more shareholders with at least one percent of the voting rights at the general meeting, provided that it is appropriate to discuss such a matter in the general meeting;

14.	Extraordinary Meetings

(a)

The Board of Directors may resolve to convene an extraordinary general meeting, and shall so convene at the demand of any one of the following:

[1]

two directors or one-quarter of the directors in office;

[2]

one or more shareholders with at least five percent of the issued share capital and at least one percent of the voting rights in the company, or one or more shareholders with at least five percent of the voting rights in the Company.

(b)

The agenda at an extraordinary general meeting shall be fixed by the Board of Directors and shall also include matters in respect of which the convening of the extraordinary general meeting is required under Article 14(a) above, as well as any matter requested by a shareholder as provided in Article 13(b)(5) above.

(c)

In the event that the Board of Directors is required to convene an extraordinary meeting as stipulated in Article 14(a) above, the Board of Directors shall, within twenty one days from receiving such requirement, call the meeting as stipulated below for a date as will be designated in the notice that will be provided to the shareholders in accordance with Article 15 herein.

15.	Notices of General Meetings

(a)

The Company shall designate the date of record with respect to entitlement to receive notices of general meetings and participate and vote at such meetings, in accordance with the Companies Law and the regulations promulgated thereunder.

(b)

Subject to the provisions of Section 69 of the Companies Law, notice of a general meeting of shareholders shall be provided to all eligible shareholders only by publication in two daily Hebrew language newspapers in Israel that have a reasonably-sized readership.

16.	Proceedings at the General Meeting

(a)

The general meeting may discuss any business in accordance with the Law and these Articles, and any matter on the agenda as detailed in the notice calling such meeting.

(b)

The quorum for any shareholders meeting shall include the presence, in person or by proxy, of shareholders holding or representing, in the aggregate, at least one third of the voting rights.

(c)

No business shall be considered or determined at a general meeting, unless the requisite quorum is present within half an hour from the time appointed for the general meeting. If within half an hour from the time appointed for the general meeting a quorum is not present, the general meeting shall stand adjourned to the same day one week thereafter, at the same time and place, or to such other time as designated in the notice for such meeting (“Adjourned Meeting”).

(d)

If within half an hour from the time appointed for the Adjourned Meeting a quorum as stipulated in Article 16(b) is not present, any number of shareholders present shall represent a quorum.

(e)

Notwithstanding the provisions of Article 16(d) above, if a general meeting is convened following demand of shareholders as provided in Article 14(a)(2) above or in accordance with Section 64 of the Law, the Adjourned Meeting shall take place only if there are present at least the number of shareholders required to convene a meeting as provided in Article 14(a)(2) above.

(f)

A general meeting in which a quorum is present may resolve to adjourn the meeting or the discussion or the vote on a matter included in the agenda to such other time and place as it may determine; only matters that were on the agenda and in respect of which no resolution was passed shall be discussed at the adjourned meeting.

(g)

If a general meeting is adjourned as stipulated in Article 16(f) above for more than twenty one days, notices for the adjourned meeting shall be given in accordance with Article 15 above.

(h)

If a general meting is adjourned without changing the agenda for no more than 21 days, notices and invitations for the adjourned meeting shall be given as soon as possible and in any event no later than seventy two hours before the time designated for the Adjourned Meeting; such notices and invitations shall be made in accordance with Sections 67 and 69(a) of the Companies Law, mutatis mutandis.

17.	Chairman of the General Meeting

(a)

The general meeting shall be chaired by the chairman of the Board of Directors or by a person that he has appointed in writing for this purpose, whether in general or for a specific meeting.

(b)

If the Board of Directors has no chair or if he is not present and has not appointed a chairman for the meeting, the meeting shall choose one of the directors present to be the chairman of such meeting, and if none of the directors is present, the meeting shall choose one of the participants to chair the meeting.

18.	Voting at the General Meeting

(a)

Subject and without prejudice to the rights or restrictions attached at any given time to any particular class of shares of the Company, each member shall have the right to one vote for each share that confer voting rights which he holds or with respect to which he acts as proxy. A shareholder shall be entitled to participate in and vote at a general meeting, himself or by proxy, subject to presentation to the Company of evidence of ownership as stipulated in the Articles, as of the date of record designated in the notice of the meeting and in accordance with the Companies Law and the regulations promulgated thereunder.

No holder of Ordinary Shares shall be entitled to participate and vote in any General Meeting (or to be counted as part of the quorum thereat): (i) unless all calls and other sums payable by him in respect of his shares in the Company have been paid, except if the allotment conditions of the shares provide otherwise, and/or (ii) in respect of any Exceptional Holdings, and/or in respect of Undisclosed Holdings as set forth in Article 45..

(b)

A corporation that is a shareholder of the Company may, in accordance with a resolution of its directors or any other managing body of such corporation, empower such person as it may designate to represent it at any general meeting. A person designated as mentioned above may, in accordance with the authorization, exercise the same rights that the represented corporation would have been entitled to exercise.

(c)

In case of a shareholder who is a minor, a conservatee, bankrupt or legally incompetent, or in case of a corporation, if the corporation is in receivership or liquidation, such shareholder may vote through its trustees, receivers, natural or legal guardians, as relevant, and these persons may vote themselves or by proxy.

(d)

If two or more persons are registered as joint owners of any share and are present at and participate in a vote, the vote of the senior amongst the joint owners attending and voting shall be taken into account, and the votes of the other joint holders will be disregarded. For this purpose seniority shall be determined by the order in which the names stand on the Register of Shareholders.

(e)

A shareholder may appoint as proxy a person who is not a shareholder of the Company. The instrument appointing a proxy to participate in and vote at a general meeting on behalf of a shareholder, shall be in writing and signed by the appointing shareholder or by his lawful representative appointed in writing, or, where the appointing party is a corporate entity, the document shall bear binding signatures as required in accordance with the articles of association of such corporate entity. If the appointing entity is a corporate entity, certification by an attorney shall be attached to the instrument appointing the proxy, confirming that the proxy was executed in accordance with the articles of association of the corporation.

(f)

A vote made in accordance with the terms of the proxy shall be valid even if before the vote, the person appointing the proxy died or was declared bankrupt or legally incompetent or canceled the proxy or transferred the share with respect to which the proxy was made, or, in case of a corporation, if a receiver or liquidator was appointed for the corporation, all unless written notice of such change was received at the Office at least one day before the meeting, or, if received at the place designated for the meeting, before the time designated for the meeting.

(g)

A proxy and power of attorney or any other certificate (as relevant) evidencing ownership, or a copy certified by a notary or an attorney, shall be deposited in a place designated for this purpose by the Board of Directors within 48 hours before the general meeting.

(h)

A shareholder holding more than one share shall be entitled to appoint more than one proxy, subject to the following provisions:

[1]

The proxy will specify the class and number of shares with respect to which it is given;

[2]

In the event that the number of share of any given class designated in the proxies made by a single shareholder exceeds the number of shares of such class actually held by such shareholder, all the proxies made by such shareholder with respect to the difference shall be null and void, but the votes with respect to shares held by such shareholder shall remain effective;

[3]

In the event that a shareholder designates a proxy and the proxy instrument does not specify the number or class of shares with respect to which it is given, the proxy shall be deemed to have been made with respect to all of the shares held by such shareholder on the date on which the proxy was deposited with the Company or delivered to the chairman of the meeting, as the case may be. In the event that the proxy is given with respect to a number of shares that is smaller than the number of shares actually held by the appointing shareholder, the shareholder shall be deemed to have abstained from the vote with respect to the balance of the shares, and the proxy shall only be valid with respect to the number of shares stipulated therein.

(i)

The appointment of a proxy (whether for a specific meeting or otherwise) shall be in writing and shall be in the following form or in any other similar form, depending on the circumstances:

I, , of , being a shareholder of B Communications Ltd. and entitled t o votes, hereby appoint of , or, in his stead, of , as my proxy to attend and vote on my behalf at the (annual/extraordinary/adjourned – as relevant) general meeting of the Company to be held on the day of , and at any adjournment thereof.

Neither the holding nor the voting of the shares to which this proxy relates requires the approval of the "Ministers" pursuant to the Communications Law or the Communications Order and are not considered “Exceptional Holdings”, as these terms are defined in the Company’s Articles of Association.

Signed this day of , .

.”

(j)

Subject to the provisions of applicable law, the Secretary of the Company may, in his discretion, disqualify proxies, proxy cards, written ballots or any other similar instruments, and notify the shareholder who submitted such proxy, proxy card, written ballot, authorization or similar instrument, in the following cases:

[1]

If the Secretary reasonably suspects that they are forged;

[2]

If the Secretary reasonably suspects that they are falsified, or given with respect to shares for which one or more proxies or written ballots have been given and not withdrawn; or

[3]

If there is no indication on such proxy, proxy card, written ballot or similar instrument as to whether or not the holdings in the Company or the vote of such shareholder require the approval of the Ministers pursuant to the Communications Law or the Communications Order or are regarded as Exceptional Holdings.

19.	Resolutions at the General Meeting

(a)

Any proposed resolution put to vote at a general meeting shall be decided by a show of hands.

(b)

Resolutions at the general meeting, including with regard to mergers, shall be decided by an ordinary majority, subject to the provisions of the law that require a special majority.

(c)

A declaration by the chairman of the general meeting that a proposed resolution has been unanimously adopted or rejected, or carried by a particular majority, shall constitute a prima facie evidence of the adoption or rejection, respectively, of same resolution.

Board of Directors

20.	Number and Appointment of the Directors

(a)

The number of the members of the Board of Directors shall be as determined from time to time by the general meeting, provided however that Board of Directors (including outside directors) shall consist of not less than two nor more than ten directors. At least two of the members of the Board of Directors shall be outside directors.

(b)

Except for outside directors, the directors of the Company shall be appointed by an Ordinary Resolution at the annual general meeting and shall remain in office until the end of the following annual general meeting; however, as long as no other director has been appointed in their stead, presiding directors shall remain in office, unless their office is vacated by operation of law or in accordance with these Articles.

(c)

The Company shall only appoint as directors such persons who are competent to serve as directors in accordance with the law.

(d)

Subject to the provisions of the law, a director may hold another office under or may be engaged by the Company, whether with or without remuneration, or under or by any other company in which the Company holds shares or any other interest, and may enter into any contract with the Company whether as buyer, seller or otherwise, and no such contract or any other contract or agreement executed by or on behalf of the Company and from which any benefit arises to the director shall be undermined [because of this reason alone], nor shall any director owe the Company any explanation regarding any profit arising from such office, engagement, contract or agreement, only because he is a director or because of the fiduciary relationship in connection therewith, provided that the director has complied with the provisions of the law regarding a persona l interest.

(e)

A corporation may serve as a director. A corporation serving as a director of the Company shall appoint an individual competent to serve as a director of the Company as its representative for this purpose, and may replace such representative, all in accordance with the obligations of the corporation toward the Company. The name of the individual serving on behalf of the corporation shall be entered in the register of directors as a person serving on behalf of a corporation. An individual serving as a director on behalf of a corporation and the corporation that appointed such person shall be subject to the duties applicable to directors, jointly and severally.

(f)

A director whose term terminates, can be reappointed.

(g)

In the event that the office of a director is vacated, regardless of the reason, the directors in office may appoint another director for the vacancy, and such director shall serve in office until the end of the term that his predecessor would have served if his office were not vacated. As long as the number of directors does not exceed the maximum permissible number, the directors may appoint additional directors up to the maximum; such appointment shall be in force until the next general meeting at which directors are appointed.

(h)

The Company may approve the appointment of a director such that his term shall commence at a later time than the appointment.

(i)

Outside directors shall be appointed in accordance with the law. Without prejudice to the foregoing, the Company may approve the appointment of an outside director for one additional three-year term, in accordance with the provisions of the law.

(j)

A director may appoint an alternate, all in accordance with the provisions of Section 237 of the Law. Alternate directors shall be subject to the provisions of the Law and the provisions of these Articles that apply to directors of the Company, and the office of an alternate director shall be vacated under the circumstances set forth by law or in these Articles that would cause the office of the appointing director to terminate.

(k)

The office of a director other than an outside director shall be vacated, ipso facto, under any of the circumstances set forth in Section 228(a) of the Law, and on any of the following events:

[1]

On his death.

[2]

On the date he is declared legally incapacitated

[3]

Without prejudice to the above, the general meeting shall be entitled to remove any director from office by an Ordinary Resolution, all subject to applicable law. The Board shall be entitled to remove from office any director appointed by the board.

(l)

The provisions of Article 20(b) and 20(k)(3) above shall not be modified without the prior written consent of the Israeli Minister of Communications.

21.	Remuneration of Directors

(a)

No director shall be paid any remuneration by the Company for his services as director unless otherwise will be prescribed by the Company. Each director shall be entitled to reimbursement of his reasonable travel and other expenses incurred in the course of his duty as a director including expenses in relation to participation in Board of Directors meetings.

(b)

A director who provides the Company with special services or exerts special efforts for one of the Company's purposes, shall be entitled to remuneration by the Company in an amount to be prescribed by the Company, and this remuneration shall be added to or come instead of the fixed remuneration, if any.

(c)

Outside directors shall be entitled to remuneration and reimbursement as provided by law. Without prejudice to the above, consideration shall not include the grant of an exemption, an undertaking to indemnify, or insurance pursuant to the provisions of the law and of these Articles, as provided in Article 31 herein.

22.	Powers of the Board of Directors

(a)

Without derogating from the powers conferred on the Board of Directors under these Articles, the Board of Directors shall outline the policy of the company and shall supervise the performance of the functions and acts of the general manager, and:

[1]

shall determine the Company’s plans of action, principles for funding them and the priorities between them;

[2]

shall examine the Company’s financial status, and shall set the credit limits that the Company be entitled to operate;

[3]

shall determine the organizational structure of the Company and its wage policy;

[4]

may resolve to issue debenture series;

[5]

shall be responsible for preparing financial reports and certifying them;

[6]

shall report to the annual general meeting on the position of the Company’s affairs and on the outcome of its business activities as provided in Section 173 of the Companies Law;

[7]

shall appoint and remove the general manager;

[8]

shall decide on acts and transactions requiring its approval pursuant to the provisions of Sections 255 and 268 to 275 of the Companies Law;

[9]

may issue shares and securities convertible to shares up to the limit of the registered share capital of the Company, in accordance with the provisions of Article 6(g) above;

[10]

may resolve to effect a distribution as provided in Article 33 herein;

[11]

shall give its opinion on special tender offers as provided in Section 329 of the Companies Law;

[12]

shall designate the minimum number of directors that must have accounting and financial expertise, in accordance with Section 240 of the Companies Law; the Board of Directors will designate such minimum number taking into account, among other things, the type and size of the Company, and the scope and complexity of its operations, and subject to the number of directors stipulated in the Articles.

(b)

The powers of the Board of Directors under Articles 22(a)(1) through 22(a)(12) may not be delegated to the general manager, except as provided in Section 288(b)(2) of the Companies Law.

(c)

Without prejudice to the powers conferred on the Board of Directors by law or in accordance with these Articles, the Board of Directors is hereby granted additional powers, as follows:

[1]

To appoint any person, persons or corporation to hold in trust for the Company any asset of the Company or in which the Company has an interest, or for any other purpose, and to perform and effectuate all actions and things required in connection with such trust, and see to the payment of such trustee or trustees;

[2]

To open, manage, defend, settle or abandon any litigation initiated by or against the Company or its officials or otherwise relating to Company matters, and to settle with regard to or extend the timetable for the payment or satisfaction of any debt, claims or demands owing by or to the Company;

[3]

Submit to arbitration any claim or demand by or against the Company;

[4]

Appoint, and, at the discretion of the Board of Directors, remove or suspend the general manager, any officer, other employee or representative, whether employed on a permanent or temporary basis or for special services, as the Board of Directors may from time to time determine, and to define their authorities and responsibilities and their remuneration, and to require assurances, under such cases and of such amounts as the Board of Directors may deem fit.

[5]

The Board of Directors may, on an ad hoc or permanent basis, authorize the general manager to appoint officers and other employees, define their authorities and responsibilities and determine their remuneration and terms of employment.

[6]

At any time and from time to time, the Board of Directors may appoint, under a power of attorney, any person to be the representative of the Company for such purposes and with such powers, authorities and discretion (not to exceed such powers, authorities and discretion granted to the Board of Directors under these Articles) and for such period and subject to such terms as the Board of Directors may deem fit from time to time, and any such appointment may, if the Board of Directors so deems fit, be conferred on the members of any local Board of Directors that is established or any member of such Board of Directors, or to any company or its members, its Board of Directors, its representatives, or the managers of any company or firm or to any person designated by any company or firm or in any other way to any group of persons appointed by t he Board of Directors, whether appointed directly or indirectly.

[7]

The Board of Directors may appoint an attorney or attorneys in Israel or abroad to represent the Company before any court, arbitrator, judicial and quasi-judicial bodies, local and central government agencies and offices in Israel and abroad, and grant such attorney such powers as the Board of Directors may deem appropriate, including the power to delegate his powers, in full or in part, to another person or persons. The Board of Directors may delegate this power to the general manager on an ad hoc or permanent basis.

[8]

From time to time and at its discretion, the Board of Directors may secure and borrow any amount of money in such manner and under such terms and timetable as it may deem fit, including by issuance of debentures or debenture series, whether secured or otherwise, or by creating a mortgage, pledge or any other security interest over the enterprise or any or all of the Company assets, whether in existence at such time or in the future, including the share capital on which calls have not yet been made and share capital on which calls have been made but which has not yet been paid up.

23.	Chairman of the Board of Directors

(a)

The Board of Directors will elect one of its member as chairman of the Board of Directors.

(b)

The chairman of the Board of Directors shall be elected by the directors at the first Board of Directors meeting after the annual general meeting or after the Board of Directors meeting at which he was appointed to serve as a director, and shall serve as chairman of the Board of Directors as long as the Board of Directors has not otherwise resolved or until he no longer serves as a director.

(c)

The chairman of the Board of Directors shall not have an additional or casting rate at a meeting of the board.

24.	Convening the Board of Directors

(a)

The Board of Directors shall meet according to the needs of the Company, and in any event at least once every three months.

(b)

The Chairman of the Board of Directors may convene a meeting of the Board of Directors at any time, and shall do so at the demand of any of the following:

[1]

Two directors;

[2]

One director – under the circumstances set forth in Section 257 of the Law;

(c)

Without prejudice to the foregoing, the Chairman of the Board of Directors shall convene the Board of Directors in the event that Board of Directors action is required subsequent to a notice or report by the general manager in accordance with Section 122(d) of the Law, or a report by the Company’s auditor in accordance with Section 169 of the Law.

(d)

Where a meeting of the Board of Directors is not convened within fourteen days of the date of demand as provided in Article 24(b) above, or of the date of notice or report of the general manager or the auditor pursuant to Article 24(c) above, each of the persons enumerated in such Articles may convene a meeting of the Board of Directors to discuss the matter specified in the demand, notice or report, as the case may be.

(e)

Notice of a meeting of the Board of Directors shall be delivered to all members at a reasonable time prior to the date of the meeting.

(f)

Such notice shall be delivered to the address of each director as made known to the Company in advance, and it shall state the date of the meeting and the place at which it will convene, as well as a reasonably detailed statement of all of the matters on the agenda.

(g)

Notwithstanding the provisions of Article 24(b), the Board of Directors may be convened to meet without notice, by the consent of all of the directors.

25.	Meeting of the Board of Directors

(a)

The agenda for meetings of the Board of Directors shall be determined by the chairman of the Board of Directors and shall include matters determined by the chairman of the Board of Directors, matters determined as provided in Articles 24(b) and 24(c) above, any matter that a director or the general manager requests the chairman of the Board of Directors to include in the agenda, at a reasonable time prior to the convening of a meeting of the Board of Directors.

(b)

The chairman of the Board of Directors shall direct the meetings of the Board of Directors. Where the chairman of the Board of Directors is not present at the meeting, the Board of Directors shall elect another of its number to direct the meeting and to sign the minutes of the meeting.

(c)

The Board of Directors may hold meetings using any means of telecommunication such that all directors participating in the meeting can hear each other simultaneously.

(d)

The Board of Directors may pass resolutions even without actually convening, provided that all of the directors entitled to participate in the discussion and vote on the matter brought up for resolution have agreed not to convene for this matter.

(e)

Where resolutions are passed in accordance with the provisions of Article 25(d) above, the chairman of the Board of Directors shall prepare and sign minutes of the resolutions, including the resolution not to convene.

(f)

The chairman of the Board of Directors shall be responsible for the implementation of these provisions.

(g)

A majority of the members of the Board of Directors shall constitute a quorum.

(h)

Any meeting of the Board of Directors in which a quorum is present may exercise all the powers, powers of attorney and discretions conferred at such time on or generally exercised by the Board of Directors.

26.	Voting at the Board of Directors

(a)

Each director shall have one vote at meetings of the Board of Directors.

(b)

Resolutions of the Board of Directors shall be passed by ordinary majority; the chairman of the Board of Directors shall not have an additional vote.

(c)

A director, in his capacity as such, shall not be party to a voting agreement, and a voting agreement shall be considered to be a breach of fiduciary duty.

(d)

Minutes approved and signed by the director who chaired the meeting shall serve as prima facie evidence of its contents.

27.	Committees of the Board of Directors

(a)

The Board of Directors may appoint subcommittees. Only directors of the Company may serve as members of subcommittees to which the Board of Directors has delegated any of its powers. Advisory subcommittees may include also non-directors as members (“Subcommittee”).

(b)

A resolution passed or an act done by a Subcommittee in accordance with powers delegated by the Board of Directors, shall be considered as a resolution passed or an act done by the Board of Directors.

(c)

Subcommittees shall provide reports on a current basis to the Board of Directors regarding their resolutions or recommendations.

(d)

Articles 24 through 26 shall apply, mutatis mutandis, to the convening of meetings of Subcommittees and the proceedings at such meetings.

(e)

The Board of Directors may not delegate its powers to a Subcommittee with regard to the following matters:

[1]

determining the Company’s general policy;

[2]

distribution, as defined in Section 1 of the Law, unless in respect of purchase of shares of the Company in a framework outlined by the Company in advance;

[3]

determining the position of the Board of Directors in respect of a matter requiring approval of the general meeting or the giving of an opinion as provided in section 329 of the Law;

[4]

appointing directors, if the Board of Directors is entitled to so appoint;

[5]

issuance or grant of shares or securities convertible into shares or realizable as shares, or debenture series, except as set forth in Section 288(b) of the Law;

[6]

Approval of financial reports;

[7]

approval of transactions and acts requiring the approval of the Board of Directors pursuant to the provisions of sections 255 and 268 to 275 of the Law.

With respect to the foregoing matters, the Board of Directors may only appoint advisory committees.

(f)

The Board of Directors may abrogate the resolution of a Subommittee appointed by it; however, such abrogation shall not prejudice the validity of a resolution of a Subcommittee pursuant to which the Company has acted towards another person who was unaware of the abrogation.

28.	Audit Committee

(a)

The Board of Directors shall appoint from its members an audit committee, and the provisions of Article 27 shall apply thereto, mutatis mutandis.

(b)

There shall be no less than three members of the audit committee, and its members shall be appointed in accordance with the provisions of Section 115 of the Law.

(c)

The internal auditor of the Company shall receive notices of the holding of meetings of the audit committee and shall be entitled to take part in them. The internal auditor may request that the chairman of the audit committee convene the committee to discuss such matter as he may specify in his request, and the chairman of the audit committee shall convene the committee within a reasonable time from the date of the request, if he finds reason to do so.

(d)

A notice of the holding of a meeting of the audit committee at which a matter relating to the audit of financial reports is to be dealt with shall be sent to the auditor who may participate in the meeting.

(e)

The audit committee will locate defects in the company’s business administration, inter alia by consulting with the Company’s internal auditor or with the auditor, and to make proposals to the Board of Directors regarding ways of correcting such defects. In addition, the audit committee will decide whether to approve acts and transactions requiring the approval of the audit committee under sections 255 and 268 to 275 of the Law.

29.	General Manager

(a)

The Board of Directors may, from time to time, appoint one or more persons, whether or not directors, as general manager(s) of the Company, either for a definite period or without any limitation of time, and may from time to time, and subject to the terms of any agreement that may be executed between such general manager(s) and the Company, remove him or them from office and appoint another or others in his or their stead.

(b)

The general manager shall be liable for the current administration of the affairs of the Company, within the scope of the policies determined by the Board of Directors, and subject to its supervision. The general manager shall have all managerial and executive powers granted by law or in these Articles, all managerial and executive powers not granted by law or by these Articles to any other corporate body of the Company, and any other power delegated by the Board of Directors.

(c)

(d)

The remuneration and other terms of the general manager shall be determined by the Board of Directors from time to time, subject to the terms of any agreement executed between him and the Company and subject to the provisions of the law, and may be paid as a salary, as a commission based on dividends, profits or turnover, or as a percentage of the profits, or any combination thereof. Where the law requires approval of the general meeting for an agreement with an officer, any such agreement shall be subject to such approval.

(e)

Subject to the provisions of the law, and in particular Section 92 of the Companies Law, the Board of Directors may from time to time delegate to the person acting as general manager at such time, the powers conferred on it in accordance with these Articles, at the discretion of the Board of Directors, and may delegate powers that shall be exercised for such purposes and needs and in such times and under such restrictions as the Board of Directors may deem appropriate. The Board of Directors may determine that powers delegated to the general manager shall be exercised exclusive by the general manager or by both the general manager and the Board of Directors, and may from time to time cancel, change and replace any or all of these powers.

(f)

The general manager may, subject to Board of Directors approval, delegate some of its powers to another person reporting to him.

(g)

The general manager shall provide the Board of Directors reports of the Company’s routine operations. Such reports will be of such scope and shall be made at such times as directed by the Board of Directors. The chairman of the Board of Directors may, at his initiative or by resolution of the Board of Directors, require the general manager to provide a report regarding the business of the Company.

30.	Officers of the Company

The Board of Directors may from time to time appoint and remove, and, subject to the provisions of the law and Article 23(c)(5) above, authorize the general manager on an ad hoc or permanent basis to appoint other officers and other employees, define their authorities and responsibilities and fix their remuneration and terms of employment.

31.	Liability Insurance, Indemnity and Exemption

(a)

Subject to the provisions of the Companies Law, the Company may enter into a contract to insure the liability of an officer for obligation imposed upon him due to an act performed by him by virtue of his being an officer, in any of the following instances:

[1]

breach of duty of care towards the Company or towards any other person;

[2]

Breach of the duty of loyalty to the Company, while acting in good faith and having reasonable cause to assume that such action would not prejudice the interests of the Company;

[3]

a financial obligation imposed on him in favor of another person.

In the event that the insurance contract covers the liability of the Company as well, the officer shall have precedence over the Company in collecting the insurance payments.

(b)

Subject to the provisions of the Companies Law, the Company may indemnify an officer for a liability or an expense as detailed in below, imposed or incurred by him in such capacity:

[1]

any financial obligation imposed on him in favor of another person by, or expended by him as a result of, a court judgment, including a settlement or an arbitrator’s award approved by court;

[2]

all reasonable litigation expenses, including attorneys’ fees, expended by the officer due to an investigation or a proceeding instituted against him by an authority qualified to administrate such investigation or proceeding, where such investigation or proceeding is “concluded without the filing of an indictment against the officer” (as defined in the Companies Law) and “without any financial obligation imposed on the officer in lieu of criminal proceedings” (as defined in the Companies Law), or that is concluded without indictment of the officer but with financial obligation imposed on him in lieu of criminal proceedings with respect to a crime that does not require proof of mens rea (criminal intent).

[3]

all reasonable litigation expenses, including attorneys’ fees, expended by an officer or charged to him by a court, in a proceeding instituted against him by the Company or on its behalf or by another person, or in any criminal proceedings in which he is acquitted, or in any criminal proceedings of a crime which does not require proof of mens rea (criminal intent) in which he is convicted.

[4]

The Company may covenant to indemnify prospectively, as set forth in Section [1] above, provided, however, that such indemnification will be limited to matters which are deemed by the Company’s Board of Directors, based on the activity of the Company at the time of the covenant, to be foreseeable, and to an amount or criteria that the Board of Directors has determined as reasonable under the circumstances, and provided further that the covenant to indemnify shall state the events that in the opinion of the Board of Directors are foreseeable given the Company’s actual activity at the time of the covenant and the amount or criteria that the Board of Directors has determined to be reasonable under the circumstances; with respect to events enumerated in Sections [2] and [3] above, the Company may also agree to provide indemnificat ion retroactively; and all in accordance with Section 260(b) of the Law.

(c)

The foregoing shall not limit the Company in any way with regard to engaging in an insurance or indemnification agreement:

[1]

With respect to persons who are not officers of the Company, including employees, contractors or consultants of the Company;

[2]

With respect to officers of the Company – to the extent such insurance or indemnification are not expressly prohibited by law.

(d)

Subject to the provisions of the Law, the Company may, before the event, fully or partially exempt an officer from liability with respect to the breach of the duty of care.

(e)

Notwithstanding the provisions of Section [d] above, the Company may not, before the event, exempt a director from his liability with respect to breach of the duty of care in distribution (as defined in the Companies Law).

32.	Internal Auditor and Auditor

(a)

[1]

The Board of Directors shall appoint an internal auditor at the proposal of the audit committee.

[2]

The internal auditor shall report to the chairman of the Board of Directors.

[3]

The internal auditor shall submit a proposal for an annual or periodic work plan to the audit committee, which shall approve it subject to such amendments as they see fit.

[4]

The internal auditor shall submit a report of his findings to the chairman of the Board of Directors, to the general manager and to the chairman of the audit committee; a report relating to matters audited pursuant to section 150 of the Law shall be provided to whoever charged the internal auditor with carrying out the audit.

[5]

The office of an internal auditor shall not be terminated except in accordance with the provisions of Section 153 of the Law.

(b)

[1]

The general meeting shall appoint an auditor for the Company. The auditor shall continue to serve until the end of next annual meeting after the annual meeting that appointed him. The general meeting may appoint an auditor to serve as such for longer than a year, all subject to the provisions of Section 154(b) of the Law.

[2]

The Company may appoint several auditors to perform the audit jointly.

[3]

The auditor’s fees shall be fixed by the general meeting appointing the auditor, or, if the general meeting did not fix the fees or has authorized the Board of Directors to do so, by the Board of Directors. The Board of Directors shall fix the auditor’s fees with respect to other services provided to the Company. The Board of Directors shall report to the general meeting of the terms of engagement of the auditor with respect to additional services, including payments and obligations of the Company toward the auditor.

33.	Distribution, Dividend Distribution and Bonus Shares

(a)

Distribution, dividend distribution and issuance of bonus shares shall be made in accordance with the provisions of the Law and these Articles, as follows:

[1]

The Board of Directors may resolve to make a distribution, distribute dividend or issue bonus shares.

[2]

Dividend distribution to shareholders of the Company shall be made to all shareholders pro rata to the nominal value of each share, unless these Articles, as amended, expressly stipulate preferences with respect to dividend distribution.

[3]

The Board of Directors may deduct from any dividend or other moneys payable to any shareholder in respect of a share any and all sums of money then payable by him to the Company in respect of such share, whether or not such payment by the shareholder has already become due.

(b)

The Company may issue redeemable securities, all subject to the provisions of Section 312 of the Law and as will be determined in the terms of issuance of such redeemable securities. The power to issue redeemable securities is conferred upon the Board of Directors.

(c)

The Board of Directors may, as it deems useful and appropriate, appoint trustee or notables to hold in trust dividends, shares or other benefits of any kind uncollected over a certain period of time by holders of bearer shares or by registered shareholders who did not notify the Company of a change of address and did not contact the Company to collect such dividend, shares or benefits, over such period of time. Such notables or trustees shall be appointed in order to liquidate, collect or receive such dividends, shares and benefits, and execute unissued shares offered to the shareholders, but will not be entitled to transfer, assign or vote the shares with respect to which they were appointed or to transfer or assign any such benefits that they hold in trust. The terms of any such trust or appointment of notables shall stipulate that upon the first demand by a share with respect to which such trustee or notables were appointed, they shall return the relevant share and all the benefits held in trust to such shareholder or to any other person as the Company may instruct. All actions and arrangements effected by such trustees or/and any agreement between them and the Board of Directors shall be binding upon all the relevant parties.

(d)

The Board of Directors may from time to time determine the method of payment of dividend or distribution of bonus shares or any other benefits, and the arrangements with respect thereto, both to holders of registered shares and to holders of bearer shares. Without prejudice to the above, the Board may effect payment of any dividend or moneys with respect to shares, by delivery of check by mail to the shareholder's address as entered in the Register of Shareholders.

34.	Calls on Shares

(a)

The Board of Directors may, from time to time, at its discretion or subject to the terms stipulated upon issuance of the relevant shares, make calls upon shareholders to perform payment of any amount of the consideration of their shares not yet paid, provided that such shareholders receive at least fourteen days' notice for each call. Each shareholder shall pay to the Company the amount of every call so made upon him at the time(s) and place(s) designated in such call.

(b)

The joint holders of a share shall be bound jointly and severally to pay all calls and installments in respect thereof.

(c)

The shareholder or the person to whom the share was issued shall owe the Company indexation and interest, as will be determined by the Board of Directors, with respect to any amount not paid when due. Interest will accrue from the date designated for payment and until actual payment. The Board of Directors may waive indexation or interest in full or in part.

(d)

Any sum which by the terms of issuance of a share becomes payable upon issuance or at a fixed date, whether on account of the nominal value of the share or by way of premiums, shall for the purposes of these Articles be deemed to be a call duly made and payable on the date on which by the terms of the issuance the same become payable, and in the event of default, all of the provisions of these Articles with respect to indexation, interest and costs, forfeiture, etc., and all the other relevant provisions hereof shall apply, as if such sum had been payable by virtue of a call duly made and notified.

(e)

The Board of Directors may, if it deems fit, receive from any shareholder willing to advance the same, all or any part of the moneys uncalled and unpaid upon any shares held by him, and may, as may be agreed between the Board of Directors and the shareholder, pay such shareholder, in addition to any dividend (if any) paid with respect to the paid-up portion of the share with respect to which early payment has been made, interest and indexation with respect to such early payment or to any portion thereof exceeding the amount which at any given time has been called.

35.	Forfeiture

(a)

In the event that any shareholder (“Debtor”) fails to pay when due any amount payable pursuant to a call in accordance with the provisions of Article 34 above, the Board of Directors may at any time thereafter resolve that any of the shares with respect to which the Debtor has received the call shall be forfeited.

(b)

In accordance with the provisions of the law, forfeiture of a share shall, cause all rights in the Company and all demands toward it with respect to such share to terminate, ipso facto.

(c)

Forfeiture will extend to any dividend with respect to such share, unpaid before forfeiture, even if already declared.

(d)

A forfeited share may be sold, reallocated or otherwise disposed of on such terms and in such manner as the Board of Directors may deem fit, with or without any amount paid or deemed to have been paid on the share. Until sold, forfeited shares shall be dormant, as defined in Section 308 of the Law.

(e)

In the event that the proceeds of the sale of forfeited shares exceeds the consideration owed by the Debtor, the Debtor shall be entitled to the difference, provided that the amount retained by the Company shall not be less than the full consideration owing by the Debtor plus the cost of the sale.

(f)

The Board of Directors shall be entitled, although not obligated, at any time to collect forfeited money or any part thereof.

36.	Register of Shareholders

(a)

The Company shall maintain a shareholders’ register, which will include the following details:

[1]

The name, identity number and address of each shareholder, as provided to the Company;

[2]

The number and class of shares held by each shareholder, noting the nominal value of such shares, and if any amount is still due with respect to any share – such amount should also be noted;

[3]

The date of issuance or transfer of the shares to the current shareholder, as relevant;

[4]

If the shares have serial numbers, the Company shall, next to the name of each shareholder, note the serial numbers of his shares;

(b)

In the event that the Company has dormant shares, as stated in Section 308 of the Law, the Register of Shareholders shall also note the number of dormant shares and the date on which they became dormant, all based on the information available to the Company. The Register of Shareholders should also specify the number of shares of the Company that, in accordance with Section 309(b) or 333(b) of the Law, do not grant voting rights, and the date on which they because shares of this kind.

(c)

In the event that the Company maintains an additional register of shareholders, as provided in Article 37 herein, and in the event that the shares registered there have serial numbers, such serial numbers shall be registered in the additional register.

(d)

The Company shall alter the registration of ownership of shares in the Register of Shareholders as provided in section Article 36(a), in each of the following circumstances:

[1]

a deed of transfer of the share was delivered to the Company, signed by the transferor and the transferee, and any requirements of the Articles, the Communications Law, the Communications Order, so long as the Communications Order applies to the Company, with respect to the transfer of shares have been complied with;

[2]

a court order requiring the amendment of the Register of Shareholders was delivered to the Company;

[3]

it has been proven to the Company that the legal conditions (including under the Articles, the Communications Law and the Communications Order, so long as the Communications Order applies to the Company) for assigning the right have been satisfied;

[4]

any other condition that is sufficient under the Articles, the Communications Law, the Communications Order, so long as the Communications Order applies to the Company, for registration of a change in the Register of Shareholders has been satisfied.

(e)

The Company may close the Register of Shareholders for a reasonable time, not to exceed 30 days, as may be designated by the Board of Directors. The Company shall publish notice of closing the Register of Shareholders at least 7 days ahead of time.

37.	Register of Substantial Shareholders and Additional Register of Shareholders outside Israel

(a)

Reports received by the Company pursuant to the Securities Law relating to the holdings of substantial shareholders of shares in the Company shall be kept in the register of substantial shareholders.

(b)

The Company may keep an additional register of shareholders outside of Israel, subject to the provisions of Section 138 of the Law.

38.	Stamp, Seal and Signature Rights

(a)

The Company may designate a seal or rubber stamps, and the Board shall provide for their safe custody;

(b)

The Board of Directors may authorize any person to sign on behalf of and act in the name of the Company, and the actions and signature of such person shall be binding upon the Company, provided that such actions and signature are not ultra vires;

(c)

The Board of Directors may use and maintain a seal for use outside of Israel, and instruct as to how it is to be used.

39.

Accounts

The Board of Directors shall cause accurate books of accounts to be maintained and financial reports to be published in accordance with Sections 171 through 175 of the Companies Law and in accordance with the provisions of any other applicable law.

40.	Charitable Contributions

The Company may make contributions of reasonable sums to worthy purposes even if such contributions are not made on the basis of business considerations. The Board of Directors shall be authorized to implement this Article.

41.

Minutes

The Company shall keep minutes of the proceedings at the general meeting, class meetings, meetings of the Board of Directors and meetings of Subcommittees, and shall keep them at its registered office or at any other address of which it has notified the Registrar, for a period of seven years from the date of such meeting.

42.

Notices

(a)

Notices and other documents that are to be delivered to any or all of the shareholders can be delivered by the Company to each of the shareholders in person or by duly stamped registered mail, addressed to the registered address of the shareholder in the Register of Shareholders, or by publication of a notice to shareholders or holders of rights of any kind in two daily Hebrew-language newspapers in Israel that have a reasonably-sized readership. Such publication shall be in lieu of personal delivery or delivery by registered mail.

(b)

If two or more persons are joint holders of a share, notices with respect to such share shall be delivered to the person first named on the Register of Shareholders in respect of such joint ownership, and any notice delivered in this manner shall be deemed sufficient. In the alternative, notice can be delivered by publication in two daily Hebrew-language newspapers in Israel that have a reasonably-sized readership.

(c)

Any shareholder registered in the Register of Shareholders, whether according to an address in Israel or abroad, and who from time to time gives the Company notice of an address for notices to be delivered to him, shall be entitled to receive notices in accordance with these Articles at such address. A shareholder shall not be entitled to receive notices at any address except as mentioned above.

(d)

A notice may be given by the Company to the persons entitled to a share in consequence of the death, bankruptcy or legal incompetence of a member, or, in case of a corporation, to the receiver or liquidator, by sending it through the mail by a prepaid letter to the address, if any, supplied for the purpose by the persons claiming to be so entitled, or – until such an address has been so supplied – by giving the notice in any manner in which the same might have been given if the death, bankruptcy, legal incompetence, liquidation or receivership had not occurred

(e)

Any notice or other document delivered or sent by mail shall be deemed to have been received within two business days from dispatch at the post office; proof that a letter containing the notice or document has been addressed to the address according to Company records and has been delivered to the post office with the correct stamp, shall be deemed proof of delivery.

(f)

Subject to the provisions of the law, wherever notice of a certain number of days should be given or where notice should be given that will be effective for a specific period of time, such number of days or period shall be inclusive of the date of delivery.

43.	Liquidation

In the event that the Company is liquidated, whether voluntarily or otherwise, the remaining assets after satisfaction of debt shall be distributed, in accordance with the law and subject to preferred rights that may be attached to shares, according to the following order:

(a)

Repayment of share capital: pari passu, pro rata to the share capital paid up on the nominal value of the shares.

(b)

The remainder: pari passu, pro rata to the share capital paid up on the nominal value of the shares, and for this purpose any uncalled amount shall be deemed to have been paid up, and any amount with respect to which a call has been made and which has not been paid as of the commencement of liquidation, shall not, for the purpose of this distribution, be deemed part of the paid up share capital.

44.	Exceptional Holdings; Compliance with the Communications Law and the Communications Order

The following provisions of this Article 44 shall apply for as long as and to the extent that the Communications Order applies to the Company:

(a)

To the extent practicable, the existence of Exceptional Holdings shall be indicated in a Register of Shareholders with a notation that such holdings have been classified as Exceptional Holdings immediately upon the Company’s learning of the same. The Company shall send a notice of any Exceptional Holdings to the registered holder of the Exceptional Holdings and to the Ministers immediately upon the Company becoming aware of such event.

(b)

Exceptional Holdings shall be subject to the provisions of the Communications Order applicable to Exceptional Holdings (including, without limitation, Section 8 thereof), and without derogating from the foregoing, shall not entitle the holder thereof to any rights in respect of such holdings, unless and to the extent that the entitlement of holders to rights in respect of such Exceptional Holdings is permissible under the Communications Order. Therefore, any action taken or claim made on the basis of a right deriving from Exceptional Holdings shall have no effect from the time that the Company becomes aware thereof, except and to the extent that the Communications Order provides otherwise.

Without derogating from the foregoing, unless and to the extent that the Communications Order provides otherwise:

(c)

Exceptional Holdings shall not have any voting rights at a General Meeting. Any shareholder participating in a General Meeting shall certify to the Company prior to the vote or, if the shareholder is voting by a proxy or any similar instrument, on such proxy card or similar instrument, as to whether or not his holdings in the Company or his vote require the approval of the Ministers pursuant to the Communications Law and the Communications Order; in the event that any shareholder does not provide such certification as aforesaid, he shall not be entitled to vote at a General Meeting and his vote shall not be counted for quorum purposes.

	(d)	No Director shall be appointed, elected or removed by virtue of Exceptional Holdings. In the event a Director is appointed, elected or removed by virtue of Exceptional Holdings, such appointment, election or removal shall have no effect.

	(e)	Without derogating from any other provision of the Communications Order, any person holding such number of shares of the Company that requires approval under the Communications Order, shall notify the Company, Bezeq and the Ministers thereof in writing, no later than 48 hours from the date of acquiring such holding.

(f)

The shareholders of the Company shall at all times comply with the terms of the Communications Law and the Communications Order. Nothing herein shall be construed as requiring or permitting the performance of any acts that are inconsistent with the terms of the Communications Law or the Communications Order. If any of these Articles shall be found to be inconsistent with the terms of the Communications Law or the Communications Order, the inconsistent provisions of such article shall be null and void, but the validity, legality or enforceability of provisions of other provisions shall not be affected thereby.

45.	Reports by Principal Shareholders

The following provisions of this Article 45 shall apply for as long as the Communications Order applies to the Company:

(a)

Any person who after acquiring, directly or indirectly, shares in the Company becomes a Principal Shareholder, shall, no later than 48 hours after becoming a Principal Shareholder, notify the Company thereof, by written notice specifying the number of the shares held by such Shareholder and the date on which such Shareholder became a Principal Shareholder. The Company shall send a notice to the Ministers of any shareholder becoming a Principal Shareholder within 48 hours of the Company becoming aware of such event.

	(b)	Any person who ceases to be a Principal Shareholder, shall, no later than 48 hours thereof, notify the Company, in writing, of the date on which such person ceased to be a Principal Shareholder.
	(c)	A Principal Shareholder shall notify the Company in writing of any aggregate change in its holdings of shares in the Company amounting to 1% or more of the outstanding share capital of the Company, from the last notice of holdings provided by such Principal Shareholder to the Company, by registered or certified mail, within fourteen (14) days after such change. The Company shall send a notice to the Ministers of such change in the holdings of a Principal Shareholder within 48 hours of the Company becoming aware of such event.

	(d)	In the event a Principal Shareholder fails to provide the notice required pursuant to the provisions of this Article 45 ("Undisclosed Holdings"), then until such Principal Shareholder notifies the Company of such Undisclosed Holdings pursuant to the provisions of this Article 45, the following provisions shall apply to such Undisclosed Holdings:

(i)

the Principal Shareholder shall not be entitled to any rights in respect of such shares, and the applicable provisions of Section 8 of the Communications Order with regard to Exceptional Holdings, as may be amended from time to time, shall apply to such Undisclosed Holdings;

(ii)

In addition, and without derogating from the foregoing, such Undisclosed Holdings shall be deemed “dormant shares” as defined in Section 308 of the Companies Law.

(e)

The provisions of this Article 45 shall not derogate from any other legal duty of a Shareholder to disclose its holdings or beneficial ownership of the Company's shares or Means of Control.

EX-4.4 3 exhibit_4-4.htm EXHIBIT 4.4 exhibit_4-4.htm

Exhibit 4.4

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SHARE PURCHASE AGREEMENT

THIS SHARE PURCHASE AGREEMENT is made and entered into as of October 25, 2009, by and between:

(1)	AP.SB.AR Holdings Ltd., a company duly organised under the laws of Israel, having its registered office at Lincoln 20, Tel Aviv (the “Seller”); and

(2)	012 Smile.Communications Ltd., a company duly organised under the laws of Israel, having its registered office at 25 HaSivim Street, Petach Tikva (the “Purchaser”).

The Seller and the Purchaser are referred to herein collectively, as “Parties”, and each of them, separately, as a “Party”.

WHEREAS:

(A)

On the date hereof, the Seller is the sole legal and beneficial owner of 814,211,545 ordinary shares, par value NIS 1.00 each in Bezeq - The Israeli Telecommunication Corporation Ltd., a public company organised and existing under the laws of the State of Israel (the “Company”), whose securities are listed on the Tel Aviv Stock Exchange, and such shares representing, on the date hereof, approximately 30.6% of the issued and outstanding share capital of the Company, and approximately 29.6% on a fully diluted basis (the “Purchase Shares”).

(B)	Upon the terms and subject to the conditions set forth herein, the Seller wishes to sell the Purchase Shares to the Purchaser and the Purchaser wishes to purchase the Purchase Shares from the Seller, all in accordance and subject to the terms herein.

(C)	The Parties wish to set forth herein all of the terms and conditions that shall govern the sale and purchase of the Purchase Shares hereunder.

NOW THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, and intending to be legally bound hereby, the Parties agree as follows:

1.	DEFINITIONS

1.1

Definitions. In addition to the terms defined in the preamble and the recitals above, the following terms shall have the following meanings:

Affiliate	A person Controlling, Controlled by or under common Control with a person, and if such person first stated above is a natural person, a relative of such person; provided, however, that in the case of the Seller, each shareholder of the Seller (and any Affiliate thereof) shall be deemed an Affiliate of the Seller.
Antitrust Approval	As defined in Section 2.4(a)(ii).
Agreement	This Share Purchase Agreement, as may be amended and/or restated from time to time, including all schedules, exhibits and annexes attached hereto or referenced hereby.

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Board	The Board of Directors of the Company.
Business Days	Any day on which banks are open for business in the State of Israel.
Cash	Cash, cash equivalents and marketable bonds.
Closing	As defined in Section 2.4.
Closing Date	As defined in Section 2.4.
Company	As defined in Recital (A).
Control or Controlled or Controlling	The ability, directly or indirectly, to direct the activities of the relevant entity, including, without limitation, the holding of (i) more than 50% of the issued share capital, or (ii) such share capital as carries directly or indirectly, more than 50% of the shareholder votes in a general meeting or the ability to appoint or elect more than 50% of the directors or equivalent of such entity.
Distributions	The payment, directly or indirectly, of any dividend or the transfer of any asset given by the Company to a shareholder of the Company by virtue of his or her right as a shareholder, whether in cash, shares or other securities of the Company, or in any other manner, or the cancellation of indebtedness of a shareholder of the Company owed to the Company.

End Date	As defined in Section 6.1(b).

Interim Period	As defined in Section 5.1(a).
ISA	The Israel Securities Authority.
MoC	The Israeli Ministry of Communications.
MoC Approval	As defined in Section 2.4(a)(i).
NIS	New Israeli Shekels, the lawful currency of the State of Israel
Purchaser	As defined in the Preamble.

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Purchase Price	As defined in Section 2.2.
Purchase Shares	As defined in paragraph (A) of the Recitals, and any further shares or other equity securities issued in respect of the Purchase Shares in the framework of, or in connection with, a share combination or subdivision, share split, reverse share split, share dividend, distribution of bonus shares or any other reclassification, reorganisation or recapitalisation of the Company’s share capital on or after the date of this Agreement and prior to the Closing Date.
Purchaser Directors	As defined in Section 2.3(c).
SEC	The United States Securities and Exchange Commission.
Security Interests	All trusts, liens, mortgages, charges, attachments, judgments, conditional sale agreements, pledges, rights of usufruct, options, rights of first refusal, rights of possession, restrictions on transfer, voting agreements, sale/leasebacks or similar arrangements, security interests or other rights or claims of others or restrictions or encumbrances of any character whatsoever.
Seller	As defined in the Preamble.
Seller Directors	As defined in Section 2.3(a)(ii).
Share Transfer Deed	As defined in Section 2.4(a)(i).
Subsidiaries	Any entity in which the Company holds: (i) more than 50% of the issued share capital or participation interests, or (ii) such share capital as carries directly or indirectly, more than 50% of the shareholder votes in a general meeting; or (iii) the ability to appoint or elect more than 50% of the directors or equivalent of such entity.

1.2

Construction.

In this Agreement, unless the context otherwise requires, words and defined terms expressed in the singular number shall include the plural and vice versa, and words expressed in the masculine shall include the feminine and neuter gender and vice versa;

1.3

Headings.

The paragraph headings are for the sake of convenience only and shall not affect the interpretation of this Agreement.

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1.4

Exhibits

The recitals, schedules, appendices, annexes and exhibits hereto form an integral part of this Agreement.

1.5 No Strict Construction.

The Parties agree that they have been represented by counsel during the negotiation and execution of this Agreement and, therefore, waive the application of any law, holding or rule of construction providing that ambiguities in an agreement or other document shall be construed against the Party drafting such agreement or document.

2.	PURCHASE AND SALE OF THE PURCHASE SHARES

2.1

Agreement to Purchase and Sell.

Subject to the terms and conditions of this Agreement, at and subject to the satisfaction of the conditions to Closing, the Seller hereby agrees to sell, transfer, assign and deliver to the Purchaser, and the Purchaser hereby agrees to purchase from the Seller, all of the Purchase Shares, free and clear of any Security Interests, together with all rights attaching or accruing to them (including without limitation all rights to Distributions to be declared or paid by the Company after the date hereof).

2.2

Purchase Price.

(a)

In full consideration for the purchase by the Purchaser of the Purchase Shares, the Purchaser shall pay to the Seller and the Seller shall receive an aggregate amount equal to six billion five hundred thirteen million six hundred ninety two thousand three hundred and sixty New Israeli Shekels (NIS 6,513,692,360) (the “Purchase Price”), reflecting a price per share of Eight New Israeli Shekels (NIS 8.00).

(b)

If the Seller receives Distributions of the Company with respect to the Purchase Shares beginning on the date hereof and ending on the date immediately preceding or on the Closing Date, then the Purchase Price will be reduced by the amount of such Distributions. In the event that any Distributions are declared, but not yet paid, relating to the Purchase Shares, the record date for which Distributions occurs during the period commencing on the date hereof and ending on the Closing Date, the Seller shall assign its right to receive such Distributions or otherwise instruct the relevant member of the Tel Aviv Stock Exchange to cause the Company to pay such Distributions directly to Purchaser; provided, however, that if such actions are not feasible then the Purchase Price will be reduced by the amount of such Distributions. At Closing, the Purchaser shall pay to the Seller the Purchase Price in cash by wire transfer of immediately available funds to the account(s) the details of which shall be designated in writing by the Seller to the Purchaser no later than five (5) Business Days prior to the Closing Date.

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2.3

Closing.

Subject to satisfaction of conditions to Closing set forth in Section 2.4, the closing of the transactions contemplated hereby, including the purchase and sale of the Purchase Shares and the payment of the Purchase Price (the “Closing”), shall take place at the offices of Purchaser at any time prior to the End Date (as applicable) notified by Purchaser to Seller, or on such other date and at such other time and place as is mutually agreed by the Parties (such date, the “Closing Date”).

At the Closing, the following actions and occurrences will take place, all of which shall be deemed to have occurred simultaneously and no action shall be deemed to have been completed and no document or certificate shall be deemed to have been delivered, until all actions are completed and all documents and certificates delivered:

(a)

The Seller will deliver, or cause to be delivered, to the Purchaser the following:

(i)

A share transfer deed in respect of the Purchase Shares, validly executed by the Seller as transferor of the Purchase Shares, in accordance with the Company's organisational documents (the "Share Transfer Deed");

(ii)

Written letters of resignation executed by all existing directors of the Company (other than the Company's "outside directors," as defined in Part 6, Chapter 1, section 5 of the Israeli Companies Law – 1999 (the "Companies Law") and other than directors representing employees and the incumbent chairman) in respect of their position as directors of the Company and of their position as directors of any of the Company's Subsidiaries (such resigning directors, the "Seller Directors"), effective as of the Closing Date, in the form attached hereto as Exhibit A;

(iii)

A certificate signed on behalf of the Seller by a duly authorised officer of the Seller, dated as of the Closing Date, certifying as to the satisfaction of the conditions set forth in Section 2.4(b);

(iv)

Written confirmation from the financing institutions that hold Security Interests with respect to the Purchase Shares that such Security Interests will be released upon payment of the Purchase Price in accordance with the provisions of Section 2.3(b)(ii) of this Agreement.

(v)

If applicable, instructions of assignment of rights to Distributions that have been declared but not yet paid, as further set forth in the second sentence of Section 2.2(b).

(b)

The Purchaser shall deliver, or cause to be delivered, to the Seller the following:

(i)

The Share Transfer Deed validly executed by the Purchaser as transferee of the Purchase Shares;

(ii)

Payment of the Purchase Price by wire transfer of immediately available funds to one or more bank account(s) designated by the Seller in accordance with Section 2.2;

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(iii)

A certificate signed on behalf of the Purchaser by a duly authorised officer of the Purchaser, dated as of the Closing Date, certifying the satisfaction of the conditions set forth in Section 2.4(c).

(c)

No later than ninety (90) days after the date hereof, the Purchaser shall provide the Seller with the names of all persons recommended by the Purchaser to serve as the directors of the Company immediately following the Closing (the "Purchaser Directors"); provided, that: (i) in any case the number of the appointed Purchaser Directors shall not exceed the number of directors permitted to serve on the Company's Board under applicable law; and (ii) the persons recommended by the Purchaser to serve as the Purchaser Directors comply in all respects with the requirements and qualifications provided for in the Company's organisational documents and under any applicable law, including any MoC regulations and internal resolutions of the MoC; and (iii) Purchaser shall have the right to change the list o f Purchaser Directors from time to time until seven (7) days prior to the last date for the issuance of the notice convening the shareholders meeting described in the following sentence. Subject to the Purchaser providing the Seller with the details of the Purchaser Directors as set forth above, the Seller shall convene a meeting of the Company's shareholders, to occur on the date of the Closing, whose agenda shall include the resignation of the Seller Directors and the election of the Purchaser Directors. The Seller shall either vote the Purchase Shares in favor of the Purchaser Directors or provide the Purchaser an irrevocable proxy to vote the Purchase Shares at such meeting.

(d)

At the Closing, (i) the Seller and the Purchaser shall provide the Company with the fully executed Share Transfer Deed, accompanied by the share certificates representing the Purchase Shares issued by the Company on the name of the Seller, and (ii) the Parties shall procure that the Company will perform the following actions: (x) record the transfer of the Purchase Shares to the Purchaser in the shareholders' register of the Company; and (y) deliver to the Purchaser a new share certificate in respect of the Purchase Shares under the name of the Purchaser in lieu of the share certificates described in sub-section 2.3(d)(i) above.

(e)

It is acknowledged by the Seller, that performances by the Company of the actions specified under sub-sections 2.3(c), 2.3(d)(i) and 2.3(d)(ii) above, shall be made concurrently with the payment of the Purchase Price by the Purchaser to the Seller and as an integral part of the Closing.

2.4

Conditions to Closing.

(a)

Joint Conditions to Closing. Each Party’s obligation to consummate the purchase and sale of the Purchase Shares hereunder is subject to the fulfilment, prior to or at the Closing, of each of the following conditions:

(i)

Approval of the MoC of the sale and purchase of the Purchase Shares pursuant to this Agreement, including the issuance of control permits to Purchaser and its Affiliates (the "MoC Approval").

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(ii)

Approval of the Israeli Antitrust Commissioner of the purchase of the Purchase Shares pursuant to this Agreement (to the extent such approval is required) (the "Antitrust Approval").

(iii)

Approval of the Prime Minister and the Minister of Communications of the State of Israel (collectively, the "Prime Minister") of the purchase of the Purchase Shares pursuant to this Agreement under the Communications Law (Bezeq and Transmissions) – 1982 and the Communications Order (Bezeq and Transmissions) (Determination of Vital Services Provided by Bezeq - The Israeli Communications Company Ltd.) – 1997 (the "Communications Order") promulgated thereunder (the "Prime Minister Approval").

(iv)

Any other approval or consent required by law to effect the transaction contemplated by this Agreement.

(a1)

For the avoidance of doubt, and in accordance with the provisions of section 5(a) of the Communications Order, the Parties agree that the portions of this Agreement relating to the granting of control in the Company to the Purchaser, if any, shall not be considered as granting "control" or "means of control" or "material influence" in the Company (as such terms are defined in the Communications Order) until subsequent to the submission of the application to receive the MoC Approval under such section 5(a), without derogating from the effectiveness of any other provisions of this Agreement.

(b)

Conditions to the Purchaser’s Obligation to Close. The Purchaser’s obligation to consummate the purchase of the Purchase Shares hereunder is subject to the fulfilment, prior to or at the Closing, of each of the following conditions:

(i)

The representations and warranties of the Seller were true and correct when made and shall be true and correct in all material respects at the Closing as though made again at the Closing Date.

(ii)

The Seller shall have performed and complied with all obligations and covenants required by this Agreement to be performed or complied with by it prior to or at the Closing in all material respects.

(iii)

An unconditional release of any charge or pledge over the Purchase Shares shall have been obtained at Closing simultaneously with payment of the Purchase Price.

(iv)

The Company shall not have taken any of the actions set forth in Section 5.1 without the Purchaser's prior consent (which may be granted or withheld in Purchaser's reasonable discretion).

(v)

During the Interim Period, there shall not have occurred (i) any action by the Company by which it exits from, in whole or in substantial part, any one or more of its four principal business sectors (i.e., fixed telephone communications; cellular; international long distance and internet services; and multichannel television) (the "Business Sectors"), in any such case in which the Purchaser did not provide its prior written consent, not to be unreasonably withheld or delayed, (ii) any event that would result, at the Closing, in Purchaser acquiring less than 30% of the Company's issued and outstanding share capital and less than 26% of the Company's share capital on a fully diluted basis.

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(c)

Conditions to the Seller’s Obligation to Close. The Seller’s obligation to consummate the sale of the Purchase Shares hereunder is subject to the fulfilment, prior to or at the Closing, of each of the following conditions:

(i)

The representations and warranties of the Purchaser were true and correct when made and shall be true and correct at the Closing in all material respects as though made again at the Closing Date.

(ii)

The Purchaser shall have performed and complied with all obligations and covenants required by this Agreement to be performed or complied with by it prior to or at the Closing in all material respects.

2.5 Tax Withholding

(a)

The Purchaser shall deduct and withhold taxes from the Purchase Price as required by law, unless and to the extent the Seller provides the Purchaser with an approrpiate certificate of tax exemption or reduced rate of withholding (in which case the Purchaser shall deduct and withhold an amount in accordance therewith). All amounts so deducted and withheld by the Purchaser shall be treated for all purposes of this Agreement as having been paid to the Seller. Purchaser shall reasonably assist and cooperate with Seller in Seller’s attempts to procure certificates of exemption or reduced withholding.

(b)

Purchaser shall reasonably cooperate with Seller to procure information regarding this Agreement and the transactions contemplated therein as may be required or necessary for the Seller or its shareholders to timely file any tax return or report the transaction.

3.	REPRESENTATIONS AND WARRANTIES OF THE SELLER

The Seller hereby represents and warrants to the Purchaser:

3.1

Organisation and Authority.

(a)

The Seller duly and validly exists under the laws of Israel and, subject to the conditions specified under Sections 2.4(a) and 2.4(b)(iii), has all necessary company power and authority to enter into this Agreement, to carry out its obligations hereunder and to consummate the transactions contemplated hereby.

(b)

Subject to the conditions specified under Sections 2.4(a) and 2.4(b)(iii), the execution and delivery of this Agreement by the Seller, the performance by the Seller of its obligations hereunder and the consummation by the Seller of the transactions contemplated hereby have been duly authorised by all requisite corporate action on the part of the Seller.

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(c)

This Agreement has been duly executed and delivered by the Seller, and (assuming due authorisation, execution and delivery by the Purchaser and subject to the conditions set under Sections 2.4(a) and 2.4(b)(iii)) this Agreement constitutes a legal, valid and binding obligation of the Seller enforceable against the Seller in accordance with its terms.

It being understood that the references to Section 2.4(b)(iii) in this Section 3.1 do not derogate from the Seller's obligation and responsibility to remove the Security Interests with respect to the Purchase Shares at the Closing.

3.2

Free and Clear.

At Closing, the Purchase Shares shall be free and clear of any Security Interests. Without derogating from the generality of the foregoing, at the Closing the Seller shall not be subject to an agreement with the State of Israel in regard to the Purchase Shares or in regard to the activities of the Company, other than agreements between the Seller and the Israeli Tax Authority that have no impact on the Company or on the Purchaser or its tax treatment or status in any manner.

3.3

Consents and Approvals; No Conflict.

Other than as specifically provided for in this Agreement, the execution and delivery of this Agreement by the Seller, the performance by the Seller of its obligations hereunder and the consummation by the Seller of the transactions contemplated hereby do not conflict with and will not result in a breach or violation of, or a default under, or give rise to any other right which may adversely affect the consummation of the transaction contemplated under this Agreement under (i) the organisational documents of the Seller and the Company; (ii) any material contract to which the Seller or the Company or any of the Company's Subsidiaries is a party; and (iii) any law to which the Seller or the Company is subject.

3.4

Litigation.

There is no judgment, decree or order against the Seller that prevents, enjoins, or materially alters or delays the sale of the Purchase Shares by the Seller under this Agreement and the consummation of the transaction contemplated herein. To the best knowledge of the Seller, the Seller has no claims against the Company and its Subsidiaries.

3.5

Related Party and Certain Other Transactions.

Schedule 3.5 sets out all current agreements between the Seller or any of its Affiliates or any of the Seller Directors or their Affiliates and the Company and its Subsidiaries. All such agreements shall have been cancelled at Closing.

3.6

[Reserved]

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3.7

Capitalisation; Charter Documents.

(a)

Schedule 3.7(a) hereof accurately describes (i) as of immediately after the Closing, the number of issued and outstanding ordinary shares of the Company held by the Seller and (ii) as of the date hereof, the percentage of the Company's issued and outstanding share capital that the Purchase Shares constitute on both a fully diluted and non-fully diluted basis.

(b)

Schedule 3.7(b) hereof accurately describes the shareholdings in the Seller.

(c)

Schedule 3.7(c) contains accurate and complete copies of the Memorandum of Association, Articles of Association and Certificate of Incorporation of the Company.

3.8

No Additional Representations

Without derogating from any right or remedy available to it under law, the Seller acknowledges that the Purchaser has made no representations other than the representations set forth in Section 4 hereof and that in deciding to enter into this Agreement the Seller is not relying on any other information that may have been provided by the Purchaser or its representatives.

4.	REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

The Purchaser hereby represents and warrants to the Seller:

4.1

Organisation and Authority.

(a)

The Purchaser duly and validly exists under the laws of Israel and subject to the conditions specified under Section 2.4(a), has all necessary company power and authority to enter into this Agreement, to carry out its obligations hereunder and to consummate the transactions contemplated hereby.

(b)

Subject to the conditions specified under Section 2.4(a), the execution and delivery of this Agreement by the Purchaser, the performance by the Purchaser of its obligations hereunder and the consummation by the Purchaser of the transactions contemplated hereby have been duly authorised by all requisite corporate action on the part of the Purchaser.

(c)

This Agreement has been duly executed and delivered by the Purchaser, and (assuming due authorisation, execution and delivery by the Seller and subject to the conditions specified under Sections 2.4(a) and 2.4(b)) this Agreement constitutes a legal, valid and binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms.

4.2

Consent and Approvals; No Conflict.

Other than as specifically provided for in this Agreement, the execution and delivery of this Agreement by the Purchaser, the performance by the Purchaser of its obligations hereunder and the consummation by the Purchaser of the transactions contemplated hereby do not conflict and will not result in a breach or violation of, or a default under, or give rise to any other right which may adversely affect the consummation of the transaction contemplated under this Agreement under (i) the organisational documents of the Purchaser; (ii) any material contract to which the Purchaser is a party; or (iii) assuming that all required regulatory approvals have been obtained, any material law to which the Purchaser is subject.

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4.3

Litigation.

There is no judgment, decree or order against the Purchaser that prevents, enjoins, or materially alters or delays the purchase of the Purchase Shares by the Purchaser under this Agreement and the consummation of the transaction contemplated herein.

4.4

Eurocom Undertakings.

A copy of a letter from Eurocom D.B.S. Ltd. ("Eurocom DBS") to the Seller, in which Eurocom DBS undertakes to (i) effect any and all actions in connection with its shareholdings in D.B.S. Satellite Services (1998) Ltd prior to the Closing, to the extent required as a condition to the granting of the Antitrust Approval or the MoC Approval, and (ii) provide and file all information in its possession or available to it necessary or required for the granting of the Regulatory Approvals, and (iii) not to take actions that would delay or impede the receipt of Regulatory Approvals, is attached hereto as Schedule 4.4A. A copy of a letter from Eurocom Communications Ltd. to the Seller, in which in order to facilitate receipt of the A ntitrust Approval, (i) Eurocom Communications Ltd. ("Eurocom") shall agree to undertake not to unduly discriminate among customers of its Nokia device distribution business, and (ii) Eurocom undertakes not to take actions that would delay or impede the receipt of Regulatory Approvals and to use best efforts to take such other action, and, subject to applicable law, to cause its Affiliates to take such actions, as may be required for the granting of the Regulatory Approvals, and (iii) Eurocom shall provide and file all information in its possession or available to it necessary or required for the granting of the Regulatory Approvals, and (iv) to the extent required, Eurocom shall vote its shares and interests in Internet Gold – Golden Lines Ltd. and/or the Purchaser on any shareholder actions in support of the transactions contemplated herein; is attached as Schedule 4.4B.

4.5

Financial Capability

(a)

At the Closing, the Purchaser will have sufficient funds to effect the purchase of the Purchase Shares, and the Purchaser acknowledges that any failure to obtain the financing necessary to consummate the transaction contemplated hereby shall not constitute a defence or condition precedent to its obligations hereunder. The Purchaser will provide the Seller with copies of all credit agreements, financing commitments and other arrangements with banks and other entities providing financing to the Purchaser for purposes of funding its obligations hereunder (collectively "Credit Agreements") shortly after such documents are made available to the Purchaser and such copies shall be complete and accurate; provided, however, that the Purchaser may redact trade secrets and other confidential commercial information. The Purchaser undertakes to take all actions necessary to fulfil all of its obligations set forth in such Credit Agreements in a prompt and timely manner.

(b)

As of the date hereof, the Purchaser itself has in its bank accounts an aggregate available Cash amount of not less than NIS300 million (the "Signing Date Available Cash Amount").

(c)

Exhibit 4.5(c) contains a "highly confident" letter from a bank with respect to the transaction contemplated hereby (the "Bank Financing"). There are no written side agreements of any sort which are not disclosed in such letter.

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4.6

Acting for Own Account

Purchaser is entering into this Agreement to purchase the Purchase Shares on its own account and not with a view to resale or redistribution of the Purchase Shares. Notwithstanding the foregoing, Purchaser shall have the right to bring other investors into the transactions contemplated hereby; provided, however, that at the Closing control of the Company (as defined in the Telecommunications Law) shall remain with the Purchaser and that doing so would not be expected to have an adverse impact on the consummation of the transactions in a timely manner and would not cause any transfer tax, stamp duty or VAT to be imposed on Seller.

4.7

No Additional Representations

Without derogating from any right or remedy available to it under law, the Purchaser acknowledges that the Seller has made no representations other than the representations set forth in Section 3 hereof and in particular has not made any representations regarding the business, assets, liabilities or prospects of the Company or its subsidiaries and that in deciding to enter into this Agreement the Purchaser is not relying on any forecasts or other information that may have been provided by the Seller or its representatives.

COVENANTS

5.1

Interim Covenants.

(a)

From the date of this Agreement until the Closing Date (the “Interim Period”), subject to applicable antitrust law, the Seller undertakes in its capacity as a shareholder of the Company to exercise its voting rights as a shareholder of the Company, to object to the passing of any shareholders’ resolution of the Company with respect to the following matters: (i) other than as required by applicable law, any amendment and/or change and/or alteration of the Company's organisational documents; (ii) voluntary liquidation of the Company or any of the Company's Subsidiaries, and/or the engagement in any arrangement with all, or a class of, the creditors of the Company and/or of the Company's Subsidiaries; (iii) other than the existing management agreement between the AP.SB.AR Cayman L.P. and the Company described in the Company's public filings, and except for existing indemnification letters as described in the Company's public filings, any related party transaction by and between the Company or any of its Subsidiaries, on the one hand, and the Seller or any of its Affiliates or the Seller Directors or any of their Affiliates (other than the Company or any of its Subsidiaries), on the other hand; (iv) other than the purchase by a Subsidiary of the Company of MIRS Communications Ltd. and Walla Communications Ltd. any merger and/or any other change in the corporate structure of the Company and/or any of the Company's Subsidiaries; and (v) any issuance of shares or other equity interests of the Company (including options, rights offerings, or convertible securities), other than resulting from (A) the exercise of options or (B) the issuance of options or shares pursuant to existing employee benefit plans consistent with past practice.

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(b)

The Seller shall not dispose of any interest in the Purchase Shares or any of them or grant any option over or create after the date hereof any Security Interest over the Purchase Shares or any of them. At the Closing, upon payment of the Purchase Price, the Seller shall release or cause to be released any Security Interest over the Purchase Shares.

(c)

During the Interim Period, contacts between the Purchaser or its Affiliates and Company management (or the management of its Affiliates) (other than ordinary course of commercial business) shall be done in coordination with the Seller.

5.2

Announcements.

(a)

Neither Party nor any of its Subsidiaries shall (and each Party shall use all reasonable efforts to procure that none of its Affiliates (and with respect to the Seller, including the Company and its subsidiaries) issue any press release or public announcement concerning this Agreement or the transactions contemplated hereby without obtaining the prior written approval of the other Party, which approval will not be unreasonably withheld or delayed, unless disclosure is otherwise required by applicable law or by the applicable rules of or listing agreement with any stock exchange on which the securities of a Party or its Affiliates are traded securities. The Purchaser shall not, and shall cause its Affiliates not to, make public announcements concerning concrete business plans with respect to the Company's assets and business operations without Seller's prior written approval, which shall not be unreasonably withheld.

(b)

Nothing in Section 5.2(a) shall: (i) prevent the Parties from providing any of their Affiliates (and with respect to the Seller, including the Company and any of its Subsidiaries) or their shareholders, attorneys, accountants or advisors any details or information regarding this Agreement, the transaction contemplated hereby, the identity of the other Party and its direct and indirect shareholders to the extent that such details or information are required for the approval of this Agreement and the transaction contemplated herein; and (ii) prevent the Purchaser from providing any lenders, institutions and other entities which will provide loans/credit to the Purchaser for the purpose of the consummation of the transactions provided in this Agreement (including by means of issuance of bonds and/or prospectus), any details or information regarding this Agreem ent and the transaction contemplated herein to the extent that such details or information are required for the purpose of financing the purchase of the Purchase Shares by the Purchaser.

5.3

Further Assurance.

(a)

The Purchaser shall, and to the extent possible subject to applicable law shall cause its Affiliates to, and the Seller shall use its commercially reasonable efforts to cause the Company to, (i) file all legally required applications with (w) the Israeli Antitrust Commissioner in connection with obtaining the Antitrust Approval, and (x) the MoC in connection with obtaining the MoC Approval, and (y) the Prime Minister in connection with obtaining the Prime Minister Approval, and (z) any other person or governmental authority whose approval is required by law to effect the transaction contemplated hereby ((w) through (z) collectively, the "Regulatory Approvals"), as soon as possible, and Purchaser will use its best efforts to file the request for the MoC Approval within 14 business days of the date hereof, and (ii) provide all information required by the Isra eli Antitrust Commissioner, the Prime Minister and the MoC in connection with such filings in a timely manner.

EXECUTION COPY

(b)

Upon the terms and subject to the conditions set forth in this Agreement, and to applicable laws, each Party (with respect to its own obligations) agrees to use, and to the extent possible subject to applicable law to cause its Affiliates to use, best efforts to obtain the Regulatory Approvals as soon as possible, to make such filings and notifications and respond to any requests for additional information made by an authority in a timely, complete and correct manner, and to comply with all applicable law and all requirements applicable to it of the MoC or the Israeli Antitrust Commissioner or the Prime Minister or other applicable agencies or regulatory authorities, as the case may be, to effect the transactions contemplated by this Agreement. Each party undertakes not to, and shall exercise best efforts to cause any of its controlling shareholders and its Affiliates (and, in the case of the Seller, the Company , the Seller Directors and each of its and their respective Affiliates) not to, take any action that would reasonably be expected to materially delay, impede or prevent receipt of any necessary Regulatory Approvals. Insofar as this Section 5.3(b) applies to undertakings of the Seller to cause the Company to take certain actions, it is understood that such obligations shall be limited only to the provision of information and submission of applications and reports (to the extent required), and specifically excludes any action that materially adversely affect the Company's interests or any such actions that require the Company to take any action with respect to the business or operations of the Company.

(c)

Without limiting the generality of the foregoing, in order to facilitate the issuance of any Regulatory Approval:

(i)

in order to facilitate receipt of the MoC Approval, the Purchaser shall consent to and comply with all requirements applicable to it that are specified in the Communications Order, and all requirements of general application substantially similar to those contained in the existing control permits with respect to the Seller or the Company in effect on the date hereof, attached hereto as Schedule 5.3(c).

(ii)

In order to facilitate receipt of the Antitrust Approval or the MoC Approval or any other Regulatory Approval, the Purchaser shall take such actions with respect to its assets, including without limitation the sale or other disposition of such assets, as and to the extent required to obtain such Approval, and shall use such proceeds and other assets not needed to support its course of business and obligations in order to finance the transaction contemplated hereby and not for purpose of a Distribution; provided, however, that if such sale is not required in order to receive such Regulatory Approval but cannot be effected as a source of financing for the transaction, the Purchaser shall provide an alternative source of financing in an amount necessary for the Purchaser to effect the Closing.

(iii)

use its best efforts to take any other actions required to facilitate the issuance of any Regulatory Approval.

EXECUTION COPY

(d)

The Seller shall use its best efforts to assist and to cooperate with the Purchaser and the Company in obtaining the approvals required under Sections 5.3(a) above and shall use its best efforts to cause the conditions to Closing set forth in Sections 2.4(a) (to the extent that the approvals provided for in that Section 2.4(a) are required by law to be obtained by the Seller) and 2.4(b) to be satisfied as promptly as practicable. Subject to the requirements of applicable law and regulations, the Seller shall cause the Company to provide such information as the Purchaser requires for filings or offering documents in connection with the tr ansactions contemplated hereby, including without limitation any financial or other information required to effect capital raising transactions; provided that (i) such information is required to be included in the relevant filings under applicable securities law and there is no restriction under applicable law to provide such information; (ii) the Purchaser bears all costs incurred by the Seller or the Company in providing such information; and (iii) the Purchaser provides customary indemnification to the Seller and the Company in connection with the provision of such information. Insofar as this clause (d) applies to undertakings of the Seller to take action or to cause the Company or any of its Subsidiaries to take certain actions, it is understood that such obligations shall be limited only to the provision of information and submission of applications and reports (to the extent required), and specifically excludes any action that materially adversely affect the Company's interests or any such actions tha t require the Company to take any action with respect to the business or operations of the Company.

The Purchaser shall provide such information as the Seller reasonably requests in connection with its tax filings; provided that (i) such information is required to be included in the relevant filings under applicable tax law and there is no restriction under applicable law to provide such information; (ii) the Seller bears all costs incurred by the Purchaser in providing such information; and (iii) the Seller provides customary indemnification to the Purchaser in connection with the provision of such information.

(e)

Each Party, upon request by the other Party, shall provide the other Party with correspondence and material relevant information with respect to Regulatory Approvals; provided that any trade secrets or other confidential information shall be redacted from such updates. The Purchaser shall promptly inform the Seller and provide detailed information with respect thereto in the event of a final decision refusing to provide an Approval contemplated by this Agreement or the determination by any relevant governmental authority of conditions for an Approval to which the Purchaser objects.

5.4

Financing.

(a)

Attached hereto as Exhibit 5.4 is an agreement between Purchaser and Eurocom pursuant to which Eurocom irrevocably grants Purchaser an irrevocable call option to require Eurocom to provide Purchaser a loan of up to the lesser of (i) NIS1.2B, or (ii) the difference between (x) the Purchase Price and (y) the sum of the Cash holdings of the Purchaser and any committed financing available to the Purchaser for the transaction contemplated hereby (the "Eurocom Option"). Such option may be exercised by Purchaser, at no cost, at any time after 120 days from the date hereof (the "120th Day"), u pon submission of a written notice to Eurocom. The underlying loan shall bear interest at a risk-free or lower rate, and shall be subordinated in all respects to committed financing referenced above. The Eurocom Option includes a representation in which Eurocom shall represent and warrant therein that it has, as of the date hereof, the financial ability to provide the required funds under the Eurocom Option and further covenants and undertakes to maintain such level of financial ability.

EXECUTION COPY

(b)

Purchaser shall take all means required in order to comply in all respects on a timely basis with all of the undertakings of the Purchaser and the terms and conditions set forth in sub-Sections 6.1(c)(i) through 6.1(c)(v) below. No later than on the date of each of the Milestones, Purchaser shall submit to the Seller a certificate issued by the Purchaser confirming that the respective conditions which are required to be fulfilled at the respective Milestones are timely fulfilled in their entirety.

(c)

In the event that Purchaser is, for any reason whatsoever, unable, at any time after the 120th Day, to timely comply with any of the terms and conditions set forth in sub-Sections 6.1(c)(i) through 6.1(c)(v) below, it hereby undertakes to immediately exercise the Eurocom Option in such manner which shall allow it to fully comply with said provisions and achieve the pertinent Milestone.

6.	TERMINATION

6.1

Right of Parties to Terminate.

This Agreement may be terminated and the transactions contemplated hereby may be abandoned, at any time prior to the Closing:

(a) by mutual written consent of the Parties;

(b)

by either the Seller or the Purchaser, by written notice to the other Party, if the Closing has not occurred on or prior to the close of business on April 25, 2010 (the “End Date") and in that case no Party may terminate this Agreement according to this Section 6.1(b) prior to such extended date; provided, further, however, that this Agreement may be terminated earlier pursuant to this Section 6.1(b) in the case of a final and unappealable determination by a relevant governmental authority not to issue an approval required for the consummation of the transactions contemplated hereby.

(c)

by Seller in the event that any of the following conditions and/or events and/or actions have not occurred or maintained (as applicable) by the date designated therefor (subject to a cure period of three business days), provided that the timely occurrence of each of the following conditions and/or events and/or actions shall be deemed to constitute part of the Purchaser's obligations and covenants hereunder and Purchaser's failure to timely comply with any of such obligations shall be deemed to constitute a material breach of this Agreement which entitles the Seller to immediately terminate this agreement:

(i) Within no later than seven (7) days following the date hereof (the "First Milestone"), the Purchaser or its wholly-owned Subsidiaries shall have in its bank accounts an aggregate available Cash amount of not less than NIS600 million, including the Signing Date Available Cash Amount (such amount, the "7-day Available Cash Amount").

(ii) Within no later than thirty (30) days following the date hereof (the "Second Milestone"), the Purchaser or its wholly-owned Subsidiaries shall have in its bank accounts an aggregate available Cash amount of not less than NIS1.00 billion, including the 7-day Available Cash Amount (such amount, the "Required Available Cash Amount").

EXECUTION COPY

(iii) Within no later than the 120th Day, the Purchaser shall have secured sufficient committed financing of no less than NIS4.25 billion (the "Third Milestone").

(iv) The Purchaser shall maintain in its bank accounts at all times following the 30-day period subsequent to the date hereof and until the 120th Day such level of available Cash amount of not less than the Required Available Cash Amount.

(v) No later than the 120th Day (the "Fourth Milestone", and collectively, with the First Milestone, the Second Milestone and the Third Milestone, the "Milestones"), the Purchaser itself shall have in its bank accounts an aggregate available Cash amount of the difference between (x) the Purchase Price and (y) the committed financing available to the Purchaser for the transaction contemplated hereby, and such amount shall be maintained at all times until the Closing Date.

The right of a Party to terminate this Agreement pursuant to this Section 6.1 shall not be available to the Party whose failure to fulfil or cause to be fulfilled, in any manner, any obligation under this Agreement has contributed to the failure of the Closing to have occurred by the End Date, whether such failure was caused by such Party’s intentional failure, by its omission or failure to act or otherwise through any fault of such Party.

6.2

Procedure upon Termination.

In the event the Purchaser or the Seller, or both, elect to terminate this Agreement pursuant to Section 6.1, written notice thereof shall be given to the other Party, and following compliance with Section 6.3 below, this Agreement shall terminate without further action of the Parties.

6.3

Effect of Termination.

Without derogating from the provisions of Section 6.1 above, if either Party validly terminates this Agreement pursuant to Section 6.1, the Parties shall be released from all liabilities and obligations arising under this Agreement with respect to the matters contemplated by this Agreement and this Agreement shall terminate and become void and have no effect; provided, that (a) to the extent that such termination results from the breach by a party hereto of any of its representations, warranties, covenants or agreements set forth herein and including as a result of Purchaser's breach of its undertakings set forth in 6.1(c) above upon the respective dates designated therefor or upon Purchaser's failure to achiev e any of the Milestones set forth therein and further including the failure by a party to satisfy a covenant hereunder by the End Date, it is agreed that no termination hereunder shall relieve such party of liability for a breach of any provision of this Agreement occurring before such termination, and (b) the obligations of the Parties set forth in Section 5.2 (Announcements), Section 6.2 (Procedure upon Termination), this Section 6.3 (Effect of Termination), Section 7.2 (Notices), Section 7.6 (Entire Agreement), and Section 7.9 (Governing Law; Jurisdiction) shall survive any such termination and shall be enforceable hereunder.

EXECUTION COPY

6.4

Undertaking to Consummate

The Parties acknowledge and agree that, except as otherwise provided herein, their obligation to consummate the transactions contemplated hereby constitutes an unconditional obligation to procure performance and consummation of the transaction.

7.	MISCELLANEOUS

7.1

Parties in Interest; Assignment.

(a)

This Agreement is binding upon and is solely for the benefit of the Parties and their respective successors, legal representatives and permitted assigns. No Party may assign this Agreement or any portion thereof without the written consent of the other Party. Any attempted assignment not in compliance with the terms of this Agreement is null and void.

(b)

Notwithstanding Section 7.1(a) above but without prejudice to the restrictions contained therein, subject to any necessary approvals of any governmental authority, the Purchaser may pledge all or any part of its rights under this Agreement to any bank and/or other financial institutions which shall provide full or partial funding for the Purchaser in respect of the purchase of the Purchase Shares under this Agreement.

(c)

Notwithstanding Section 7.1(a) above, the Purchaser may assign its rights to receive the Purchase Shares to any Affiliate; provided, however, that Purchaser remains liable for all obligations of the Purchaser and of such Affiliate hereunder.

7.2

Notices.

All notices or other communications hereunder shall be in writing and shall be given in person, by registered mail (registered international air mail if mailed internationally), by an overnight courier service which obtains a receipt to evidence delivery, or by facsimile transmission (provided that written confirmation of receipt is provided) with a copy by mail, addressed as set forth below:

If to the Seller:	AP.SB.AR Holdings Ltd. 20 Lincoln Street Tel Aviv 67134 Facsimile: +972-3-625-5500 Attn: Michael Zellermayer, Adv.
With a copy to (which shall not constitute notice):	Zellermayer, Pelossof & Co. 20 Lincoln Street Tel Aviv 67134 Facsimile: +972-3-625-5500 Attn: Michael Zellermayer, Adv.
If to the Purchaser:	012 Smile.Communications Ltd. 25 Hasivim Street Petach Tikva Facsimile: +972-72-200-2090 Attn.: Stella Hendler

EXECUTION COPY

With a copy to (which shall not

constitute notice):

Fischer Behar Chen Well Orion & Co.

3 Daniel Frisch St.

Tel Aviv 64731, Israel

Facsimile: +972-3-609-1116

Attn: Avraham Well, Adv.

or such other address as any Party may designate to the other in accordance with the aforesaid procedure. All communications delivered in person or by courier service shall be deemed to have been given upon delivery, those given by facsimile transmission shall be deemed given on the Business Day following transmission with confirmed answer back, and all notices and other communications sent by registered mail (or air mail if the posting is international) shall be deemed given five (5) Business Days after posting.

7.3

Successors and Assigns.

This Agreement shall be binding upon and inure to the benefit of and be enforceable by the Parties and their respective successors and permitted assigns.

7.4

Delays or Omissions; Waiver.

The rights of a Party may be waived by such Party only in writing and, specifically, the conduct of any one of the Parties shall not be deemed a waiver of any of its rights pursuant to this Agreement and/or a waiver or consent on its part as to any breach or failure to meet any of the terms of this Agreement or an amendment hereto. A waiver by a Party in respect of a breach by the other Party of its obligations shall not be construed as a justification or excuse for a further breach of its obligations.

No delay or omission to exercise any right, power, or remedy accruing to any Party upon any breach or default by the other under this Agreement shall impair any such right or remedy nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein or in any similar breach or default thereafter occurring.

7.5

Amendment. This Agreement may be amended or modified only by a written document signed by all the Parties.

7.6

Entire Agreement. This Agreement (together with the recitals, schedules, appendices, annexes and exhibits hereto) contains the entire understanding of the Parties with respect to its subject matter and all prior negotiations, discussions, agreements, commitments and understandings between them with respect thereto not expressly contained herein shall be null and void in their entirety, effective immediately with no further action required.

7.7

Severability. If a provision of this Agreement is or becomes illegal, invalid or unenforceable in any jurisdiction, that shall not affect the validity or enforceability in that jurisdiction of any other provision hereof or the validity or enforceability in other jurisdictions of that or any other provision hereof. Where provisions of any applicable law resulting in such illegality, invalidity or unenforceability may be waived, they are hereby waived by each Party to the full extent permitted so that this Agreement shall be deemed valid and binding agreements, in each case enforceable in accordance with its terms.

EXECUTION COPY

7.8

Counterparts; Facsimile Signatures. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. A signed Agreement received by a Party via facsimile will be deemed an original, and binding upon the party who signed it.

7.9

Governing Law; Jurisdiction. The Agreement shall be governed by and construed in accordance with the laws of the State of Israel, without giving effect to the principles thereof relating to conflict of laws. The Parties hereby consent and submit to the exclusive jurisdiction of the competent courts of Central District, Israel, which shall have jurisdiction to hear all disputes arising in connection with this Agreement and no other courts shall have any jurisdiction whatsoever in respect of such disputes.

7.10

No Third-Party Beneficiaries. Nothing in this Agreement shall create or confer upon any Person, other than the Parties or their respective successors and permitted assigns, any rights, remedies, obligations or liabilities.

EXECUTION COPY

[Signature Page of Share Purchase Agreement]

IN WITNESS WHEREOF, this Agreement has been duly executed and delivered on the date herein above set forth.

1. AP.SB.AR Holdings Ltd.

By:

Signature: _________________________

Name: _________________________

Title: _________________________

2. 012 SMILE.COMMUNICATIONS LTD.

By:

Signature: _________________________

Name: _________________________

Title: _________________________

EXECUTION COPY

Exhibit A

Form of Resignation

RESIGNATION LETTER

The undersigned, [name of the Seller appointed director] (hereinafter, the “Seller Director”), acting in his capacity as a director of [the Company]/ [Applicable Subsidiary], hereby agrees to the following:

The Seller Director hereby tenders his resignation as a director of [the Company] / [Applicable Subsidiary] and as a director, officer, trustee, agent, or fiduciary of any other corporation, partnership, joint venture, employee benefit plan, trust, entity, or enterprise of any kind whatsoever that is an Affiliate of the Company or any of its Subsidiaries.

All capitalised terms used but not otherwise defined herein shall have the respective meanings set forth in the Share Purchase Agreement, dated as of October 25, 2009, by and between [Seller] and [Purchaser]

Date: _______________, 2009

__________________________

[name of Director]

EXECUTION COPY

Schedule 3.5

Management agreement between Bezeq and Ap.Sb.Ar Cayman LP

Engagements in favor of Seller Directors (insurance and indemnification)

EXECUTION COPY

Schedule 3.7 a

(i)

As of immediately after the Closing, the number of issued and outstanding ordinary shares of the Company held by the Seller shall be: 814,211,545 ordinary shares.

(ii)

As of the date hereof, the percentage of the Company's issued and outstanding share capital that the Purchase Shares constitute on a fully diluted basis is approximately 29.6% and on a non-fully diluted basis approximately 30.6%.

EXECUTION COPY

Schedule 3.7 b

Shareholders of the Seller:

SCG Israel Ventures LLC. holds 45% equity shares and 40.5% voting shares.

Arkin Communications Ltd. holds 10% equity shares and 19% voting shares.

Purple Green Project and Investment Ltd and Yellow Green Finance and Investments Ltd. hold in the aggregate 45% equity shares and 40.5% voting shares

EX-4.5 4 exhibit_4-5.htm EXHIBIT 4.5 exhibit_4-5.htm

Exhibit 4.5

Execution Copy

FIRST AMENDMENT TO THE SHARE PURCHASE AGREEMENT

This AMENDMENT (the "Amendment"), dated as of March 28, 2010 to the Share Purchase Agreement and the Addendum thereto dated as of February 8, 2010 (collectively, the "Agreement") dated as of October 25, 2009, is entered into among AP.SB.AR Holdings Ltd. and B. Communications (SP2) Ltd.

WHEREAS, the Parties to the Agreement wish to amend sub-Section 2.3(c) of the Agreement in the manner set forth below and to add a new sub-Section 2.4(b)(vi), all as further set forth below;

NOW, THEREFORE, in consideration of the mutual promises herein made, the Parties hereby agree as follows:

All terms used and not otherwise defined herein shall have the meanings ascribed thereto in the Agreement.

It is hereby agreed that the following language shall be added at the end of sub-Section 2.3(a)(ii):

"and evidence of the appointment of the Purchaser Directors, subject to the provisions of Section 2.3(c) below;"

It is hereby further agreed, that sub-Section 2.3(c) of the Agreement shall be amended and replaced in its entirety with the following language:

"The Purchaser has provided the Company with the names of the persons recommended by the Purchaser to serve as directors of the Company immediately following the Closing (the "Purchaser Directors"); provided that (i) the persons recommended by the Purchaser to serve as the Purchaser Directors comply in all respects with the requirements and qualifications provided for in the Company's organizational documents and under any applicable law, including any MoC regulations and internal resolutions of the MoC, and (ii) Purchaser shall have the right to change the list of Purchaser Directors from time to time until five(5) Business Days prior to the Closing Date. Subject to the Purchaser providing the Seller with the details of the Purchaser Directors as set forth above at least five (5) Business Days prior to the Clo sing Date, and further subject to Purchaser providing Seller with advance written notice of at least five (5) Business Days prior to the Closing Date regarding the designated date thereof, the Seller shall act to convene a special Board meeting on the designated Closing Date, whose agenda shall include the resignation of the Seller Directors and the appointment of the Purchaser Directors in their stead, all in accordance with the provisions of Article 85.1 of the Articles of Association of the Company."

Execution Copy

It is hereby further agreed that a new sub-Section 2.4(b)(vi) shall be added to the Agreement, as follows:

"(vi) Appointment of the Purchaser Directors, subject to the provisions of Section 2.3(c) above."

This Amendment forms an integral part of the Agreement and any provision of the Agreement not specifically altered, modified or amended hereby shall remain in full force and effect. References to the Agreement shall be deemed to be references to the Agreement as amended hereby and as further amended from time to time.

This Amendment may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. A signed Amendment received via facsimile will be deemed an original, and binding upon those who signed it.

[Signature page follows]

Execution Copy

IN WITNESS WHEREOF, the Parties have executed this Amendment as of the date first written above.

AP.SB.AR Holdings Ltd.

By: ______________________

Title: _____________________

Date: _____________________

B. Communications (SP2) Ltd.

By: ______________________

Title: _____________________

Date: _____________________

EX-4.7 5 exhibit_4-7.htm EXHIBIT 4.7 exhibit_4-7.htm

Exhibit 4.7

[Official emblem of the State of Israel]

Permit to Control Bezeq The Israel Telecommunications Corporation Ltd.

Granted to Companies in the Eurocom Group

By the authority vested in me under Section 4d of the Communications Law (Telecommunications and Broadcasts), 5742-1982 (the "Communications Law") and pursuant to Section 3 of the Communications Order (Telecommunication and Broadcasts) (Determination of Essential Service Provided by Bezeq The Israeli Telecommunications Corporation Ltd.), 5757-1997 (the "Communications Order"), and after reviewing the Request, as defined in Section 1 below, we hereby grant the companies set forth below, in addition to recipients of the Control Permit for Individuals, authorization to jointly hold the means of control in Bezeq The Israel Telecommunications Corporation Ltd ("Bezeq"), to joi ntly control Bezeq and to encumber the means of control in Bezeq, subject to the provisions of this Permit:

B. Communications (SP2) Ltd., Private Company No. 51-440539-8 ("B. Communications 2");

B. Communications (SP1) Ltd., Private Company No. 51-440541-4;

B. Communications Ltd., Public Company No. 51-283274-2 ("012 Smile");

Internet Gold – Golden Lines Ltd., Public Company No. 52-004426-4 ("Internet Gold");

Eurocom Communications Ltd., Private Company No. 51-082316-4;

Eurocom Holdings (1979) Ltd., Private Company No. 51-083327-0;

Eurocom Assets Holdings Ltd., Private Company No. 51-371049-1;

Eurocom Assets Ltd., Private Company No. 51-370976-6;

Eurocom Technologies Management (2005) Ltd., Private Company No. 51-370974-1;

10.

Eurocom Communication Holdings (2005) Ltd., Private Company 51-370978-2.

(hereinafter, jointly and severally, "Permit Holder").

Definitions

1.1.

In this Permit –

"Request"

Request for authorization to hold means of control in Bezeq, to control Bezeq and to encumber the means of control of Bezeq, in the form of the questionnaires submitted by 012 Smile and B. Communications 2 pursuant to the Communications Order, including the documents attached to the questionnaires and any other document or information provided with respect to the Request;

"Lending Parties"

Bank Hapoalim Ltd., Bank Leumi Le-Yisrael Ltd., Israel Discount Bank Ltd., Mizrachi Tefahot Bank Ltd., HSBC Bank Plc., First International Bank of Israel Ltd., Union Bank of Israel Ltd., Makefet Fund Pension and Provident Center - AS Ltd. (under special management), Hadassa Employees Pension Fund Ltd. (under special management), Mivtachim The Workers Social Insurance Fund Ltd. (under special management), "Egged" Members Pension Fund Ltd. (under special management), Central Benefits Fund of Histadrut Employees Ltd. (under special management), Poalim (Romema) Trustees Ltd. and Bank Hapoalim Ltd., in its capacity as Security Trustee;

"Financing Parties"

The Lending Parties, with the exception of Poalim (Romema) Trustees Ltd. and Bank Hapoalim Ltd. in its capacity as Security Trustee;

"Control Permit for Individuals"

Permit to control and hold the means of control in Bezeq issued on April 11, 2010, to Mr. Shaul Elovitch and Mr. Yosef Elovitch (the permit is attached hereto as Appendix A);

"Lien Permit"

Permit to encumber the means of control in Bezeq and B. Communications 2, which was issued to the Lending Parties on April 4, 2010 (the "Lien Permit") (the Lien Permit is attached hereto as Appendix B);

"Credit Agreement"

Agreement for the provision of credit dated February 11, 2010, between B. Communications 2 and the Financing Parties;

"Minimum Rate"

30% of any type of means of control in Bezeq;

"Ministers"

The Prime Minister and the Minister of Communications.

1.2.

The remaining terms in this Permit which have not been defined above shall have the meaning ascribed to them in the Communications Law, Communications Order or the Interpretation Law, 5741-1981, unless otherwise indicated by the language or context.

General

2.1.

This Permit is granted in reliance on, and its validity is conditional upon the fact that the Ministers have been provided correct information regarding the details pertaining to each of the companies comprising part of the Permit Holder, with respect to the Request and as set forth herein.

2.2.

Subject to the provisions of Sections 4.3 and 4.4 below, this Permit is granted subject to and as long as B. Communications 2 is controlled, including pursuant to the Agreement, exclusively by the other companies ("Other Companies" – B. Communications 1, 012 Smile, Internet Gold, Eurocom Communications Ltd., Eurocom Holdings (1979) Ltd., Eurocom Assets Holdings Ltd., Eurocom Assets Ltd., Eurocom Technologies Management (2005) Ltd., Eurocom Communication Holdings (2005) Ltd.) comprising part of the Permit Holder or the Holder of the Control Permit for Individuals, as set forth in the Request. The chains of ownership attached to the Request are attached hereto as Appendix C, and constitute an integral part hereof.

2.3.

This Permit is subject to the provisions of the Communications Law and the Communications Order, as may be in effect from time to time. Nothing in the provisions of the Permit derogates from the provisions of any law, including with respect to the authority of the Ministers and the Director General of the Ministry of Communications pursuant to the Communications Law, Communications Order and the Control Permit for Individuals. It is hereby clarified that nothing in this Permit derogates from the obligation to obtain a permit for other actions provided in the Communications Law or the Communications Order or under applicable law.

2.4.

The Permit Holder undertakes to comply with the provisions of the Communications Law, Communications Order and the provisions thereunder.

2.5.

Nothing in this Permit derogates from the Permit Holder's duty to receive authorization pursuant to applicable law, to the extent required.

2.6.

This Permit is granted to the Permit Holder exclusively in accordance with the control structure therein, as set forth in the Request on the basis of which this Permit was granted.

Reporting

3.1.

Each of the companies comprising part of the Permit Holder is required to report to the Ministers regarding changes to details provided in the Request or, as required by the Ministers, additional details pertaining thereto, in accordance with the provisions of the Communication Law and the provisions pursuant thereto, as soon as possible after becoming aware of the change and no later than the commencement of the first quarter following the occurrence of such change.

3.2.

Without derogating from the generality of the foregoing, B. Communications 2 shall report to the Ministers regarding changes in the composition of the Board of Directors of the Company compared with the Board of Directors composition provided in the Request or the report, as set forth in this Section below:

(a)

Changes in the composition of the Board of Directors – every six months;

(b)

Changes in half of the composition of the Board of Directors or more – within 30 days of the change.

3.3.

The companies enumerated in Sections 3-4 comprising part of the Permit Holder shall be required to report to the Ministers regarding a holder of means of control in such companies which constitute exceptional shareholdings, immediately upon becoming aware thereof.

3.4.

The companies enumerated in Sections 3-4 of the Permit Holder shall be required to report to the Ministers in the event a shareholder in any such company becomes an interested party and regarding changes of one percent or more in the interested party's shareholdings in each of the foregoing, within 48 hours of becoming aware of such change.

3.5.

The failure to make a report, as set forth in Sections 3.3 and 3.4 above shall constitute a breach of the terms of the Permit and grounds for revocation of the Permit.

Authorization to Control and Hold Means of Control

4.1.

As of the date of granting of this Permit, the companies comprising the Permit Holder may be controlling shareholders of Bezeq (hereinafter in this Permit, "Controlling Shareholders"), subject to satisfaction of the provisions of the Communications Law and the Communications Order applying to them as Controlling Shareholders, as aforementioned. For such purpose, and subject to the provisions of Section 3(a3) of the Communications Order, the Controlling Shareholders, by means of B. Communications, must hold means of control in Bezeq that shall not be less than the Minimum Rate. For the avoidance of doubt, it is hereby clarified that this Permit does not constitute a permit under Section 3(b3) of the Communications Order for the purchase of shares by way of a full tender offer.

4.2.

B. Communications 2, alone, shall directly hold the means of control in Bezeq, as set forth in Subsection 4.1. In this respect, registration of the means of control in Bezeq in the name of a trust company wholly owned by Bank Hapoalim Ltd., which is granted a permit to hold by means of a lien, pursuant to the Communications Law, and the granting of power of attorney by it to B. Communications 2, as set forth in the Lien Permit, shall be deemed to be direct shareholdings by B. Communications 2. Nothing in the provisions of this Subsection derogates from the right of any of the Permit Holders to hold additional means of control in Bezeq by means other than B. Communications 2, all subject to the provisions of the Communications Law and the Communications Order.

4.3.

The Controlling Shareholders shall not transfer means of the control in a company at a rate which requires the Ministers' approval under the Communications Order, without the Ministers' prior written approval. In this respect, "transfer" means all at once or in portions, alone or together with the Other Companies comprising the Permit Holder or with a holder of the Control Permit for Individuals.

4.4.

Notwithstanding the provisions of Section 4.3, and without derogating from the provisions of Section 3, the companies comprising the Permit Holder may transfer means of control in Bezeq among themselves or between themselves and the holder of the Control Permit for Individuals, subject to the following conditions:

(a)

No change occurs in the compliance of the Controlling Shareholders and the holder of the Control Permit for Individuals with the provisions of the Communications Law and the Communications Order, including with respect to the "Israeliness" requirement;

(b)

No control or means of control in Bezeq is transferred at a rate requiring the Ministers' approval under the Communications Order to parties not comprising part of the Permit Holder or who do not comprise part of the holder of the Control Permit for Individuals;

(c)

The Permit Holder and holder of the Control Permit for Individuals shall report to the Ministers at least 14 days prior to such transfer of means of control.

4.5.

This Permit is based on the Controlling Shareholders' undertaking to purchase the means of control in Bezeq exclusively for the companies comprising part of the Permit Holder and the holder of the Control Permit for Individuals, and not for any other party, and that they, alone, shall exercise the means of control in Bezeq. It is further based on the Controlling Shareholders' warranty that they are not aware of any legal preclusion which may affect their ability to exercise the aforementioned means of control, including receivership, bankruptcy or liquidation proceedings.

4.6.

Within 75 days of the granting of the Permit, the Articles of Association of Parties 3 and 4 comprising part of the Permit Holder (the "Articles" and the "Companies", respectively) shall be amended as follows:

(a)

A provision shall be added to the Articles pursuant to which the method of appointing the directors provided in the aforementioned Articles shall not be modified without the prior written approval of the Minister of Communications. The language of the aforementioned provision shall be submitted to the Ministry of Communications prior to the vote in the General Meeting;

(b)

A provision shall be added to the Articles pursuant to which the Companies shall report to the Ministers regarding a holder of the means of control therein with exceptional shareholdings, immediately upon becoming aware of such exceptional shareholdings;

(c)

A provision shall be added to the Articles pursuant to which the Companies shall report to the Ministers in the event a shareholder in each of the Companies becomes an interested party, and regarding any change in an interested party's shareholdings in the Companies within 48 hours of the date the Companies become aware of such change.

4.7.

The failure to amend the Articles, as aforementioned above, within 75 days of the granting of the Permit or modification of the provisions to be amended in the Articles, as aforementioned, shall constitute grounds for canceling the Permit.

Encumbrance of the Means of Control

5.1.

The Controlling Shareholders may encumber the means of control which are the subject of the Permit in accordance with the provisions of this Permit, the Control Permit for Individuals and the Lien Permit, and subject to the provisions of the Communications Order.

5.2.

This Permit is granted on the basis of the Lending Parties' undertaking to comply with the provisions of the Communications Law, Communications Order and the Lien Permit granted to them, with respect to any matter pertaining to their rights under the Credit Agreements and the realization of the Lien, and in particular: that the Lending Parties may not exercise rights pursuant to the means of control except as set forth in the Permit granted to them; and that the rights granted to the Lending Parties in the Credit Agreement shall not be deemed to be a transfer of ownership of the means of control but solely as an encumbrance of collateral.

5.3.

This Permit is granted with respect to the encumbrance of the means of control exclusively to the Lending Parties as defined in Section 1, and any change in the composition of the Lending Parties or a modification of the Credit Agreement, as set forth in the Lien Permit, shall require the prior written consent of the Ministers.

5.4.

In the event a receiver is appointed on any grounds whatsoever with respect to shareholdings in B. Communications or with respect to B. Communication's shareholdings in Bezeq, the foregoing shall constitute grounds for canceling this Permit.

5.5.

A violation of the Lien Permit by the Financing Parties, as defined herein, shall constitute grounds for canceling the Lien Permit and shall constitute grounds for appointing a receiver and trustee, in accordance with the provisions of the Lien Permit. From the time of his appointment, the trustee shall hold and exercise the means of control in Bezeq, and shall also exercise the rights pursuant thereto, during the receivership process and until the sale of shares of Bezeq, and the provisions of the Communications Law and the Communications Order which apply to a Controlling Shareholder of Bezeq shall apply to the trustee in this respect. In such instance, the Lending Parties shall not provide the trustee instructions regarding the exercise of the means of control in Bezeq and in connection with the management of Bezeq, whether directly or indirectly. Until such time as the trustee is appointed, as aforementioned , the Controlling Shareholders shall continue to hold and exercise the means of control in Bezeq and B. Communications 2, and they shall also exercise the rights pursuant thereto.

5.6.

The Ministry of Communications shall be added as a party to any legal proceeding which takes place as part of such proceedings, including in a motion for the appointment of the receiver and trustee and in motions pertaining to the trustee's activity. In such framework, the Minister of Communications may submit any motion and request any relief it so determines.

Security and "Israeliness" Requirements

6.1.

The shareholdings of the Israeli Party, as defined in the Communications Order, in B. Communications 2, shall, at all times, be as set forth in Subsection (a) or Subsection (b):

(a)

At least 19% of each of the means of control in B. Communications 2 at all times;

(b)

The following two:

(1)

At least 19%, at all times, of the rights to vote in the General Meeting and the rights to appoint directors in B. Communications 2; and

(2)

The right, at all times, to appoint at least five of the directors in Bezeq and Bezeq's subsidiaries and not less than one director in each such company, to be appointed by the Israeli Party, provided that the percentage of its direct or indirect shareholdings in Bezeq, shall not be less than 3% of any of the means of control in Bezeq, at all times. With respect to this Subsection, indirect shareholdings shall be calculated as the product of the Israeli Party's holdings in each of the means of control in B. Communications 2, based on the lower rate thereof, multiplied by the percentage of the Controlling Shareholder's holdings in each of the means of control in Bezeq.

6.2.

The following conditions shall exist with respect to the Permit Holder at all times:

(a)

The Permit Holder shall not be controlled by any country or a government company or a company controlled by a government company. The Permit shall expire if the provisions of this Subsection cease to exist with respect to the Permit Holder, and the Ministers' approval pursuant to Subsection (b) is not granted.

(b)

The Ministers may authorize a government company to hold the Permit Holder, provided that the government company's aggregate direct or indirect shareholdings in Bezeq shall not exceed 5% of any type of means of control, and it does not control the Permit Holder. In this respect, "Control" shall be as defined in the Securities Law.

6.3.

For the avoidance of doubt, in the event the Communications Order determines provisions with respect to the matters set forth in Subsections 6.1 and 6.2 above, the provisions of the Communications Order, as worded at the time, shall prevail.

6.4.

Without derogating from the provisions of applicable law, if it becomes evident to the Ministers that a change has occurred in comparison with the factual situation that was presented to the Ministers upon considering the Request, which, in their opinion could harm state security, including the ability to protect its security-related affairs, essential public needs or the provision of the essential service, the Ministers, upon consulting with the Minister of Defense, may cancel the Permit.

Violation of the Terms of the Permit and the Cancellation Thereof

7.1.

In the event the Ministers discover that the information they were provided is incorrect, there has been a material change in the details provided by the Controlling Shareholders which justify the following or that the Controlling Shareholders failed to submit a report, as set forth in Section 3, and the Ministers see that a material concern exists that the provision of the essential service or the grounds for determining that it is an essential service, as set forth in Section 4d(a)(1) of the Law may be adversely affected, the Ministers may act in accordance with Section 10 of the Communications Order, including regarding the provision of instructions and cancellation of the Permit.

7.2.

The provisions of the Communications Order shall apply with respect to the cancellation or expiration of the Permit.

7.3.

The cancellation of the Permit shall also be deemed to be the cancellation of the Control Permit for Individuals.

7.4.

As of the date of cancellation of the Permit, as provided in the Ministers' notice to the Permit Holder and Bezeq, all the shareholdings purchased under the Permit shall be rendered exceptional shareholdings, as defined in the Communications Order.

Conditional Permit for Holding

Authorization to hold means of control is hereby granted, as required in the Communications Order, to an interested party in 012 Smile and Internet Gold which does not comprise part of the Permit Holder or the holder of the Control Permit for Individuals to, subject to the following conditions:

(a)

The percentage of the aforementioned interested party's shareholdings does not exceed 15% of any type of means of control in 012 Smile and Internet Gold;

(b)

012 Smile and Internet Gold reported the shareholdings of such interested party, as required in Section 3 above;

(c)

The percentage of shareholdings of the holder of the Control Permit for Individuals in Internet Gold, Internet Gold's shareholdings in 012 Smile and Eurocom Communications' shareholdings in Internet Gold exceed 50% of the means of control in each of the companies at all times;

(d)

The Articles of 012 Smile and Internet Gold provide that the appointment, dismissal or termination of office of directors shall be performed by the General Meeting, by a resolution passed by an ordinary majority of those participating;

(e)

The reporting rules applying to 012 Smile and Internet Gold do not establish any obligation to report to the stock exchange or securities authority on which 012 Smile and Internet Gold's shares are traded at the time regarding the fact that a shareholder has become an interested party in these companies, or the aforementioned reporting rules enable holders of the means of control to refrain from reporting to the stock exchange or securities authority therein that the shareholders have become interested parties.

Validity

This Permit shall become effective as of the date of publication of the Communications Order (Telecommunication and Broadcasts) (Determination of Essential Service Provided by Bezeq The Israeli Telecommunications Corporation Ltd.) (Amendment), 5770-2010.

April 13, 2010	_______(-)_________	_______(-)________
29 Nissan 5770	Benjamin Netanyahu Prime Minister	Moshe Kachlon Minister of Communications

EX-4.8 6 exhibit_4-8.htm EXHIBIT 4.8 exhibit_4-8.htm

Exhibit 4.8

Credit Agreement

Entered into in Tel Aviv as of the 11th day of February 2010

By and between:	The Lenders set forth in Appendix B hereto

	Of the first part;

And:	Bank Hapoalim Ltd.
	In its capacity as Facility Agent (as defined below)
	And in its capacity as Security Trustee (as defined below)

	Of the second part;


And:	B Communications (SP2) Ltd.
	Private Company No. 51-440539-8
	2 Dov Friedman Street, Ramat Gan
	(Hereinafter, the "Company")

	Of the third part;

WHEREAS, the Company sought to enter into a transaction with the Lenders for the provision of credit by the Lenders for the purpose of partially financing the Company's purchase of the Purchased Shares of Bezeq pursuant to the Purchase Agreement, and expenses and additional amounts to be borne by the Company in connection with the Purchase Transaction and in connection with the provision of the Credit and the management thereof, as these terms are defined below; and

WHEREAS, the Company advised the Lenders that it shall use its own resources for the remainder of the financing required by the Company for the Purchase Transaction, as such term is defined below, in the amount as set forth in Section 8.7.1 below; and

WHEREAS, the Lenders have agreed to provide the Company the Credit, as such term is defined blow, subject to the terms and conditions of this Agreement as set forth below; and

WHEREAS, the Lenders wish to set forth herein the relationship between the Company and the Lenders (which shall also apply, subject to the provisions of this Agreement, with respect to any future transferee) with respect to the Credit and Collaterals, as such terms are defined below; and

WHEREAS, the terms of this Agreement are subject to the Communications Law, Communications Order, the Lien Permit and the Control Permit, the General License and the Additional Licenses, as such terms are defined below;

NOW, THEREFORE, the parties stipulate and agree as follows:

Section		Page
1	General	3
2	Definitions	4
3	Representations of Company	20
4	Purposes of Credit	24
5	Types of Credit	24
6	Each Lender's Portion of Credit	24
7	Terms for the Provision of Credit	25
8	Conditions Precedent for Provision of Credit	26
9	Terms of Loans Based on Credit Type	34
10	Arrears Interest	36
12	Linkage Differentials for Amounts in Arrears	37
11	Interest on Deposits	37
13	Amortization Schedule	38
14	Change of Dates	38
15	Additional Payments	38

16	Early Repayment and Release of Proceeds from Bezeq	39
17	Voluntary Early Repayment	46
18	Company's Account	48
19	Taxation	50

20	Allocation of Payments	50
21	Company's Undertakings	52
22	Collaterals	60
23	Type of Collaterals	62
24	Immediate Repayment	63
25	Lenders' Rights	69
26	Position Holders	71
27	Provisions Applying to a Position Holder	75
28	Limitation of Liability	78
29	Company's Representations and Warranties Towards Position Holders	78
30	Lenders' Liability; a Lender in Breach	78
31	Relationship Between Lenders	78
32	Credit Repayment	79
33	Lenders' Rights to Demand Immediate Repayment of the Credit	80
34	Right of Transfer; Disclosure of Information	81
35	Facility Agent's Books as Evidence	84
36	Use of Information	84
37	Disclosure of Information Between Lenders and Facility Agent, and to Authorities	85
38	Company's Obligation to Provide Notice	85
39	Indemnification for Court Ruling	85
40	Tax Charges and Mandatory Payments	86
41	Provision of Balance Sheets and Periodic Financial Statements	86
42	Waiver	86
43	Modification	87
44	Validity of Agreement	87
45	Expenses and Fees	87
46	Company's Responsibility	88
47	Notices and Warnings	89
48	Substantive Law and Place of Jurisdiction	90

General

1.1.

The preamble and appendices hereto constitute an integral part hereof and [are to be regarded] as one of the provisions hereof.

1.2.

In the case of a contradiction between the provisions of this Agreement and the provisions of any of the other Credit Documents (as this term is defined below), the provisions of this Agreement shall prevail. In any other instance, the provisions of this Agreement and the provisions of the remaining Credit Documents shall be deemed to supplement one another.

1.3.

The terms of this Agreement are subject to the provisions of the Communications Law, Communications Order, the Lien Permit and Control Permit (when issued) and the provisions of the General License and the Additional Licenses. In the case of a contradiction between the provisions of this Agreement and the provisions of the Communications Law, Communications Order, permits or licenses, the provisions of the Law shall prevail.

The parties shall take steps to obtain the permits, as set forth in Section 8 below, and, if necessary, shall act in good faith to amend this Agreement, as set forth in the aforementioned Section.

1.4.

The headings of this Agreement are for reference only and are not to be considered in interpreting this Agreement.

1.5.

No modification and/or amendment and/or supplement hereto, including the appendices hereto, shall be valid, and shall be deemed to have not been made, unless made in writing and signed by the parties hereto.

1.6.

Notices which the Company is required under this Agreement to provide to any of the Lenders and/or Position Holders shall be made exclusively to the Facility Agent (as these terms are defined below), and shall be in writing. Notices, approvals or consents which any of the Lenders and/or Position Holders are required to furnish to the Company shall be provided to the Company exclusively through the Facility Agent, and any notice, approval or consent communicated or provided to the Company by the Facility Agent shall be deemed to have been communicated or provided by all the Lenders and/or Position Holders, as applicable.

1.7.

If any of the Lenders and/or Position Holders (as these terms are defined below) are entitled to perform a particular action, pursuant to the provisions of this Agreement, they may, but shall not be obligated to do so.

1.8.

Whenever the words "Lenders through the Facility Agent" appear, reference is made to decision-making by the Lenders, pursuant to the provisions of this Agreement, and such decision shall be transferred to the Facility Agent, who shall submit it to the Company. In this respect, the provisions of Section 26.1.3 below shall apply.

1.9.

In this Agreement, the singular includes the plural and the male gender includes the female gender, and vice versa.

1.10.

This Agreement shall also be to the benefit of any Permitted Transferee (as this term is defined below) on behalf of any of the Lenders, and any reference herein to a Lender shall also refer to any Permitted Transferee in lieu thereof.

2.	Definitions

In this Agreement, the following terms shall have the meanings as set forth below:

	The Option -		Shall mean the two types of phantom options the Company granted, as set forth below, in connection with the increase in value of shares of Bezeq, which together are equal to 2% of the issued share capital of Bezeq as of the date of execution of this Agreement: 1. An option the Company granted Bank Hapoalim for full underwriting, as set forth in Section 6.1 below; and 2. an option the Company granted to the Lenders or a portion thereof, based on a distribution to be provided to the Company by the Facility Agent. The terms of the aforementioned phantom options shall be as set forth in the Option Agreements.
	Internet Gold -		Shall mean Internet Gold – Golden Lines Ltd., Private Company No. 52-004426-4, a company controlled by Eurocom Communications.
	Event of Default-		Shall mean one of the events set forth in Section 24 below.
	Credit A -		Shall mean loans in the Credit Currency to be provided to the Company by the Lenders, through the Facility Agent, for the purpose of partially financing the purchase of the Purchased Shares, and expenses and additional amounts to be borne by the Company in connection with the Purchase Transaction and in connection with the provision of the Credit and management thereof, in an aggregate amount that will not exceed seven hundred million (700,000,000) New Israeli Shekels (subject to the last section of the definition of "Credit or Loans" below).

	Credit B -		Shall mean loans in the Credit Currency to be provided by the Lenders to the Company, through the Facility Agent, for the purpose of partially financing the purchase of the Purchased Shares, in an aggregate amount that is not to exceed two billion (2,000,000,000) New Israeli Shekels (subject to the last section of the definition of "Credit or Loans" below).
	Credit C -		Shall mean loans in the Credit Currency to be provided by the Lenders to the Company, through the Facility Agent, for the purpose of partially financing the purchase of the Purchased Shares, in an aggregate amount that is not to exceed seven hundred million (700,000,000) New Israeli Shekels (subject to the last section of the definition of "Credit or Loans" below).
	Credit D -		Shall mean loans in the Credit Currency to be provided by the Lenders to the Company, through the Facility Agent, for the purpose of partially financing the purchase of the Purchased Shares, in an aggregate amount that is not to exceed one billion and two hundred million (1,200,000,000) New Israel Shekels (subject to the last section of the definition of "Credit or Loans" below).
	"Credit" or "Loans"		Shall mean Credit A, Credit B, Credit C and Credit D in an aggregate amount of four billion and six hundred million New Israeli Shekels (NIS 4,600,000,000). Notwithstanding the foregoing and subject to the restrictions set forth in Section 8.4 below, if :

			(a)	During the period commencing from the execution of this Agreement and ending on the Closing Date, Bezeq distributes a Dividend; or
			(b)	If Bezeq declares a Dividend with respect to which the determining date precedes the Closing Date but with respect to which the date of distribution occurs after the Closing Date, and the Sellers have not assigned rights to receive [such dividend] to the Purchaser.

and the Consideration Amount under the Purchase Agreement is reduced, in accordance with the foregoing –

then, the aggregate amount of Credits shall also be reduced as follows:

			The reduction against Credit A shall be performed to the full amount thereof; and to the extent any amount remains thereafter, the Company shall make a deposit in the Company's Account, as set forth in Section 8.5 of this Agreement, in the amount of NIS 150 million. In the event that there are remaining amounts for reduction after reducing Credit A amount (and after depositing the full deposit amount), Credit C shall be reduced against [such remaining amounts]. An example for calculating the aforementioned method of reduction is attached hereto as Appendix E.
	Stock Exchange -		Shall mean the Tel Aviv Stock Exchange Ltd.
	Bezeq -		Bezeq The Israel Telecommunications Corporation Ltd., Company No. 52-003193-1, a public company whose shares are listed for trade on the Stock Exchange.
	Collaterals -		Shall mean the liens and other collaterals set forth in Section 22 below, to be provided in favor of the Lenders through the Security Trustee, to secure repayment of the Credit Amounts.
	Bank Hapoalim -		Shall mean Bank Hapoalim Ltd. including all its current and future branches and offices in Israel, and any entity in lieu or on behalf of the Bank pursuant to this Agreement, and any Permitted Transferee of the bank (in accordance with and subject to the provisions of Section 34 below).
	Position Holder-		Shall mean the Facility Agent and/or Security Trustee.
	Credit Request –		Shall mean an irrevocable request to provide a Loan to the Company out of Credit A or Credit B or Credit C or Credit D, as applicable, in the form attached hereto as Appendix A. Any such Credit Request shall constitute an integral part of this Agreement and shall supplement it.
	Financial Statements -		Shall mean financial statements (and, with respect to Bezeq – on a consolidated basis) including, inter alia, a balance sheet, profit and loss statement, cash flow statement and any other report required by the competent authorities, together with the notes to such statements. Annual financial statements shall be audited by an accredited external auditor and quarterly financial statements shall be reviewed by an accredited external auditor. The Financial Statements shall be prepared in accordance with generally accepted accounting principles that apply to the relevant reporting company.

	Dividend -		As defined in the Companies Law, including Management Fees, bonus shares and/or other shares issued and/or distributed, to the extent issued or distributed for, in connection with and/or in lieu of the shares of any company.
	Permitted Dilution -		Dilution of the Company's holdings in Bezeq by way of an issuance of securities, provided that: (1) the Company's holdings in Bezeq comply with the provisions of Section 24.17 below, and (2) the exercise price per share with respect to convertible securities of Bezeq shall not be less than NIS 8.
	Fully Diluted –		Reduction in the percentage of shareholdings by way of a securities issuance, without taking into account convertible options or securities with respect to which the realization or conversion date is later than the last Credit repayment date according to the Amortization Schedule.
	Law ["din"] -		As defined in the Interpretation Law, 5741-1981, including, for the avoidance of doubt, any relevant permit granted by a competent authority and any order or instruction issued by such competent authority.
	Management Fees-		Shall mean management fees, wages, consulting fees, participation fees, fees, monetary amounts and payments of any type whatsoever paid by any company out of its profits and/or any other source to its shareholder by virtue of its status as such, regardless of their title. For the avoidance of doubt, wages, remuneration payments to directors and payments for transactions pertaining to the provisions of services or the purchase of products/assets shall not be considered management fees.
	Permits –		The Control Permit and Lien Permit.
	Control Permit -		A permit to be issued, inter alia, to the company by the Prime Minister and Minister of Communications, to hold Control of Bezeq.
	Lien Permit -		A permit to be issued to the Lenders, the Security Trustee and the Trust Company by the Prime Minister and Minister of Communications, to encumber the means of control in Bezeq in favor of the Lenders through the Security Trustee, and to register the means of control in Bezeq in the name of the Trust Company, and any other permit required (to the extent required) for the foregoing purposes.

	Shareholder Loans -		Shall mean an amount provided by any shareholder to a company in which it holds shares, in any manner or form, and which the shareholder has the right to receive in return from such company (whether the principal amount or together with linkage and/or interest differentials) presently or in the future – not as a residual right after dissolution – including a loan provided to any company by its shareholder and/or a capital note and/or promissory note made by any Company in favor of its shareholder and/or which it provided by it to its shareholder.
	012 Smile Loan -		A Cash loan to be provided by 012 Smile to the Parent Company, no later than the Closing Date, for the purpose of financing the purchase of the Purchased Shares.

	Parent Company Loans -		(a)	Cash loans which the Parent Company is to provide the Company, no later than the Closing Date, for the purpose of financing the purchase of the Purchased Shares; and
			(b)	Any additional loan to be provided by the Parent Company to the Company;

			and to which the terms set forth in Section 21.10 below shall apply.
	Inter-Creditor Agreement		Shall mean the agreement that was executed/to be executed among the Lenders and Position Holders in connection with the Credit.
	Upper Trust Agreement -		The trust agreement to be executed between the Parent Company, Trust Company and a Position Holder, in connection with shares of the Company held by the Parent Company, in the form attached as an appendix to the Debenture in Appendix 22.1.1 hereto.
	Lower Trust Agreement -		The trust agreement to be executed between the Company, Trust Company and a Position Holder in connection with the Purchased Shares, in the form attached as appendix to the Debenture in Appendix 22.1.3 hereto.

	Management Agreement -		Shall mean an agreement to be executed between the Company and Bezeq, to the extent executed, for the provision of management and consulting services to Bezeq.
	Purchase Agreement -		Shall mean the agreement dated October 25, 2009, between the Sellers and 012 Smile, and the clarification to such agreement (entitled "Addendum to Share Purchase Agreement") dated February 8, 2010.
	Option Agreements -		The option agreements to be executed by the Company on the Closing Date, as set forth in Section 8.3.2(t) below, in the form attached hereto as Appendix 8.3.2(20).
	Liability (of the Company) -		Debt and/or undertaking and/or obligation of the Company, including with respect to and/or in connection with the Credit that is the subject of this Agreement, including the obligation to perform or refrain from performing an action.
	Parent Company-		Shall mean B Communications (SP1) Ltd., Private Company No. 51-440541-4, which holds 100% of the Company's issued and paid-up share capital (on a Fully Diluted basis) and the rights attached thereto, and which shall provide collaterals, as set forth in Section 22 below, in favor of the Lenders through the Security Trustee.
	Trust Company -		Shall mean Poalim (Romema) Trustees Ltd., Private Company No. 52-003352-3, a company wholly owned by Poalim Trust Services Ltd.
	Financial Debt -		Shall mean, with respect to Bezeq and any date referred to respectively – Bezeq's total debts and liabilities – (1) to banks and other financial institutions (for the avoidance of doubt, with the exception of debts to suppliers and service providers, customers, workers, compensation liabilities and liabilities to the tax authorities; and (2) deriving from bonds of all types, including non-convertible bonds and convertible bonds; and (3) with respect to loans which Bezeq received from any third party, with the exception of debts to suppliers and service providers, customers, employees, compensation liabilities and tax authority liabilities; all as presented in the annual or quarterly consolidated Financial Statements of Bezeq, for the period ending on the referenced date.

	Net Financial Debt -		Shall mean, with respect to Bezeq and any date referred to respectively – the Financial Debt less (1) Cash; and (2) the debt attributed in Bezeq's Financial Statements to YES, all as presented in the annual or quarterly consolidated Financial Statements of Bezeq, for the period ending on the referenced date.
	Month -		According to the Gregorian calendar.
	Companies Law -		Shall mean the Companies Law, 5759-1999, as amended from time to time.
	Communications Law-		Shall mean the Communications Law (Telecommunications and Broadcasting), 5742-1982, as amended from time to time.
	Distribution -		Shall mean as defined in the Companies Law.
	Company's Account -		Shall mean account no. ___________ at the Central Branch (600) of Bank Hapoalim, which is managed in the Company's name exclusively for the purpose of the provision of Credit to the Company pursuant to the terms of this Agreement, and for deposit of the Proceeds from Bezeq pursuant to the terms of this Agreement.
	Trust Company Account -		Shall mean account no. __________ at the Central Branch (600) of Bank Hapoalim, in the Trust Company's name, and the Trust Company shall serve as trustee for the Company, of the first part, and for the Lenders through the Security Trustee, of the second part, pursuant to the Lower Trust Agreement.
	Account for Credit -		Shall mean any of the accounts termed "Account for Credit " specified in Appendix B hereto.
	"Business Day" or "Banking Business Day in Israel"-		Shall mean any day, except for Saturdays, rest days, two days of Rosh Hashana, Yom Kippur eve and Yom Kippur, the first day of Succoth and Shemini Atzeret, Purim, the first and seventh days of Passover, Independence Day, Shavuoth and Tisha B'Av, and with the exception of any other day determined by the Supervisor of Banks or by Law to be a day that is a non-banking Business Day in Israel;
	Eurocom Communications -		Eurocom-Communications Ltd., Company No. 51-082316-4.

	Total Debt to EBITDA Ratio -		With respect to each relevant date referred to - the number obtained after dividing: (1) Bezeq's Net Financial Debt plus: the number obtained by dividing (a) the Credit Amounts (as the outstanding balance thereof shall be at the relevant examination date) less the Cash in the Company's possession; by (b) the percentage which the Purchased Shares represent out of the registered and issued share capital of Bezeq as of the date of calculation; by: (2) The EBITDA of Bezeq less the EBITDA components pertaining to YES. For the avoidance of doubt, such a deduction shall apply for as long as YES is not consolidated under Bezeq's Financial Statements; [The foregoing is] as of the Closing Date and thereafter. For the avoidance of doubt, as of the Closing Date and until the end of 4 consecutive quarters, Bezeq's EBITDA shall include results preceding the Closing Date. All the foregoing terms not explicitly defined shall be defined in accordance with the generally accepted accounting principles applying to Bezeq and/or the Company under Law. An example of the Total Debt to EBITDA Ratio is attached hereto as Appendix C.
	Net Financial Debt to EBITDA Ratio-		With respect to each date to referred to respectively – it shall mean the number received from dividing:

			(1)	Bezeq's Net Financial Debt; by
			(2)	Bezeq's EBITDA less the EBITDA components pertaining to YES. For the avoidance of doubt, such a deduction shall apply for as long as YES is not consolidated under Bezeq's Financial Statements;

All of the foregoing [shall be applied], as of the date of the performance and consummation of the Purchase Transaction and thereafter. For the avoidance of doubt, from the Closing Date and until the end of 4 consecutive quarters, Bezeq's EBITDA shall include results preceding the purchase date.

All the above terms not explicitly defined shall be defined in accordance with the generally accepted accounting principles applicable to Bezeq under Law.

An example of the calculation of the Net Financial Debt to EBITDA Ratio is attached hereto as Appendix D.

	Debt Coverage Ratio -		Shall mean, with respect to each date referred to respectively – the ratio of the Cash Dividends actually distributed by Bezeq with respect to the Purchased Shares during the four consecutive quarters preceding such date (including, for the avoidance of doubt, Dividend amounts actually distributed with respect to the Purchased Shares prior to the purchase) to the total principal and Interest amounts with respect to the Credit payable by the Company in the 12 (twelve) subsequent Months following the date of calculation. For the avoidance of doubt, the following shall not be taken into account in such calculation: repayment of Credit A; repayment of the principal of loans that should be repaid in a single payment at the end of their term and amounts which the Company announced it intends to repay in an early repayment. All the above terms not explicitly defined shall be defined in accordance with the generally accepted accounting principles applying to the Company by Law.
	Account Balance -		Shall mean the total credits to the account up to the relevant date less the total charges to the account up to such date.
	Credit Balance -		Shall mean a positive Account Balance.
	Released Monies		The aggregate amount of money which the Company may withdraw from the Company's Account pursuant to the provisions of Sections 16.1 and 16.3 below.
	Board at the Branch -		Shall mean a board that is hung at the branch and an information sheet placed on the counter at which relevant transactions are performed and at a branch which also does not have over-the-counter services voice answering.
	Index or Consumer Price Index -		Shall mean the Consumer Price Index (also known as the cost of living index) including vegetables and fruit, published by the Central Bureau of Statistics (hereinafter, the "Bureau") including such index even if published by any other official government institution, and including any official index in its place, whether or not it is based upon the same data. In the event that there is another index in lieu of the existing index, the relationship thereof shall be determined by the Bureau, and where such relationship is not determined by the Bureau for six Months from the publication of the other index, the Trust Company or Facility Agent shall make such determination, upon consulting with economic experts.

	New Index -		Shall mean the last index known on the date of actual payment.
	Base Index -		Shall mean the last index known on the Date on which an Indexed Linked credit is provided, pursuant to this Agreement.
	Sellers –		Shall mean AP.SB.AR Holdings Ltd.
	Closing Date -		Shall mean the date of the performance and consummation of the Purchase Transaction, which shall occur on April 24, 2010, or at an earlier date to be agreed upon by 012 Smile and/or the Company and the Sellers as part of the Purchase Agreement. The Company may, from time to time, provide the Lenders written notice at least 14 days in advance that the closing date has been postponed to a date that is later than April 24, 2010, provided that the closing date of this Agreement and the Purchase Agreement occurs no later than June 30, 2010.
	Date of Credit -		Shall mean the Closing Date on which the Facility Agent shall credit the Company's Account for the Credit principal, in accordance with and subject to the fulfillment of all the conditions of this Agreement.
	Actual Repayment Date -		Shall mean the business day on which any amount out of the Credit Amounts is actually repaid.
	Agreed Repayment Date -		Shall mean the date on which any of the Credit Amounts are to be repaid pursuant to this Agreement, including on immediate repayment, as set forth in Section 24 below.
	Cash -		Shall mean, with respect to the Company and/or Bezeq, with respect to any date referred to respectively – the total of (1) cash and (2) deposits in banks and financial institutions lawfully authorized to engage in financial activity; and (3) Bezeq's short-term investments which are classified as such according to the generally accepted accounting principles applicable to Bezeq under Law; and (4) securities portfolio, comprised of a Treasury Bill (Makam) and Israeli Government bonds only, all of which constitute part of the current assets of the Company and/or Bezeq, as applicable, all as set forth in the quarterly and annual consolidated Financial Statements of the Company and/or Bezeq, as applicable, for the period ending on the same referenced date.

	Credit Currency -		New Israeli Shekels.
	Foreign Currency-		Shall mean any freely convertible foreign currency.
	Realization of the Collaterals-		Shall mean the exercise, from time to time and in the manner prescribed by Law, of any collateral provided to the Security Trustee for the Lenders to secure the Credit, pursuant to the Credit Documents, by the Lenders and/or by the Lenders through a Position Holder and/or receiver; exercise of rights of set-off in the Company's Account and any other action which amounts to the realization of assets and rights for the purpose of repaying the Credit Amounts.
	Antitrust Commissioner –]		Shall mean the General Director of the Antitrust Authority acting by virtue of the Restrictive Trade Practices Law, 5748-1988.
	Lenders -		Shall mean the entities set forth in Appendix B, as updated from time to time by the Facility Agent, and anyone acting on their behalf, and any transferee on their behalf (in accordance with and subject to the provisions of Section 34 below) in their capacity as Lenders under this Agreement.
	Credit Facility Agent or Facility Agent –		As defined in Section 26.1 below.
	Additional Shares-		Shares to be purchased by the Company out of the issued share capital of Bezeq, in addition to the Purchased Shares, all as set forth in Section 3.3.4 below.
	Purchased Shares-		Shall mean 814,211,545 ordinary shares par value NIS 1 per share, representing, as of February 9, 2010, approximately 30.6% of the issued share capital of Bezeq and all the rights attached to such shares (not on a Fully Diluted basis), and approximately 29.6% of the issued share capital of Bezeq and all the rights attached to such shares (on a Fully Diluted basis), and all the shares, securities and other rights with respect to and in connection with the Purchased Shares, all as set forth in the Purchase Agreement under the term "Purchase Shares."

	Credit Documents-		Shall mean each of the following: (a) this Agreement (including the appendices hereto); (b) all the Credit Requests; (c) all the documents and forms attesting to the creation of each of the Collaterals enumerated in Section 22 below; (d) the Company's Account Opening Documents, and the appendices and addendums thereto; (e) all the decisions, approvals, documents and agreements in connection with the provision of the Credit and management thereof (including in connection with the opening of the Company's Account) that were executed by the Company or furnished by the Company or anyone on its behalf, all in the form, on the terms and in the manner to be agreed upon by the parties; (f) the fees letter dated February 11, 2010 (hereinafter, the "Fees Letter"); (g) the Option Agreements; (h) any other agreement or document which the Lenders through the Facility Agent determined in writing, – at the Company's consent – to comprise part of the Credit Documents;
	Company's Account Opening Documents-		As defined in the application for opening an account and general terms for managing an account that was signed by the Company in connection with the Company's Account.
	Credit A Margin -		Shall mean 2% per year.
	Credit B Margin -		Shall mean 2.5% per year.
	Credit C Margin -		Shall mean 2.5% per year.
	Credit D Margin -		Shall mean 2.5% per year.
	Security Trustee -		As defined in Section 26.2 below.
	Permitted Transferee-		Any of the entities set forth in Subsections (2), (3) or (4) of the First Schedule to the Securities Law, 5728-1968, which acts for its own account. Notwithstanding the foregoing, it is agreed that by the last date Eurocom Communications' Guarantees, as these are defined in Sections 16.2.2.5 below, are or may be in effect, such a transfer shall be permitted to a bank in Israel or abroad, and any other transfer shall occur subject to the Company's prior written consent.

	Free and Clear -		Shall mean, with respect to the Purchased Shares – as described in Section 3.2 of the Purchase Agreement, and free and clear of all pledges, encumbrances (including those described in Sections 2.3(a)(iv) of the Purchase Agreement), attachments, liens, rights of first refusal, tag-along rights, debt, claim, lock-up arrangements (except pursuant to the Communications Law, Communications Order, the Permits and the Licenses) or any third party right.
	Consideration Amount -		Shall mean an aggregate amount of NIS 6,513,692,360 (Six Billion Five Hundred Thirteen Million Six Hundred Ninety Two Thousand and Three Hundred Sixty New Israeli Shekels) reflecting a price of NIS 8 per share, to be paid to the Sellers by the Company in cash, for the purchase of the Purchased Shares, and such amount may be reduced in accordance with the method of calculation, as set forth in Section 2.2(b) of the Purchase Agreement.
	Credit Amounts -		Shall mean the principal amounts of the Credit, interest, linkage differentials and/or exchange rate differentials, to the extent there are any, the Additional Payment (as defined in Section 15.1 below), Arrears Interest, reasonable expenses associated with the collection proceedings (including - subject to the instructions of the Supervisor of the Banks in this respect - the fees of attorneys appointed by the Position Holders and who will act on their behalf and on behalf of all the Lenders) which the Company will owe in connection with the Credit or any portion thereof and other fees, expenses and payments of any type which the Company owes to the Lenders in connection with the Credit or any portion thereof, as was and/or is to be agreed between the Company and the Lenders and/or the Position Holders, as well as the Company's liabili ties towards the Position Holders, including with respect to payment of expenses and fees.
	Facility Agent's Books -		Including the Facility Agent's Entries and any book and/or ledger and/or bill presentment and/or ledger card and/or sheet of the Facility Agent and/or issued by the Facility Agent, the Facility Agent's entry reel, copies of the foregoing approved by the Facility Agent or submitted thereby as part of its books, and anything to be derived from the foregoing through data storage or retrieval means, and electronic and other technological imaging, performed during the Facility Agent's ordinary course of business.

	Purchase Transaction -		Shall mean the purchase of the Purchased Shares by the Company from the Sellers pursuant to the Purchase Agreement, against the Consideration Amount.
	Material Activity-		Shall mean, with respect to Bezeq, any assets and/or any rights of Bezeq (and/or of any of the corporations included in its Financial Statements) whose relative contribution to Bezeq's activities exceeds 10%; the value of Bezeq's activity shall be calculated, exclusively for purposes of this definition, by multiplying Bezeq's EBITDA by 5.7.
	Prime -		Shall mean the interest defined by Bank Hapoalim as its prime interest rate and updated by it from time to time.
	Communications Order -		The Communications Order (Telecommunications and Broadcasting) (Determination of Essential Service Provided by "Bezeq" The Israeli Telecommunications Corporation Ltd.), 5757-1997.
	Special Majority -		Subject to other provisions of this Agreement, Lenders whose aggregate amount of the principal balance is 70 % (seventy percent) and upwards of the total principal balance.
	Interest -		Shall mean the rate of the Wholesale Interest on the Date of Credit, with respect to each type of Credit and the Loans that will be executed thereof (Credit A, Credit B, Credit C and Credit D or a portion thereof) plus the appropriate margin for such type of Credit (the margin of Credit A, margin for Credit B, margin for Credit C and margin for Credit D).
	Wholesale Interest -		Shall mean the interest prior to the addition of any margin, which is used by Bank Hapoalim for determining the interest for its customer for purpose of providing credits – in an amount type and period similar to the amount, type and period of the relevant credit, as of the Date of Credit. With respect to a portion of the Credit which is to be provided at a floating interest rate, the interest rate to be determined for such Credit based on the principles set forth above shall vary throughout the period of such Credit, exclusively in accordance with and up to the changes to the Prime interest rate (all without derogating from the provisions of this Agreement pertaining to events with respect to which the margin rate will be increased). As of the date of this Agreement, the Wholesale Interest rate w ith respect to each type of Credit and the Loans deriving from such credit are at the rates set forth in Appendix F hereto.

	Arrears Interest –		Shall mean the Interest plus an additional margin of 2.3% (Two percent and Three Decimal of a Percent) per year.
	Entries -		Shall mean any entry or copy thereof which preserves information regarding or with respect to activity in the Account, whether recorded or copied by way of printing, duplication, electronic imaging, photographing (including microfilm), and whether recorded or copied by means of any mechanical, electrical or electronic machine or any technology which preserves the information regarding or in connection with activity in the Account, and any output, computer material which is information and electronic messages containing the Account information or notices of the Facility Agent regarding the Account, which were created by computer entry means, as "output," "computer material" (which is information) and "computer" are defined in the Computers Law, 5755-1995, and a paper printout of the contents of a computer file, or any entry by any other means of entry or presentation of words or digits or other symbols which the Facility Agent ordinarily uses or is aided by in its entries.
	General License -		Shall mean the General License for the Provision of Domestic Fixed-Line Telecommunication Services which was granted to Bezeq, in accordance with the Communications Law.
	Licenses -		Shall mean the General License and Additional Licenses.
	Additional Licenses -		Shall mean the licenses granted by the Ministry of Communications to Bezeq and to companies in its control, except the General License.
	Change in Control -		Shall mean one of the following events: (1) If Mr. Shaul Elovitch and Mr. Yosef Elovitch (or thereafter, their family members) cease to hold directly or indirectly at least 51% of the issued and paid-up share capital (on a Fully Diluted basis) of Eurocom Communications and all the rights attached thereto; (2) if Eurocom Communications ceases to hold directly or indirectly at least 51% of the issued and paid-up share capital (on a Fully Diluted basis) of Internet Gold and all the rights attached thereto; (3) if Internet Gold ceases to hold directly and/or indirectly at least 51% of the issued and paid up share capital (on a Fully Diluted basis) of 012 Smile and all the rights attached thereto; (4) if 012 Smile ceases to hold directly 100% of the issued and paid up share capital (on a Fully Diluted basis) of the Parent Company and all th e rights attached thereto; (5) if the Parent Company ceases to hold directly 100% of the issued and paid up share capital (on a Fully Diluted basis) of the Company and all the rights attached thereto. Details of the share capital of the Company as of the date of execution of this Agreement are attached hereto as Appendix G.

	Restructuring or Restructure-		Shall mean, with respect to the Company, a merger as defined in the Companies Law; any action resulting in the Company's purchase of assets and/or undertakings of others, and the sale of assets and/or undertakings by the Company, with the exception of the actions permitted hereunder. Shall mean, with respect to Bezeq, a merger, as defined in the Companies Law, in which Bezeq is the target company.
	Material Change to the nature of Activity -		Shall mean, with respect to Bezeq, any change with respect to Bezeq's areas of activity such that Bezeq ceases all or a substantial portion of its operations in any of the three following areas of activity: the domestic telecommunications sector, the cellular sector, the international calling and Internet services sector;
	Lender's Portion -		Shall mean the ratio of the Company's outstanding debt to such Lender with respect to the Credit Amounts, to the Company's total unpaid debt towards all the Lenders with respect to the Credit Amounts as set forth in Appendix B1 hereto, and as updated from time to time by the Facility Agent. It is clarified that as long as the Credit is not yet provided, the Lender's Portion shall be calculated according to the ratio of the amount of each Lender's undertaking to provide credit (as it may be from time to time up to the Date of Credit) to the Lenders' total undertakings to provide credit according to this Agreement, as set forth in the weighted summation line set forth in Appendix B2 hereto.
	Control -		Shall be as defined in the Securities Law, 5728-1968.

	Year -		According to the Gregorian calendar.
	Customary Sale Rate -		Shall mean the "transfer/assignment-sale" exchange rate that is published by Bank Hapoalim from time to time on the Board at the Branch with respect to the relevant currency;
	Proceeds –		Shall mean any amount to be distributed as a Dividend with respect to the Purchased Shares (in kind or as Cash) and/or any amount which the Company is entitled and/or shall be entitled to receive from Bezeq as a Dividend for the Purchased Shares and/or towards the Shareholder Loans.
	Credit Term -		Shall mean, with respect to each type of Credit, respectively, the period commencing on the Date of Credit and ending on the last Agreed Repayment Date of such Credit.
	012 Smile -		Shall mean 012 Smile Communication Ltd., Company No. 51-283274-2, which is controlled by Internet Gold.
	EBITDA -		Shall mean, with respect to Bezeq, the aggregate amount of the following amounts: the operating profit, depreciation expenses and deductions as reported in Bezeq's consolidated Financial Statements and which relate to the twelve consecutive Months (four quarters) preceding the relevant examination date. All of the terms above which have not been explicitly defined shall be defined in accordance with the generally accepted accounting principles applying to Bezeq by Law.
	YES -		D.B.S. Satellite Services (1998) Ltd. Company No. 51-270513-8.

Chapter A - Representations

3.	Representations of the Company

Without prejudicing and/or derogating from any declaration and/or representation and/or undertaking of the Company in this Agreement and/or in any other agreement and/or document provided and/or to be provided to the Lenders in connection with the Credit, the Company represents and warrants towards the Lenders and the Facility Agent, as of the date of execution of this Agreement, as follows:

3.1.

The Company is a private company, which was duly incorporated and registered pursuant to the laws of the State of Israel, and is existent and active.

3.2.

The Company's entire issued and paid up share capital is 15,000,001 ordinary shares par value NIS 1 per share, and is wholly owned by the Parent Company. In addition, the Company has not issued any securities which are convertible into shares and/or has not in any manner undertaken to issue any securities which are convertible into shares.

3.3.

3.3.1.

The Company does not operate and/or manage any business and/or activities of any type whatsoever, alone and/or together with another party, nor does it hold shares or capital in other companies or hold rights and/or interests in any business, all with the exception of the Purchased Shares.

3.3.2.

The Company has no debt whatsoever towards any other party, except with respect to the Parent Company Loans and with respect to the debts to the Lenders hereunder, and the Company is neither authorized nor permitted to receive any credit whatsoever from any party, with the exception of the Parent Company Loans and the Credit pursuant to this Agreement. In addition, the Company is not a guarantor for any third party, nor is it authorized or permitted to serve as a guarantor for any third party for the repayment of debts of another/others.

3.3.3.

The Company is neither authorized nor permitted to employ workers.

3.3.4.

The sole purpose of the Company is to purchase, hold and sell shares of Bezeq, to manage the aforementioned shareholdings and to perform all actions with respect thereto, and it is not authorized or permitted to act for any other purpose. It is clarified that the Company may, but is not obligated to, purchase the Additional Shares, provided that the Additional Shares are purchased exclusively with the Company's own resources (including the Released Monies) and/or by means of the Parent Company Loans, subject to the provisions of Section 21.10 below.

3.4.

The Company has the legal power, authority and rights to enter into this Agreement and the remaining Credit Documents and to fulfill all the provisions and terms thereof.

3.5.

With the exception of the Permits and remaining approvals required to complete the Purchase Transaction pursuant to Law and the Purchase Agreement, which are to be received prior to the actual provision of the Credit, as set forth in Section 8 below, the Company has received all the agreements, authorizations, Permits and approvals required pursuant to the incorporation documents and/or Law and/or the instructions of any authority, in connection with its entering into this Agreement and for the purpose of performing its undertakings hereunder – and no further agreements and/or permits and/or approvals are necessary.

3.6.

Subject to receiving the Permits and other approvals required for completing the Purchase Transaction pursuant to Law and the Purchase Agreement, and [pursuant to the] terms thereof, all of the Company's undertakings pursuant to, within the context of and/or in connection with this Agreement are legal, in full force and effect, binding upon and enforceable against them, in accordance with the terms hereof and the terms of the appendices hereto.

3.7.

The Company is not in breach of any contract, document or undertaking to which the Company is a party.

3.8.

The Company's execution of this Agreement and the performance of the undertakings set forth herein do not and will not incur a breach of any contract, document or undertaking to which the Company is a party and/or do not constitute and shall not constitute a breach and/or deviation from any provision of the Company's incorporation documents.

3.9.

There is no pending or anticipated claim, arbitration, litigation or administrative proceeding against the Company.

3.10.

To the best of the Company's knowledge, Bezeq is duly incorporated and validly existing and registered in accordance with the laws of the State of Israel. In addition, Bezeq's shares are listed for trade on the Stock Exchange and the Purchased Shares are listed for trade on the Stock Exchange.

3.11.

To the best of the Company's knowledge: (a) subject to receiving the Permits and remaining approvals required to complete the Purchase Transaction pursuant to law and the Purchase Agreement, which [approvals] are to be received prior to the actual provision of the Credit, as set forth in Section 8.3.2(j) below, the Purchase Agreement, including all provisions thereof, is lawful, valid and binding upon the parties thereto; (b) as of the Closing Date, the Company is entitled to purchase the Purchased Shares pursuant to the Purchase Agreement and is entitled to all the rights and shall be bound by all the obligations of the Purchaser under the Purchase Agreement; and (c) with the exception of payment of the Consideration Amount for the purchase of the Purchased Shares and receipt of the aforementioned Permits and approvals, all the terms set forth in the Purchase Agreement, which, according to the conditions of the Purchase Agreement, are meant to be satisfied as of the execution of this Agreement, have been fully satisfied.

3.12.

The Company has met all the terms of the Purchase Agreement; it has not breached the Purchase Agreement and, to the best of its knowledge, no breach of the Purchase Agreement has occurred.

3.13.

As of the Date of Credit and thereafter: (1) the Purchased Shares shall be wholly owned by the Company, Free and Clear (however, with respect to the period following the Date of Credit, the term "Free and Clear" in this respect shall not include actions not in the Company's control, such as attachments and claims, without derogating from the provisions of Sections 24.9 and 24.10 below), with the exception of the encumbrances the Company is to create pursuant to Section 22 below, and they shall be registered under the name of the Trust Company in such condition, and the Company shall bear any payment to apply, if any applies, to the transfer of the Purchased Shares to the Trust Company's name, as aforementioned; and (2) no restriction or condition applies under Law or agreement to the transfer, encumbrance or exercise of the Purchased Shares, and the Company may encumber the Purchased Shares (all except as subjec t to the restrictions prescribed by the Communications Law, the Communications Order, the Licenses, Control Permit, Lien Permit and remaining Permits and approvals granted and/or to be granted under law for the purpose of completing the Purchase Transaction, as set forth in Section 8.7 below), and the Company has not assigned any right or performed any other action which diminishes the value of the Purchased Shares.

3.14.

To the best of the Company's knowledge, the Sellers have no right to cancel the Company's acquisition of all or part of the Purchased Shares, and, to the best of the Company's knowledge, they have no grounds to assert rescission of the Purchase Transaction.

3.15.

The information provided to the Lenders by the Company in connection with the transaction contemplated hereunder, as part of the documents set forth in Appendix 3.15, is complete and accurate. For the avoidance of doubt, it is hereby clarified that to the extent the documents enumerated in Appendix 3.15 include business plans and future forecasts, these assessments are exclusively estimates, and there can be no certainty they will materialize.

3.16.

No events and/or circumstances have occurred that constitute – or which, over time or after notice or warning is provided, will constitute – an Event of Default.

3.17.

3.17.1.

The Purchase Agreement constitute the sole agreement existing in connection with the Purchase Transaction, and, apart from such agreement, no other verbal or written agreements exist between the Sellers and 012 Smile and/or anyone on its behalf and/or the Company, directly and/or indirectly, in connection with the Company's purchase of the Purchased Shares.

3.17.2.

With the exception of the Purchase Agreement, no agreement and/or document has been executed or is to be executed which contain provisions which affect or may affect the Parent Company's rights in connection with its shares of the Company and/or the rights in connection with the Purchased Shares and/or the Lenders' rights and/or the liabilities of the Company and/or the Parent Company towards the Lenders, including a management agreement, control agreement, voting agreement and/or shareholder agreement; and the Company hereby undertakes towards the Lenders to refrain from signing such an agreement or document without obtaining the Lenders' prior written consent, through the Facility Agent, to do so.

3.18.

The Company is aware that the Position Holders shall have towards it only the rights and obligations explicitly provided in this Agreement hereinabove and hereinbelow and pursuant to Law, and, other than as provided in this Agreement and in Law, the Position Holders or anyone on their behalf shall have no rights or obligations or responsibility towards the Company by virtue of and/or in connection with the Credit Documents. The Company does not, nor shall it have any claim and/or dispute and/or demand towards the Position Holders and their officers, employees, consultants or attorneys of the Position Holders regarding and/or in connection with this Agreement and/or the Credit Documents, except in the case of gross negligence on the part of the Position Holders. The Company hereby releases the Position Holders, and their officers, employees, consultants and attorneys from liability for any damage or loss it may s uffer as a result of an action or abstention from action by the foregoing parties, except in the case of gross negligence by such Position Holders. This Section shall be interpreted as granting rights to the Position Holders, and their officers, employees, consultants, and attorneys who shall be permitted to rely on the provisions hereof.

Chapter B – The Credit

4.	Purposes of Credit

The Lenders through the Facility Agent shall provide the Credit to the Company, on the Date of Credit, in the amounts and on the dates pursuant to and subject to the terms of this Agreement, for the purpose of partially financing the purchase of the Purchased Shares under the Purchase Agreement and the fees and expenses associated with the Purchase Transaction, and the Company undertakes to use [the Credit] exclusively for such purpose.

5.	Types of Credit

5.1.

At the request of the Company, the Lenders agree to provide the Credit to the Company, to the Company's Account, in accordance with the terms set forth below.

5.2.

Each of the Loans out of the Credit shall be provided to the Company by the Lenders, through the Facility Agent, on the Date of Credit, and the time period and terms thereof shall be as set forth herein.

6.	Each Lender's Portion of Credit

6.1.

The entire Credit amount shall be provided by the Lenders, through the Facility Agent. With respect to the relationship of the Lenders amongst themselves, each Lender shall provide an amount equal to its relative portion of the various types of Credit, as set forth in Appendix B2 hereto.

Full underwriting – notwithstanding the distribution of the amounts among the Lenders in Appendix B2, Bank Hapoalim shall be responsible towards the Company to transfer the entire Credit amount to the Company on the Closing Date, and shall supplement on the Closing Date any difference [in amount] that is created (if it is created) for any reason whatsoever (including the failure by any of the other Lenders to obtain a permit) and, in such instance, the provisions of Sections 8.7.4 and 8.7.6 below shall apply exclusively with respect to Bank Hapoalim.

6.2.

The Lenders, trough the Facility Agent shall provide the Credit to the Company, subject to fulfillment of all the conditions precedent set forth in Section 8 below to the satisfaction of the Lenders.

6.3.

In the event the Lenders, through the Facility Agent, approve the provision of the Credit to the Company, the Facility Agent shall credit the Credit amount to the Company's Account and all the terms and provisions in the Credit Documents shall apply to the Credit.

6.4.

The Facility Agent's crediting of the Company's Account for the entire Credit amount specified in the Company's requests, as aforementioned, shall constitute conclusive and decisive evidence of the Company's acceptance of Credit on the terms set forth in the Credit Documents. As of the Date of Credit, all the terms and provisions of this Agreement shall apply to the Credit, including the calculation of Interest on and with respect to the Credit.

7.	Terms for Provision of Credit

7.1.

Subject to receiving the Lender's Notice confirming that the conditions precedent set forth in Section 8.2.1(b) below and the conditions set forth in Section 8.1 below have been satisfied, in order to motivate the Lenders to provide the Company the Credit, the Company shall provide the Facility Agent with the appropriate Credit Requests with respect to each type of Credit, signed by it, at least 5 business days prior to the Date of Credit.

Subject to the satisfaction of the conditions precedent for providing Credit, as set forth in Section 8 below (including consummation of the Purchase Transaction as of the Closing Date), the Credit Requests shall be irrevocable.

7.2.

Credit of the Company's Account by the Facility Agent, as aforementioned, shall constitute sufficient proof of the fact that the Company received the Credit in accordance with the terms contained in the Credit Requests and this Agreement.

7.3.

The Facility Agent shall furnish the Lenders with a copy of the Credit Requests it receives, as soon as possible after receiving them, and shall note the amount of each Lender's Portion of the requested Credit in accordance with Credit type and in accordance with the provisions of Section 6 above.

7.4.

Each Lender shall, in accordance with the Facility Agent's instructions, transfer an amount as instructed by the Facility Agent to each Lender, which is equal to such Lender's Portion of the requested Credit to the account so instructed by the Facility Agent by 12:00 p.m. on the Date of Credit (with a copy of proof thereof to the Facility Agent), in accordance with and subject to the provisions of Section 6 above, as of the Date of Credit. All such Credit shall be provided in fulfillment of all the conditions precedent set forth in this Section 7 and Section 8 below, and subject to the Company's performance of its undertakings hereunder, all to the satisfaction of each of the Lenders. Nothing in the provisions of this Section affects the provisions of Section 30 below.

7.5.

In the event all the Lenders provide the Company with all the amounts set forth in Subsection 7.4 above, in accordance with the aforementioned instructions of the Facility Agent, [equivalent to] the Credit amount that is the subject of the Credit Requests, the Facility Agent shall credit the Company's Account for the Credit amount, and all the terms and provisions contained in the appropriate Credit Requests and this Agreement shall apply to the Credit.

7.6.

The date of provision of Credit to the Company's Account shall, for all intents and purposes, be deemed to be the date the Company receives the Credit, including with respect to the calculation of the Interest on the Credit.

7.7.

Nothing in this Section derogates from the provisions of Section 6.1 above, and the provisions of Sections 7.3-7.6 above are intended to set forth the Lenders' relationship amongst themselves.

8.	Conditions Precedent for Provision of Credit

8.1.

The Lenders' provision of the Credit and receipt thereof by the Company is conditional upon the satisfaction of the conditions precedent enumerated in Section 8.2 below, by each of the Company and the Lenders (as applicable) up to 4 Business Days prior to the Closing Date, and upon the satisfaction of all the other conditions precedent set forth in Section 8 below, on the dates set forth alongside them.

8.2.

8.2.1.

(a)

Receipt of the Control Permit, inter alia, by the Company (or agreeing upon the form of the Permit with the relevant authorities and such [authorities'] confirmation that the Control Permit shall be signed and furnished on the Closing Date) and fulfillment of the remaining conditions precedent under the Purchase Transaction (to the extent they are fulfilled).

(b)

The Lenders' receipt of the Lien Permit in the form to be approved by the Lenders (through the Facility Agent) in their reasonable discretion, for the Liens to be created in favor of the Lenders pursuant to this Agreement (or agreeing on the form of the Permit with the relevant authorities and their confirmation that the Lien Permit shall be signed and furnished on the Closing Date).

8.2.2.

Without derogating from the provisions of the last part of Section 6.1 above, Bank Hapoalim declares, exclusively with respect to itself, that based on its own research and investigations, to the best of its knowledge, no preclusion exists to receive the Lien Permit with respect to the entire Purchased Shares; that it does not hold (and, to the best of its knowledge, it is not considered by Law to be a holder of) directly and/or indirectly, any company which holds a license and/or franchise in the communications sector in Israel and/or which operates in such field in Israel in a manner which may affect its ability to obtain the Lien Permit, and that no other grounds exist with respect thereto which have been prescribed by Law as constituting grounds for not issuing the Lien Permit. Bank Hapoalim shall make its best efforts to maintain this status until such time as the Credit is provided (and thereaft er, the provisions of Section 25 below shall apply).

8.2.3.

The Lenders undertake that to the extent that the following is required for the purpose of obtaining the Permits required to complete the Purchase Transaction (including the Lien Permit): (a) the amendment of the provisions of this Agreement and any of the related arrangements (such as the amendment of the Articles of Association of the Company); or (b) any action by the Company, the Parent Company, Eurocom Communications or Bezeq, and such action requires the approval of the Lenders pursuant to the terms of this Agreement, the Lenders shall act in good faith to assist the Company in obtaining the Permits, all provided that the Lenders' rights under the Credit Documents are not harmed.

8.3.

In addition to the foregoing, the provision of Credit under this Agreement is subject to the fulfillment of the following cumulative conditions:

8.3.1.

No later than 7 business days prior to the Closing Date, the Company shall lawfully open the Company's Account and the Lenders, through the Facility Agent, shall receive an original copy of the Company's Account Opening Documents (including the documents and approvals required with respect to the prohibition on money laundering).

8.3.2.

The Lenders, through the Facility Agent, shall receive the other approvals and documents as set forth in this Section below, in the form and on the terms satisfactory to the Lenders, through the Facility Agent, and at its sole discretion and on the dates stipulated alongside them:

(a)

No later than the date of execution of this Agreement, copies of the incorporation documents and certificate of incorporation of the Company, certified by an external attorney of the Company as current and as true copies of the original. The Company's incorporation documents shall also include the restrictions set forth in Section 3.3 above.

(b)

No later than the date of execution of this Agreement, copies of the incorporation documents and certificate of incorporation of the Parent Company certified by an external attorney of the Parent Company as current and as true copies of the original.

(c)

No later than the date of execution of this Agreement, copies of the incorporation documents and certificate of incorporation of Eurocom Communications certified by an external attorney of Eurocom Communications as current and as true copies of the original.

(d)

No later than the date of execution of this Agreement, a copy of the Purchase Agreement signed by the parties thereto, and certified by an external attorney of the Company as a true copy of the original.

(e)

Concurrently with the execution of this Agreement, an original copy of this Agreement signed in the margins by the Parent Company and Eurocom Communications, in connection with their undertakings set forth herein, in the form set forth in the margins of this Agreement.

(f)

No later than the Closing Date, an original copy of all the Credit Documents, signed by the Company.

(g)

No later than the Closing Date, copies of the Collaterals documents signed by it, as set forth in Section 22 below (including the Lower Trust Agreement and the Upper Trust Agreement attached to the Collaterals documents).

(h)

No later than the Closing Date, an approval, signed by an external attorney of the Company, in the form to be agreed upon by the Company and the Lenders, pursuant to which the following resolution was approved at a Meeting of the Board of Directors of the Company which was duly convened in accordance with the Company's incorporation documents and in which directors constituting a legal quorum of the Board of Directors of the Company were present:

(1) This Agreement, the Credit Documents and the obligations and undertakings of the Company thereunder are approved by the Board of Directors of the Company; and (2) detailing the names of the signatories authorized by the Company to sign all documents in connection with the Credit, and to receive on behalf of the Company any resolution and agree with the Lenders, through the Facility Agent, from time to time, at their discretion and subject to the restrictions set forth in the aforementioned resolution of the Board of Directors, to the extent specified, about [terms and] conditions of any type in connection with the Credit Documents, and to sign all the notices, approvals and reports required from the Company pursuant to the Credit Documents.

(i)

No later than the Closing Date, an approval signed by an external attorney of the Parent Company, in the form to be agreed upon with the Lenders, pursuant to which the following resolution was approved at a Meeting of the Board of Directors of the Parent Company which was duly convened in accordance with its incorporation documents and in which directors constituting a legal quorum of the Board of Directors of such company were present:

(1) This Agreement and the remaining Credit Documents to which the Parent Company is a party, with respect to and in connection with the Credit (i.e. the Debenture, as set forth in Section 22.1.1 and the Undertaking, as set forth in Section 22.1.4) are approved by the Board of Directors of the Parent Company; and (2) the names of the signatories authorized by the Parent Company to sign all documents to which the Parent Company is a party in connection with the aforementioned documents, and to receive any resolution on its behalf and agree with the Lenders, through the Facility Agent, from time to time, at their discretion and subject to the restrictions set forth in the aforementioned resolution of the Board of Directors, to the extent specified, about [terms and] conditions of any type in connection with the aforementioned documents, and to sign all the notices, approvals and reports required from the Parent Company pursuant to the Credit Documents.

(j)

No later than the Closing Date: an approval signed by an external attorney of the Company in the form to be agreed upon by the Company and the Lenders (which may be based on factual approvals of the Company) pursuant to which: (1) all other agreements, licenses, approvals and Permits required under the Purchase Agreement and/or Law to perform the Purchase Transaction, including those enumerated in Section 2.4(a) of the Purchase Agreement, to the extent required, have been received, and all the Permits, agreements, approvals and permits presumed to be final are signed and binding (a certified original copy of the decision of the Antitrust Commissioner, the Control Permit and additional decisions of the Ministry of Communications and/or the ministers pursuant to the Communications Order, to the extent any exist, and the other decisions set forth in Section 2.4(a) of the Purchase Agreement shall be attached to such approval, to the extent the foregoing are required by Law in connection with the Purchase Transaction, with the exception of the Lien Permit); and (2) all the conditions for performing and consummating the Purchase Transaction have been fully satisfied, with the exception of payment of the purchase consideration.

(k)

No later than the Closing Date, an original copy of the Company's statement regarding its entitlement to receive the Purchased Shares on the Date of Credit, and that the Company has not granted or undertaken to grant rights in the Purchased Shares to another party, as aforementioned, nor has it executed a voting agreement with another party in connection with the Purchased Shares.

(l)

On the Closing Date, a copy of Bezeq's shareholders' register received from the secretary of Bezeq, or such other approval to the Facility Agent's satisfaction regarding the percentage of holdings of Bezeq's issued capital.

(m)

On the Closing Date, the irrevocable instruction set forth in Section 22.1.3.7 below, with respect to the Purchased Shares, approved by Bezeq.

(n)

On the Closing Date, a certified original copy of all the documents and approvals set forth in Sections 2.3(a) and 2.3(d) of the Purchase Agreement (subject to the provisions of Section (o) below).

(o)

On the Closing Date, an original copy of the documents required for transferring the Purchased Shares in the Trust Company's name and for transferring the Parent Company' shares of the Company in the Trust Company's name, and of the Collaterals documents (including all the agreements and approvals in connection with the Collaterals documents, with the exception of the Lien Permit, to be provided to the Company by the Lenders as set forth in Section 8.2.1(b) above) duly signed and authorized and to the complete satisfaction of the Security Trustee.

(p)

On the Closing Date, the share certificate with respect to the Purchased Shares, registered in the Trust Company's name and duly executed, which shall replace the share certificate stated in Sections 2.3(a) and (y)(ii)(d)2 of the Purchase Agreement.

In addition, the share certificate with respect to the Parent Company's shares of the Company, registered in the Trust Company's name and duly executed.

(q)

On the Closing Date, written approval by Bezeq stating that the Trust Company has been registered in Bezeq's shareholders register, together with a copy of Bezeq's shareholders' register signed by Bezeq's secretary, in which the Purchased Shares are registered in the Trust Company's name.

In addition, written approval by the Company stating that the Trust Company has been registered in the shareholders' register of the Company, together with a copy of the Company's shareholders' register signed by an officer of the Company, in which all the issued shares of the Company are registered in the Trust Company's name. In addition, the Company shall provide a report form to the Registrar of Companies regarding the transfer of all the issued shares of the Company in the Trust Company's name, duly signed by an officer of the Company.

(r)

An original copy of the Credit Requests signed by the Company, as set forth in Section 7.1 above.

(s)

No later than the Closing Date, an original copy of the irrevocable instructions to the Lenders through the Facility Agent, signed by the Company, pursuant to which the Company instructs the Lenders, through the Facility Agent, to charge the Company's Account and to credit the account of the Sellers, whose details shall be provided in such instructions for the purpose of paying the consideration under the Purchase Agreement, for the Credit Amount, less: (i) the Credit Amounts to be provided for the purpose of paying commissions to the Lenders and the expenses associated with the transaction, in an amount of up to one hundred million shekels (NIS 100,000,000) (it is clarified that the expenses to be borne by the Company, as set forth in this Section and in this Agreement, also include amounts borne or to be borne by 012 Smile, and for which 012 Smile shall charge the Company), and less: (ii) the Credit Amounts to be deposited in a deposit , as set forth in Section 8.5 (to the extent it applies).

(t)

No later than the Closing Date, each of the relevant Lenders shall receive an original copy of the Option Agreement which the Company is to execute with it; the Facility Agent shall provide the Company with the distribution of options among the Lenders in writing seven (7) days prior to the Closing Date.

8.4.

Evidence is provided to the satisfaction of the Lenders, through the Facility Agent, that during the period of time between the execution of the Purchase Agreement and the Date of Credit, none of the following events occurred: (1) Bezeq paid a Dividend in Cash or in kind to its shareholders and/or Bezeq performed or undertook to perform another Distribution; (2) Bezeq declared a Dividend in Cash or in kind or undertook to declare a Dividend in Cash or in kind, all (with respect to Subsection (1) and with respect to Subsection (2) in an aggregate amount exceeding one billion shekels (with respect to the Purchased Shares).

8.5.

Without derogating from Section 8.4 above, if the last section of the definition of the Credit or Loans occurs with respect to a Dividend distribution by Bezeq following the Closing Date, after deducting the consideration price accordingly: the Company deposits in the Company's Account an amount in Cash equal to the amount by which the consideration was reduced less the amount of Credit A, but not more than NIS 150 million. The monies deposited, as aforementioned, shall be akin to the Cash deposit for the purpose of Section 16.1 below.

8.6.

During the period of time between the execution of the Purchase Agreement and the Date of Credit, the Company does not agree, without the Lenders' prior written approval, that Bezeq shall approve any of the resolutions enumerated in Section 5.1(a) of the Purchase Agreement.

8.7.

On the Date of Credit, all the following conditions with respect to the Company shall be fulfilled to the satisfaction of the Lenders, through the Facility Agent:

8.7.1.

The Parent Company shall invest equity (as such term is defined according to generally accepted accounting principles applicable in Israel, from time to time) in the Company and/or provide the Company with the Parent Company Loans, all in an amount equal to the difference between (a) the price actually paid as part of the Purchase Transaction, plus amounts to cover all of the taxes, expenses and other amounts to be borne by the Company in connection with the performance of the Purchase Transaction and in connection with the provision and management of the Credit, and (b) the Credit amount to be provided as set forth in this Agreement, and an amount equal to the aforementioned difference shall be deposited in the Company's Account.

8.7.2.

As of the Closing Date, no Event of Default shall have occurred (without taking into account any cure periods).

8.7.3.

No event as defined in Section 2.4(b)(v)(i) of the Purchase Agreement occurs with respect to Bezeq and/or no resolution is received by Bezeq to perform any of the actions set forth in Section 2.4(b)(v)(i) of the Purchase Agreement. In any event, it is clarified that the consent of 012 Smile and/or the Company and/or anyone on their behalf as set forth in such Section, shall be granted subject to the prior written consent of the Lenders through the Facility Agent thereto.

8.7.4.

Without derogating from the generality of Subsections 8.2.2 and 8.7.2 above, there shall be no preclusion and/or restriction and/or prohibition, including any preclusion and/or restriction and/or prohibition applicable by Law and/or by the Bank of Israel and/or a governmental body and/or under any order, with respect to the provision of the Credit or with respect to the repayment thereof or with respect to Collaterals to secure such [Credit] and the rights pursuant thereto and/or the realization thereof (except pursuant to the Communication Law, the Communication Order, the Permits and Licenses). The form of the Control Permit shall not contradict the terms of this Agreement.

8.7.5.

Immediately after their purchase, the Purchased Shares shall be registered in the Trust Company's name.

8.7.6.

As of the Date of Credit, all of the following conditions shall have been performed to the full satisfaction of the Lenders through the Facility Agent: all the consents, licenses, Permits and other approvals required by Law shall have been received, including the Control Permit and Lien Permit, pursuant to the terms of the Credit Documents (a certified original copy of the aforementioned consents, licenses, approvals and Permits shall be furnished to the Lenders through the Facility Agent, with the exception of the Lien Permit, which is to be provided to the Company by the Lenders, as set forth in Section 8.3.2(o) above), and all such Permits, consents, approvals and license being final and binding.

8.7.7.

As of the Date of Credit, after the Company furnishes the Lenders, through the Security Trustee, the Collaterals documents signed by it, as set forth in Section 8.3.2(g) above: Bank Hapoalim (in its capacity as Facility Agent and Security Trustee) shall have provided the Company the documents which require [Bank Hapoalim's] signature and the signature of the Trust Company, signed by them. Among other documents, but without derogating from the foregoing, the following documents shall have been provided to the Company:

(a)

The Lower Trust Agreement and Upper Trust Agreement, signed by Bank Hapoalim and the Trust Company;

(b)

Proxy to vote the Purchased Shares, in the form attached as Appendix C to the Lower Trust Agreement, signed by the Trust Company.

(c)

Irrevocable instructions addressed to Bezeq, with respect to amounts and assets due to the Trust Company from Bezeq, in the form attached as Appendix B to the Lower Trust Agreement, signed by the Trust Company and authorized by Bezeq.

(d)

Proxy to vote shares of the Company held by the Parent Company, in the form attached as Appendix III to the Upper Trust Agreement, signed by the Trust Company.

(e)

Instructions to the Company, with respect to amounts and assets due to the Trust Company from the Company, in the form attached as Appendix II to the Upper Trust Agreement, signed by the Trust Company. The Company shall confirm receipt of the aforementioned instructions in the form attached thereto.

8.8.

The Company shall provide the Lenders, through the Facility Agent, written acknowledgement that the representations and warranties provided by the Company and/or the Parent Company as set forth in this Agreement and the Credit Documents are correct and accurate as of the Date of Credit.

9.	Terms of Loans Based on Credit Type

9.1.

Types of Interest on the Loans

The Credit (including any part of Credit A, Credit B, Credit C and Credit D) shall, at the Company's selection, be of the following types: fixed-interest rate loan in the Credit Currency (Index-linked) and/or at fixed interest-rate (non-Index linked) and/or at a floating interest rate (non Index-linked).

9.2.

Interest

The Credit principal shall bear accrued Interest, which shall be charged as of the Date of Credit and on the dates set forth in this Agreement, the Credit Request and the Amortization Schedule.

9.2.1.

The interest on the principal amount of each Credit type (Credit A, Credit B, Credit C and Credit D) or on any part of a Credit type shall be as follows, as selected by the Company and as requested in the Credit Request:

9.2.1.1.

Fixed interest at the Wholesale Interest rate known on the Date of Credit plus the margin appropriate for such Credit type (Credit A Margin or the Credit B Margin or Credit C Margin or Credit D Margin). Bank Hapoalim's notice regarding its Wholesale Interest rate shall bind the Company and the remaining Lenders.

Or –

9.2.1.2.

Floating interest, comprised of interest at the Wholesale Interest rate known on the Date of Credit plus the margin corresponding to such Credit type (Credit A Margin or Credit B Margin or Credit C Margin or Credit D Margin). For the avoidance of doubt, it is clarified that the initial interest rate shall be determined in accordance with the Wholesale Interest rate in place at the Date of Credit. In the event the Company takes Credit at a floating interest rate, then, on the date of conclusion of each interest calculation period, the Company shall be entitled to convert the aforementioned Credit into fixed-interest Index-linked or non Index-linked loans. Such conversion may be performed with respect to a portion of the Credit, provided that the converted amount shall not be less than NIS 50,000,000. On each aforementioned conversion date, the Credit Facility Agent shall announce the new Wholesale Interest rate o f the amount that was converted.

9.3.

Repayment of the Principal

The Company undertakes to repay the Credit principal on the date as set forth in the Credit Requests and subject to and in accordance with the provisions below:

Principal of Credit A	–	in a single payment, no later than November 30, 2010.
Principal of Credit B	–	in 13 (thirteen) equal and consecutive payments every six Months as of November 30, 2010, and up to November 30, 2016.
Principal of Credit C	–	in a single payment, no later than November 30, 2016.
Principal of Credit D	–	in a single payment, no later than May 30, 2017.

9.4.

Interest Calculation Period

In this Agreement, "Interest Calculation Period" shall mean:

9.4.1.

With respect to Credit A – as of the Date of Credit and up to November 30, 2010, or up to the Actual Repayment Date, whichever is earlier.

9.4.2.

With respect to Credit B, Credit C and Credit D – a period of six Months, as requested in the relevant Credit Requests. It is clarified that the first and/or last Interest Calculation Period may be shorter or longer, all as set forth in the relevant Credit Requests and the Amortization Schedule. The first date of payment of the Interest with respect to the first interest period shall be on November 30, 2010.

The Interest shall be calculated on the basis of the number of days that have actually passed from the relevant Date of Credit, divided by 365 or 366 days, according to the year.

9.5.

Repayment of Interest

The Company undertakes to repay the Interest on the dates as set forth in the relevant Credit Requests and subject to the following provisions:

9.5.1.

With respect to Credit A – in a single payment, to be effected at the end of the Credit A period, and the Interest shall be calculated with respect to the entire principal of Credit A.

9.5.2.

With respect to Credit B, Credit C and Credit D: at the end of each Interest Calculation Period, the Interest shall be calculated on the outstanding balance of the principal of the relevant loan, as it shall be from time to time, and with respect to the period commencing as of the beginning of the relevant Interest Calculation Date and to the end thereof (not including the date of payment). For the avoidance of doubt, in the event reference is made to a loan at a floating interest rate, the Interest shall be calculated taking into account the interest rate/s applying during such Interest Calculation Period and as set forth in the Amortization Schedule.

9.6.

Linkage

The Credit principal amounts, the Amount in Arrears (as defined in Section 10 below) and all Interest types may be fully: non-linked or index-linked, all as authorized by the Lenders through the Facility Agent, and as set forth in the Credit Requests.

Whenever amounts payable to the Lenders on account of the Credit Amounts are Index-linked (hereinafter, the "Index-Linked Amounts"), the following linkage terms shall apply thereto:

If it becomes evident that the New Index rose in comparison with the Base Index, the Company shall pay the Lenders the Index-Linked Amounts multiplied by the New Index and divided by the Base Index.

If it becomes evident that the New Index did not rise or has fallen in comparison with the Base Index, the Company shall pay the Index-Linked Amounts without any linkage.

If prior to a relevant repayment date a New Index which was to have been published prior to such date is not published, then, for the purpose of calculating linkage differentials, as set forth above, the "New Index" shall be the last Index published prior to the aforementioned repayment date (hereinafter, the "Temporary Index").

The Temporary Index shall be used for the purpose of calculating the aforementioned linkage differentials until the New Index is published (hereinafter, the "Index Published in Delay").

If it becomes evident that the Index Published in Delay has risen or fallen in comparison with the Temporary Index, the Company shall be charged or credited by the Lenders for the consequential difference, as applicable. If it becomes evident that the Index Published in Delay has not fallen or has risen in comparison with the Base Index, the Company shall pay the Index-Linked Amounts without any linkage.

The Company undertakes to pay the Lenders the aforementioned linkage differentials.

10.	Arrears Interest

10.1.

In the event the Company fails to pay any of the amounts it owes to the Lenders pursuant to this Agreement and/or the relevant Credit Request, on the Agreed Repayment Date or – if no repayment date is determined – as of the date it was demanded to pay [such amount] (hereinafter, the "Amount in Arrears"), the Amount in Arrears shall bear Arrears Interest subject to the provisions of any Law. Notwithstanding the foregoing, to the extent the Company pays the Amount in Arrears within seven (7) days of the date it was required to make such payment, then the Amount in Arrears shall not accrue Arrears Interest during such seven days.

10.2.

Subject to the foregoing, the Amount in Arrears shall bear Arrears Interest as of the Agreed Repayment Date of such amount, or – if no date for repayment has been determined – as of the date the Company was demanded to pay such amount in accordance with the terms of this Agreement and up to the Actual Repayment Date of such amount.

10.3.

Arrears Interest shall be paid by the Company in the Credit Currency, all as subject to any Law.

10.4.

The Arrears Interest shall be calculated by the Lenders, through the Facility Agent, on the balances of the Amount in Arrears and subject to the provisions of any Law, and shall be added to the Amount in Arrears at the end of every six Months.

10.5.

The Company declares that it agrees to the Arrears Interest rate determined in this Agreement, and that it is aware that the maximum Arrears Interest rate quoted by Bank Hapoalim is higher than the Arrears Interest rate under this Agreement.

11.	Interest on Deposits

Interest provided in Appendix 11 hereto shall be credited to monetary deposits in the Company's Account. In addition, the Company shall be exempt from custody fees for the securities to be held by the Company in the Company's Account pursuant to the provisions of this Agreement.

12.	Linkage Differentials for Amounts in Arrears

In addition to and without derogating from the remaining provisions of this Agreement, and, in particular, without derogating and in addition to the provisions of Section 10 above:

12.1.

It is clarified that for the purpose of calculating linkage differentials, as set forth in Section 9.6 above, in the relevant instance, the Base Index with respect to the Amount in Arrears and the Arrears Interest shall be the Index known on the Agreed Repayment Date of the relevant Amount in Arrears, or – if no date has been determined for the repayment thereof – the Index that is known on the date the Company is demanded to pay any such Amount in Arrears (hereinafter, the "Base Index for the Amount in Arrears").

12.2.

Linkage differentials, as set forth in Section 9.6 above, with respect to the Amount in Arrears and the Arrears Interest shall be calculated as set forth in Section 12.1 above, as of the Agreed Repayment Date of the relevant Amount in Arrears, or – if no date has been determined for the repayment thereof – as of the date the Company is demanded to pay any such Amount in Arrears and up to the Actual Repayment Date of such amount.

12.3.

If it becomes evident that the New Index has fallen or has not risen in comparison with the Base Index for the Amount in Arrears, no linkage differentials shall be paid on the relevant Amount in Arrears and Arrears Interest, with respect to the period of delay, upon repayment of the aforementioned Amount in Arrears.

13.	Amortization Schedule

Details regarding any loan provided pursuant to a Credit Request, with respect to payments and repayment dates of the loan principal, interest and linkage differentials, to the extent any exist, shall be included in an amortization schedule to be sent to the Company by the Lenders, through the Facility Agent, immediately subsequent to the Date of Credit (hereinafter, the "Amortization Schedule"). The Amortization Schedule shall constitute an integral part of this Agreement.

If the Amortization Schedule does not reach the Company within 30 days of the Date of Credit, the Company undertakes to provide the Facility Agent written notice thereof, and, in the absence of such notice, the provisions set forth in the copy of the Amortization Schedule in the Facility Agent's possession shall apply to the Company.

14.	Change of Dates

14.1.

In the event an Agreed Repayment Date on which a certain payment is to be repaid on account of the Credit Amounts occurs on a day which is not a Business Day (hereinafter, the "Original Charge Date"), repayment of the payment on account of the Credit Amounts shall be deferred to the first Business Day after the Original Charge Date (hereinafter, the "Deferred Charge Date") (hereinafter, "Deadline Deferral").

14.2.

In the event a Deadline Deferral occurs, as set forth in Section 14.1 above, the entire amount whose charge has been deferred, as aforementioned, shall bear the interest at the Interest rate, including for the period in which the charge was deferred, as aforementioned, all subject to any Law.

14.3.

For the avoidance of doubt, it is clarified that the date of compounding the Interest to the Credit principal shall not be deferred or accelerated, including in the event such date falls on a day which is not a Business Day.

15.	Additional Payments

15.1.

The Company undertakes to pay the Lenders, from time to time, additional amounts at a rate to be determined by the Lenders from time to time and which shall serve as reasonable compensation to the Lenders for a rise in the cost of the Credit to the Lenders, after the date of execution of this Agreement, for all or part of the following reasons:

15.1.1.

As a result of a new obligation (which is not existent or known on the date of execution of this Agreement) under any Law, which is imposed on the entities among the Lenders that are banks, which are require by the Bank of Israel and/or any competent authority under the Law in Israel:

15.1.1.1.

To hold liquid assets at any rate or any currencies in connection with the provision of the Credit and/or the continued provision thereof with respect to customers and credits of the same type or scope; and/or

15.1.1.2.

To pay and/or allocate any payments to the State treasury (for reasons other than tax or levies as set forth in Section 19 below) and/or the Bank of Israel and/or any competent authority under Israeli Law in connection with the provision of the Credit and/or the continued provision thereof;

(hereinafter, the "Additional Payment").

15.2.

The Additional Payment shall be repaid in the Credit Currency on the following dates: on each of the dates determined for payment of the Interest on the Credit; or – if a different date has been determined for such purpose under Law which cannot be made contingent, on the date prescribed by Law.

15.3.

Notwithstanding the foregoing, if the foregoing occurs, the Company shall be granted the right to early repayment of all or any part of the Credits on the date of payment of the Interest 30 days after the Company's notice of its intention to do so, at the amounts of the principal, Interest and linkage accumulated up to the actual date of payment, and without any penalties or fines (for the avoidance of doubt, it is clarified that the provisions of Section 17 below shall not apply to early repayment under this Section). In the event such a notice is issued by the Company, the Lenders, through the Facility Agent, shall be entitled to notify the Company that they will not be waive their right to charge the Company the Additional Payment, and, in such instance the Company shall not be entitled to repay the Credits early, as aforementioned.

16.	Early Repayment and Release of Proceeds from Bezeq

16.1.

In this Section 16:

16.1.1.

The "Original Credit Principal Balance" shall mean the original balance of the Credit B principal, the Credit C principal and the Credit D principal (without the Credit A principal balance).

16.1.2.

"Special Proceeds" shall mean any Cash Dividend distributed to the Company by Bezeq, which derives from profits other than Bezeq's ongoing operations.

16.1a.

The Company undertakes that in accordance with the order of payments provided in Section 20 below, the Company shall deposit a Cash deposit in the Company's Account out of the Cash Proceed which Bezeq pays and/or distributes to the Company until an amount of NIS one hundred fifty million (NIS 150,000,000) accumulates in the deposit (hereinafter in this Section, the "Encumbered Deposit"). The Company shall, through the Security Trustee, create and record in favor of the Lender a fixed first-ranking lien over the Encumbered Deposit (but not on the profits thereof, which shall be deposited in the Company's Account) to secure repayment of the Credit Amounts. Such lien shall be in addition to the other Collaterals provided and/or to be provided in favor of the Lenders to secure repayment of the Credit Amounts under the Credit Documents, and the Lien Documents wi th respect to the Encumbered Deposit and the related approvals and decisions shall be in the form attached as Appendix 16.1a hereto.

In the event the Company does not have sufficient Cash to make one of the payments on account of the Credit in accordance with the Amortization Schedule, the Company may use all or a portion of the Encumbered Deposit in order to effect the aforementioned payments, without such use constituting a breach of this Agreement. In such instance, and subject to the provisions of Section 20 below, the Company hereby undertakes to supplement the Encumbered Deposit up to a total of one hundred fifty million shekels (NIS 150,000,000) out of the subsequent amounts which Bezeq will pays and/or distribute to the Company as a Cash Proceeds.

16.2.

In the event Bezeq pays and/or distributes a Cash Proceeds (which are not Special Proceeds) to the Company, the Proceeds shall be deposited in the Company's Account (hereinafter, the "Proceeds Monies") and the following shall apply with respect thereto:

16.2.1.

Until such time as 15% of the Original Credit Principal Balance is repaid (by means other than the realization of any of the Collaterals in favor of the Lenders) and without the foregoing affecting any of the Company's undertakings under this Agreement and/or any of the Credit Documents: all the Proceeds Monies shall be utilized, at the Company's sole discretion, to increase the Company's liquidity balance in the Company's Account and/or for early repayment of the Credit Amounts. In the event of early repayment, the provisions of Section 17.4 below shall apply.

16.2.2.

After at least 15% but not more than 25% of the Original Credit Principal Balance is repaid (by means other than realization of any of the Collaterals in favor of the Lenders) and without the foregoing affecting any of the Company's undertakings hereunder and/or under any of the Credit Documents: all the Proceeds Monies shall be utilized, at the Company's sole discretion, to increase the Company's liquidity balance and/or for early repayment of the Credit Amounts, as set forth in Section 16.2.1 above (in the event of early repayment, the provisions of Section 17.4 below shall apply).

Notwithstanding the foregoing:

Following each date of repayment according to the Amortization Schedule, the Company shall be entitled to request that the Lenders, through the Facility Agent, examine whether all the conditions set forth in this Section 16.2.2 below have been satisfied.

The Lenders, through the Facility Agent, shall examine whether the conditions are satisfied within two Business Days of the Company's request.

In the event such conditions are satisfied, the Company shall be entitled to withdraw from the Company's Account an amount equal to up to 75% of the amount remaining after deducting the amounts paid according to the Amortization Schedule on the aforementioned repayment date.

With respect to the remaining Proceeds Monies, the provisions at the beginning of this subsection shall apply, subject to the Company's payment of the consideration for the Option as set forth in Section 16.5 below, to the extent the Company has an obligation to make such payment at such time.

The following are the conditions:

16.2.2.1.

No Event of Default has occurred as of the date of examination (it is clarified that an Event of Default which is within a cure period shall be deemed to be an Event of Default for purposes of this Subsection); and

16.2.2.2.

From the period of payment of the Proceeds being examined and up to the date of examination, Bezeq did not pay and/or distribute to the Company any additional Cash Proceeds (which are not Special Proceeds); and

16.2.2.3.

The Company has fully repaid all current maturities as of such time (principal, interest and linkage differentials thereon, to the extent there are any) for the Credit; and

16.2.2.4.

The Encumbered Deposit is deposited in the Company's Account; and

16.2.2.5.

The Total Debt to EBITDA Ratio as of the relevant examination date and following the distribution of the Proceeds Monies does not exceed 3.45 (three and forty five tenths [hundredths]) and the Company provides the Facility Agent an approval signed by an external accountant of the Company confirming the aforementioned financial ratio and the method of calculation thereof; and

16.2.2.6.

Eurocom Communications has executed a permanent guarantee in favor of the Lenders, through the Security Trustee, to secure repayment of the Credit Amounts, which guarantee is limited to the amount of money the Company wishes to actually withdraw from the Company's Account pursuant to this Section 16.2.2 (hereinafter, "Eurocom Communications Guarantee Letter"). The Eurocom Communications Guarantee Letter to be executed, as aforementioned, shall be independent of the remaining Collaterals provided and/or to be provided in favor of the Lenders to secure repayment of the Credit Amounts pursuant to the Credit Documents. The Eurocom Communications Guarantee Letter and the related approvals and decisions shall be in the form attached hereto as Appendix 16.2.2.6. Upon satisfaction o f the conditions set forth in Section 21.21 below, the Lenders may, by a resolution passed by a Special Majority of Lenders, exercise the Eurocom Communications Guarantee Letter;

It is hereby agreed that after at least 25% (twenty five percent) of the Original Credit Principal Balance is repaid (by means other than Realization of the Collaterals in favor of the Lenders), the guarantee which Eurocom Communications provided pursuant to this Section 16.2.2.6 shall become void. The Lenders, through the Security Trustee, shall return the Eurocom Communications Guarantee Letter which was provided to them to Eurocom Communications, and Eurocom Communications shall be released from any obligations thereunder.

16.2.3.

After at least 25% of the Original Credit Principal Balance is repaid (by means other than Realization of any of the Collaterals in favor of the Lenders) and without the foregoing affecting any of the Company's undertakings hereunder and/or under any of the Credit Documents: all the Proceeds Monies shall be utilized, at the Company's sole discretion, to increase the Company's liquidity balance and/or for early repayment of the Credit Amounts, as set forth in Section 16.2.1 above, and the provisions of Section 17.4 below shall apply.

Following every repayment date according to the Amortization Schedule, the Company shall be entitled to request that the Lenders, through the Facility Agent, examine whether the conditions set forth in this Section 16.2.3 below exist.

The Lenders, through the Facility Agent, shall examine whether the conditions are satisfied, within two business days of the Company's request.

In the event all the aforementioned conditions are satisfied, the Company shall be entitled to withdraw from the Company's Account an amount equal to up to 75% of the amount remaining after deducting the amounts repaid according to the Amortization Schedule on the aforementioned repayment date.

With respect to the remaining Proceeds Monies, the provisions at the beginning of this subsection shall apply, but subject to the payment by the Company of the consideration for the Option, as set forth in Section 16.5 below, to the extent the Company shall have an obligation to make such payment at such time.

The following are the conditions:

16.2.3.1.

No Event of Default has occurred as of the examination date (it is clarified that an Event of Default which is within a cure period shall be deemed to be an Event of Default for purposes of this subsection); and

16.2.3.2.

As of the examination date, Bezeq did not pay and/or distribute to the Company any additional Cash Proceeds (which are not Special Proceeds); and

16.2.3.3.

By such date the Company fully repaid all the current maturities (principal, interest and linkage differentials thereon, to the extent any exist) with respect to the Credit; and

16.2.3.4.

The Encumbered Deposit is deposited in the Company's Account; and

16.2.3.5.

The Total Debt to EBITDA Ratio as of the relevant examination date and following the aforementioned distribution of the Proceeds Monies exceeds 3.25 (three and twenty five hundredths), and the Company provides the Facility Agent an approval signed by an external accountant of the Company, confirming the above financial ratio and the method of calculation thereof.

16.3.

In the event Bezeq pays and/or distributes Special Proceeds to the Company, the proceeds shall be deposited in the Company's Account and the following provisions shall apply with respect thereto:

16.3.1.

Until such time as at least 25% of the Original Credit Principal Balance is repaid (by means other than Realization of any of the Collaterals in favor of the Lenders) and without the foregoing affecting any of the Company's undertakings under this Agreement and/or any of the Credit Documents: any Special Proceeds shall be applied towards early repayment of the Credit Amounts, and the provisions of Section 17.4 below shall apply.

16.3.2.

After at least 25% of the Original Credit Principal Balance is repaid (by means other than Realization of any of the Collaterals in favor of the Lenders) and without the foregoing affecting any of the Company's undertakings under this Agreement and/or any of the Credit Documents: any Special Proceeds shall be applied towards early repayment of the Credit Amounts, and the provisions of Section 17.4 shall apply.

Notwithstanding the foregoing:

Each time after Special Proceeds are deposited in the Company's Account, the Company shall be entitled to request that the Lenders, through the Facility Agent, examine whether the conditions set forth in this Section below are satisfied.

The Lenders, through the Facility Agent, shall perform the examination within two Business Days of the Company's request.

In the event all the aforementioned conditions are satisfied, the Company shall be entitled to withdraw from the Company's Account, at its request, amounts as set forth in Section 16.3.2.3, and the provisions set forth in the beginning of this subsection shall apply to the remainder of the Special Proceeds, subject to payment of the consideration for the Option, as set forth in Section 16.5 below, to the extent the Company has an obligation to make such payment at such time.

The following are the conditions:

16.3.2.1.

16.3.2.2.

By such date the Company has fully repaid all the current maturities (principal, interest and linkage differentials thereon, to the extent any exist) with respect to the Credit; and

16.3.2.3.

The amounts to be released to the Company out of each Special Proceeds shall be determined as set forth below:

16.3.2.3.1.

If the Total Debt to EBITDA Ratio as of the relevant examination date and following distribution of the Special Proceeds does not exceed 3.3 (three and three tenths), then, upon satisfaction of the remaining conditions as above-listed in this Section, the amounts to be released by the Facility Agent for the Company's use shall be 25% of every Special Proceeds.

16.3.2.3.2.

If the Total Debt to EBITDA Ratio as of the relevant examination date and following distribution of the Special Proceeds does not exceed 3 (three), then, upon satisfaction of the remaining conditions as above-listed in this Section, the amounts to be released by the Facility Agent for the Company's use shall be 50% of every Special Proceeds.

16.3.2.3.3.

If the Total Debt to EBITDA Ratio as of the relevant examination date and following distribution of the Special Proceeds does not exceed 2.75 (two and seventy five hundredths), then, upon satisfaction of the remaining conditions as above-listed in this Section, the amounts to be released by the Facility Agent for the Company's use shall be 75% of every Special Proceeds.

16.4.

It is hereby clarified that:

16.4.1.

The Company may, at its discretion, instruct the Lenders, through the Facility Agent, to deposit the Proceeds Monies or the Special Proceeds in a deposit in the Company's Account encumbered in favor of the Lenders through the Security Trustee, and the aforementioned monies (i.e. the Proceeds Monies and the Special Proceeds) shall be utilized to repay the Credit Amounts on the subsequent dates, in accordance with the repayment terms set forth in the Credit Documents.

16.4.2.

The Cash deposited in the Company's Account shall also be taken into account upon examining the Original Credit Principal Balance repayment rates, as set forth in this Section 16 above, all in accordance with the formula set forth in Appendix 16.4.2 hereto.

16.4.3.

For the avoidance of doubt, Sections 17.1 through 17.3 shall not apply to early repayments pursuant to the provisions of this Section 16. In addition, whenever early repayment occurs pursuant to Section 16.2 and 16.3 above, the Company shall not be penalized under Section 17.5 below (however, if the early repayment is effected with respect to a fixed-interest rate loan, the Company shall be charged an early repayment fee as set forth in Section 17.4 below, subject to the terms thereof).

16.5.

Payment of the Consideration for Realization of the Option

The Company shall pay the Lenders who are holders of the options under the Option Agreement the consideration for realization of the Option, as follows: the consideration shall be paid exclusively out of the remainder of the Proceeds Monies or out of the remainder of the Special Proceeds which the Company may not withdraw from its Account, as set forth in this Section 16 above (25% of the Proceeds Monies and 75%, 50% or 25% of the Special Proceeds amount, in accordance with the levels in Section 16.3.2.3 above).

For the avoidance of doubt, the consideration for the Option shall be paid exclusively as set forth in this Section. If the above mentioned remaining amounts in the Company's Account are insufficient the payment shall be deferred to a later date on which money is available out of such remaining amounts for payment of the Option.

17.	Voluntary Early Repayment

The Company may request the Lenders to repay all or a portion of each of the above Credits, and any portion of a specific loan prior to the Agreed Repayment Date agreed in accordance with the terms of this Agreement (hereinafter, "Early Repayment") subject to the following conditions:

17.1.

The Company's request for Early Repayment of any amount on account of the Credit, as aforementioned, is submitted in writing to the Lenders, through the Facility Agent, at least 7 (seven) business days in advance, and shall be irrevocable, and shall stipulate the amount with respect to which Early Repayment is requested, as well as the date of Early Repayment.

17.2.

The Early Repayment of the amount requested by the Company shall be effected at the end of the Interest Calculation Period ending immediately after 7 (seven) business days have passed, as set forth in Section 17.1 above, and shall be accompanied by payment of the interest accrued on such amount up to the actual Early Repayment Date.

17.3.

Any principal amount which is repaid early shall not be less than NIS 30,000,000 (Thirty Million New Israeli Shekels).

17.4.

In the event any of the Loans which are the subject of the Credit are fixed-interest rate loans, then, in the event of Early Repayment of all or part of such Loans, the Company shall pay the Lenders, through the Facility Agent, an Early Repayment fee in addition to the amount which is repaid early, to be calculated as follows:

If the Alternative Interest in effect on the Early Repayment date is lower than the Wholesale Interest Rate in effect on the Date of Credit, the Early Repayment fee shall be an amount equal to the capitalization of the remaining payments payable pursuant hereto as payment of the principal and interest after the requested repayment date, with respect to the amount which was repaid early, at the Alternative Interest rate (as defined below) less the capitalization of the remaining payments which are payable hereunder as principal and interest payments after the requested repayment date, with respect to the amount which was repaid early, at the Wholesale Interest rate in effect on the Date of Credit.

For the avoidance of doubt, it is hereby clarified that if the Alternative Interest in effect on the Early Repayment date is equal to or higher than the Wholesale Interest Rate in effect on the Date of Credit, the Company shall not pay any repayment fee pursuant to this Section 17.4.

The Alternative Interest, for purposes of this subsection, shall mean the Wholesale Interest Rate in effect at Bank Hapoalim as of the requested Early Repayment date for the remaining relevant Credit period and in accordance with the original Amortization Schedule thereof.

17.5.

In the event the requested Early Repayment date occurs during the first four years as of the Date of Credit, and provided that the source of the Early Repayment is not from any Cash Proceeds paid to the Company by Bezeq, the Company shall pay the Lenders, through the Facility Agent, the following fee, in addition to the amount to be repaid early and in addition to the other fees as set forth in this Section with respect to the Early Repayment:

17.5.1.

If the requested Early Repayment date occurs during the first year from the Date of Credit – an Early Repayment fee in an amount equal to 2.5% (two and one half percent) of the amount repaid early.

17.5.2.

If the requested Early Repayment date occurs during the period commencing from the beginning of the second year from the Date of Credit and ending at the end of the second year from the Date of Credit – an Early Repayment fee in an amount equal to 1.85% (one and eighty five hundredths percent) of the amount to be repaid early.

17.5.3.

If the requested Early Repayment date occurs during the period commencing from the beginning of the third year from the Date of Credit and ending at the end of the third year from the Date of Credit – an Early Repayment fee in an amount equal to 1.4% (one and four tenths percent) of the amount to be repaid early.

17.5.4.

If the requested Early Repayment Date occurs during the fourth year from the Date of Credit – an Early Repayment fee in an amount equal to 0.85% (eighty five tenths [hundredths] percent) of the amount to be repaid early.

17.6.

If the requested Early Repayment date occurs during the period commencing from the beginning of the fifth year from the Date of of Credit and thereafter, the Company shall not be charged an Early Repayment fee pursuant to this subsection 17.5.

17.7.

There shall be no preclusion at Law to make the requested Early Repayment.

17.8.

An amount repaid early pursuant to Section 16 above or this Section 17 shall not be provided again as Credit.

17.9.

Notwithstanding the foregoing, it is hereby clarified that repayment of Credit A (which is a bridge loan until Bezeq's payment of the first Dividend) shall be made at any time until November 30, 2010, and the Company shall not be charged any fee or penalty for repaying such Credit at any date earlier than November 30, 2010, provided that Credit A is provided to the Company at a floating interest rate.

18.	Company's Account

18.1.

The Company hereby gives the Facility Agent instructions to charge the Company's Account for all Credit Amounts, on their repayment dates in accordance with this Agreement (hereinafter, the "Charge Instruction"). In addition, the Facility Agent shall be entitled to charge the Company's Account for the Option, subject to prior written coordination with the Company.

18.2.

The Facility Agent shall comply with the Charge Instruction, except in circumstances in which the two following cumulative conditions exist with respect to any of the Credit Amounts:

18.2.1.

The Company provides the Facility Agent written notice at least 3 business days prior to the Agreed Repayment Date of any of the Credit Amounts that it intends to directly pay a particular amount due to the Lenders at such time, on account of the Credit Amounts (hereinafter, the "Direct Repayment Amount") (hereinafter, "Direct Repayment Notice"); and

18.2.2.

The Company directly pays the Direct Repayment Amount on the Agreed Repayment Date of the Direct Repayment Amount.

18.3.

Without derogating from the Lenders' rights under this Agreement and/or under any other document and/or form executed and/or to be executed by the Company in favor of the Lenders and/or the Facility Agent and/or by Law, the Company is aware that in the event it becomes evident that on an Agreed Repayment Date of any of the Credit Amounts (hereinafter, the "Amounts to be Charged") the Company's Account does not have a Credit Balance (hereinafter, the "Repayment Balance ") equal to the full amount of the Amounts to be Charged, the Facility Agent may refrain from performing the Charge Instruction on the aforementioned Agreed Repayment Date with respect to all or part of the Amounts to be Charged , wholly or partially, as applicable. Without derogating from the foregoing, the Facility Agent may, at its sole discretion, but is not obligated to, perform the Charge Instruction on the aforementioned Agreed Repayment Date and/or from time to time, on every Business Day following the aforementioned Agreed Repayment Date on which the Company's Account contains a Repayment Balance of any amount, by means of charging the Company's Account for the full Repayment Balance, as aforementioned, or for a portion thereof, all at the Facility Agent's discretion.

18.4.

In the event the Facility Agent charges the Company's Account for any of the Amounts to be Charged (all or a portion thereof), as applicable (hereinafter, the "Charged Amount") and it becomes evident that the Company's Account does not contain a Repayment Balance sufficient for payment of the Charged Amount, the Facility Agent may cancel all or part of such charge and regard such cancelled amount, or a portion thereof, as an amount not paid on account of the Credit Amounts and to take any action it so determines under this Agreement accordingly.

18.5.

The Company is aware that the Facility Agent is under no obligation to examine whether and on which of the dates on which a Charge Instruction was executed the Company's Account contains a Repayment Balance which is sufficient for executing the Charge Instruction on such date, and the Company shall bear all possible consequences should such Repayment Balance fails to exist.

18.6.

In the event the Charge Instruction is executed, as aforementioned, the outstanding Amounts to be Charged, or a portion thereof, shall bear Arrears Interest at the rate as set forth in Section 10 above and subject to the terms thereof.

18.7.

Without derogating from the Lenders' rights under this Agreement and/or under the remaining Credit Documents and/or under Law, the Company is aware and agrees that in the event it becomes evident that on a particular payment date determined hereunder, with respect to the Credit principal and interest thereon, the Company's Account does not contain a Credit Balance for the full Amounts to be Charged on account of the Credit, the Lenders may refrain from executing such instruction on the aforementioned payment date until the first subsequent Business Day on which a sufficient balance is available in the Company's Account.

19.

Taxation

If after the execution of this Agreement the Company is, at any time, required by Law and/or the instructions of any authority or by a central bank to deduct or pay tax on a particular payment due from the Company with respect to the Credit or any portion thereof, or for a particular payment due or to become due from the Company pursuant to this Agreement and/or a Credit Request (hereinafter respectively, the "Payment to the Lenders"), the Company shall deduct tax at source from the Payment to the Lenders ("Deduction") and, within ten business days of the Deduction, shall issue the Lenders, through the Facility Agent, confirmation of the amounts paid with respect to each such Deduction, in order for the Lenders, through the Facility Agent, to present such approval to the Israeli tax authorities. In the event the Company fails to provide timely confirmation of the amounts paid with respect to such Deduction, the Payment to the Lenders shall increase in a manner which shall ensure that on the date of payment, the Lenders, through the Facility Agent receive a net amount equal to the amount the Lenders would have received if the Deduction had not been required.

20.	Allocation of Payments

20.1.

Any amount, payment or credit of any type which is paid or credited to the Company shall be allocated by the Lenders, through the Facility Agent, against any of the Company's Liability towards the Lenders and/or the Position Holders and against all its various types of liabilities hereunder (such as, without derogating from the generality of the foregoing, an obligation which is created as a result of the Company's obligation to indemnify the Lenders and/or return to them amounts it withdrew and/or as a result of a transfer of amounts to a third party, as well as fees, expenses and various payments, loans and so forth) at the Lenders' discretion; and as part of and within a Liability hereunder (hereinafter, the "Specific Liability"), in accordance with the following order:

20.1.1.

To pay all reasonable fees and expenses incurred and or to be incurred in connection with the Specific Liability, including the collection thereof, subject to the provisions of Section 45 below, including expenses of the receiver or the receiver and the special manager and/or assets receiver and/or trustee and/or special manager and the wages of any one of them at a rate to be approved by the court or the Execution Office.

20.1.2.

To pay actual expenses paid by a Position Holder to third parties, for which it was not actually reimbursed by the Company by such date, and to pay any fees due to the Trustee.

20.1.3.

To pay the Arrears Interest.

20.1.4.

To pay the Additional Payment, to the extent there is any.

20.1.5.

To pay the Interest.

20.1.6.

To pay any other payment due and/or to become due to the Lenders under this Agreement and/or another document executed and/or to be executed by the Company and/or under any Law in connection with the Specific Liability.

20.1.7.

To pay the principal amount of the Specific Liability and the linkage differentials with respect thereto, to the extent any exist, pursuant to the provisions of Section 20.2 below.

20.1.8.

For the deposit of monies in the Encumbered Deposit and the supplementation thereof, to the extent required, as set forth in Section 16.1a above.

20.1.9.

For payment of the Option, as set forth in Section 16.5 above, and out of the balances enumerated in such section (to the extent any exist).

The foregoing shall apply to any amount paid to the Company from any source, including any amount arising from the realization of guarantees and/or as a result of the realization of any of the Collaterals and/or the assets and/or as a result of the sale of property encumbered in favor of the Lenders and/or as a result of the sale of other property or a portion thereof and all the rights, monies and Proceeds received by the receiver and/or receiver and special manager and/or assets receiver and/or trustee and/or special manager and/or any amount, payment and/or credit of any type to be paid and/or received in favor of the Company, and any time the Lenders, through the Facility Agent, exercise the right of set off as set forth in Section 25 below.

20.2.

The order of repayment of the principal of the Credit types shall be as follows, and, if necessary, shall include the deposit or supplementation of the Encumbered Deposit:

First, payment on account of Credit A.

Second, payment according to the Amortization Schedule.

Third, deposit of the monies in the Encumbered Deposit, to the extent necessary, as set forth in Section 16.1a above.

Notwithstanding the foregoing, in the event of Early Repayment (pursuant to Sections 16 and/or 17) and/or immediate repayment, the following shall apply:

First, payment on account of Credit A.

Second, deposit of the monies in the Encumbered Deposit, to the extent necessary, as set forth in Section 16.1a above (except in the event of immediate repayment).

Third, payment on account of Credit C;

Fourth:

(1)

Until such time as at least 25% of the Original Credit Principal Balance is paid (by means other than realization of any of the Collaterals in favor of the Lenders): repayment on account of Credit D.

(2)

After at least 25% of the original Credit Principal Balance (as such term is defined in Section 16.1.1 above) is paid (by means other than Realization of the Collaterals in favor of the Lenders): half (50%) of the repayment shall be with respect to the principal of Credit B and the second half of the Credit payment shall be with respect to the principal of Credit D. Following repayment of Credit D, the full repayment shall be made on account of Credit B.

(3)

Notwithstanding Subsection (2) above, in the event of repayment as result of a distribution of Special Proceeds (as this term is defined in Section 16.1.2 above), the order of repayment shall be as follows: repayment on account of Credit D, and, following full repayment of Credit D, repayment shall be on account of Credit B (without taking into account the percentage of the Original Credit Principal Balance repaid as of such time).

For the purpose of examining the Original Credit Principal Balance percentages, as set forth in this Subsection (d) above, the Cash deposited in the Company's Account shall also be taken into account, all in accordance with the formula set forth in Appendix 16.4.2 hereto.

Chapter C: Company's Undertakings

21.	The Company's Undertakings

Until such time as the Credit Amounts are fully repaid to the Lenders, the Company undertakes towards the Lenders and Position Holders as follows:

21.1. (a)

Any Proceeds and/or monies payable to the Company from any individual and/or company at any time shall be paid exclusively to the Company's Account, subject to the provisions regarding the transfer of monies via the Trust Account, as set forth in the Lower Trust Agreement.

(b)

The Company shall not withdraw any monies from the Company's Account, except: (i) pursuant to the provisions of Section 16 above; (ii) transaction expenses and fees, mandatory payments or taxes under Law, legal counsel, accounting, officers insurance, fees and any other expense during the ordinary course of business of a special purpose company with a similar type of activity, all up to an aggregate annual amount of NIS 500,000; (iii) Management Fees to the Parent Company in an aggregate amount that shall not exceed NIS 10,000,000 (ten million New Israeli Shekels) per year; and (iv) payment to the Parent Company and/or 012 Smile as reimbursement of expenses incurred in connection with a transaction, in the amounts and on the terms as set forth in Section 8.3.2(s)(i) above.

(c)

Notwithstanding the foregoing, upon the occurrence of an Event of Default (without taking into account cure and/or waiting periods, to the extent provided) and as long as it continues, the Company shall not withdraw any monies from the Company's Account.

21.2.

Subject to any Law, to notify the Facility Agent in writing immediately when the Company becomes aware of any intention to modify Bezeq's incorporation documents and to object to any modification to Bezeq's incorporation documents, if the Lenders, through the Facility Agent, notify the Company in writing that in the Lenders' opinion, these modifications adversely affect or may, in some manner, adversely affect all or part of the Lenders' rights with respect to the Credit and/or the Lenders' rights in connection with all or part of the Purchased Shares and/or the Lenders' rights and/or the Company's liabilities towards the Lenders in connection with this Agreement and/or the other Credit Documents.

It is clarified and agreed that the Lenders agree to amend Bezeq's Articles of Association such that the Board of Directors of Bezeq is granted the right to appoint directors to the Board of Directors of Bezeq (as published by Bezeq in an immediate report dated December 29, 2009) as well as to increase Bezeq's registered capital for the purpose of a Permitted Dilution, to the extent necessary.

21.3.

The Company may not declare, pay, distribute or (as applicable) perform or undertake to declare, pay, distribute or perform any Management Fees and/or Dividends and/or other Distribution and/or any payments (principal, interest or any other payment) including on account of Shareholders Loans and/or Management Fees and/or fees, however they are titled, directly or indirectly, in Cash, cash equivalent or in any other manner to the Parent Company, and/or provide Shareholder Loans to the Parent Company other than subject to the fulfillment of the provisions of Section 16 above regarding use of the Proceeds which the Company receives from Bezeq. Notwithstanding the foregoing, and subject to the Company's satisfaction of all the conditions of the Credit Documents (without taking into account the cure and/or waiting periods, to the extent granted), the Company may pay Management Fees to the Parent Company in an aggrega te amount that shall not exceed NIS 10,000,000 (Ten million New Israeli Shekels) per year, and it may reimburse the Parent Company and/or 012 Smile for expenses incurred in connection with a transaction, in the amounts and on the terms as set forth in Section 8.3.2(s)(i) above.

21.4.

(a) The Company shall not have obligations and undertakings (subject to the provisions of Section 21.1(b)) except with respect to the Credit Amounts and the Parent Company Loans; and (b) the Company shall not provide loans or other financing whatsoever and/or act as guarantor for any third party to guarantee payment of third party obligations and undertakings, without the prior written consent of the Lenders, through the Facility Agent, and the Company has not provided such loans or signed any guarantees in favor of any third parties or undertaken to provide any such loans or guarantees.

21.5.

Other than liens created and/or to be created in favor of the Lenders, through the Security Trustee as set forth in this Agreement, the Company shall not create any floating charge of any rank and/or any fixed charges of any rank over its assets, or enable the existence of any such floating charge or fixed charge without the prior written consent of the Lenders, through the Facility Agent.

21.6.

The Company (a) shall not engage and shall not be involved, directly or indirectly, in any occupation or activity of any field, type and form, with the exception of holding the Purchased Shares and the Additional Shares (to the extent they are purchased by it); and (b) without derogating from the generality of the foregoing, it shall not decide upon, approve or agree to any merger, re-organization or any other transfer (whether in a single transaction or a series of transactions) of (all or part of) its assets or business.

21.7.

The Company shall fulfill all the undertakings and terms in accordance with the consents, Permits, license and approvals set forth in Sections 8.2.1(a) and 8.7.6 above, and shall ensure, to the extent it is in its control, that (a) none of these consents, permits, licenses or approvals expires, is cancelled, suspended or terminates (without being renewed) or ceases to be fully valid for any other reason or is materially altered without the consent of the Lenders, through the Facility Agent; and (b) the Company does not violate the terms or provisions of any of such consents, Permits, licenses or approvals. Without derogating from any provision granting the Company a cure period under this Agreement, it is hereby clarified that a violation of the aforementioned terms and provisions which is remedied by the Company during a cure and/or waiting period, to the extent that such a period exists, shall not be regarded as a breach of an obligation under this Agreement as well.

21.8.

The Company shall duly report and submit reports to the tax authorities in a timely manner, all in accordance with the requirements of any Law, arrangement or taxation decision and shall pay all the taxes payable by it pursuant to such reports and reporting, or according to a conclusive assessment or taxation arrangement prepared with respect thereto.

21.9.

The Company and the Parent Company shall execute all the certificates, forms, declarations, requests and documents and shall perform any action, the execution or performance of which (as applicable) is required (a) by Law or as agreed in the Credit Documents by the Position Holders or the Lenders; and/or (b) for the purpose of preserving the validity of the Collaterals documents and Collaterals created thereunder or for the purpose of Realizing the Collaterals, subject to the provisions of any any Law.

21.10.

Until such time as the conditions precedent set forth in Section 16 above are satisfied with respect to the relevant Proceeds or the relevant conditions regarding payment of the Management Fees, as set forth in Section 21.3 above, all amounts of any type which the Company owes and/or shall owe the Parent Company for any reason (including the Parent Company Loans) (principal, interest and linkage differentials, to the extent they exist) shall be subordinated to the Credit Amounts, and in any case shall not be secured by any collateral , the [Company] shall not repay to the Parent Company any amounts it provided and/or is to provide the Company in any manner (including repayment of the principal, Interest and linkage differentials, to the extent any exist, on account of the Shareholder Loans). For the avoidance of doubt, it is clarified that nothing in this Section with respect to the foregoing constitu tes an agreement that the Company shall have any obligation and/or Liability towards the Parent Company, with the exception of the Parent Company Loans, to be provided on the terms set forth in this Section 21.10, and the Management Fees, as set forth in Section 21.3 above and subject to the terms thereof.

21.11.

The Company shall notify the Lenders, through the Facility Agent, of any General Meeting of Bezeq in which the agenda includes a resolution regarding share dilution, changes to rights granted by the Shares, Restructuring of Bezeq and a creditor arrangement, as set forth in Section 24.6 below.

Subject to the provisions of Section 21.2 above, it is hereby clarified that the Company shall use the voting rights granted to it in the General Meeting of Bezeq (pursuant to the proxies granted to it by the Trust Company as part of the encumbrance of the Purchased Shares and pursuant to the Additional Shares) at its discretion, with respect to any item raised in the General Meeting.

(For the avoidance of doubt, the Parent Company shall exercise the voting rights granted to it in the General Meeting of the Company, pursuant to the proxies to be granted to it by the Trust Company under the Upper Trust Agreement, at its discretion, with respect to any item raised in the General Meeting).

21.12.

Refrain from taking any action or performing any act which may result in the cancellation of the purchase of the Purchased Shares or harm the Company's property rights as holder of the Purchased Shares and/or harm the Lenders' property rights as holder, through the Security Trustee, of a first-ranking lien on the Purchased Shares.

21.13.

No modification to the Purchase Agreement shall be agreed upon without the prior written consent of the Lenders, through the Facility Agent.

21.14.

To provide the Lenders, through the Facility Agent, with a copy of all notices it receives from the Sellers and/or provides the Sellers, and which is required under the provisions of the Purchase Agreement, and which has or may have implications for the Lenders' rights under this Agreement, immediately upon receiving such notice or immediately upon sending it to the Sellers, respectively.

21.15.

The Company agrees that in the event that any of the financial ratios set forth below with respect to the Financial Statements of the Company and/or Bezeq, as applicable, are not satisfied, the Lenders shall be entitled to demand the immediate repayment of the Credit Amounts, in accordance with the terms of Section 24.18 below, and to take all the steps they so determine to collect the Credit Amounts, including Realization of the Collaterals in accordance with the terms thereof:

The following are the financial ratios:

21.15.1.

Bezeq's equity capital, less the capital attributed to minority shareholders, shall not be less, at all times, than a total of NIS 1,500,000,000 (One Billion Five Hundred Million New Israeli Shekels).

21.15.2.

Bezeq's equity capital, less the capital attributed to minority shareholders out of the total balance sheet shall not be less, at all times, than 10%. Assets and liabilities of consolidated companies shall be taken into account according to the percentage of holdings in the consolidated companies.

21.15.3.

Bezeq's Net Financial Debt to EBITDA Ratio shall not exceed 3 at all times.

21.15.4.

The Total Debt to EBITDA Ratio shall not exceed:

During the reporting period until December 31, 2010	During the reporting period until December 31, 2013	During the reporting period until December 31, 2014	During the reporting period beginning on March 31, 2015 and onward
4.5	4	3.5	3

The Company is aware that the foregoing financial ratios are based on existing accounting standards and accounting principles which were applied in the last Financial Statements of the Company and of Bezeq. Applying standards and/or accounting principles which are different from those on the basis of which the last Financial Statements were prepared, in the Company's and Bezeq's Financial Statements, including the International Financial Reporting Standards (IFRS), accounting principles in Israel and/or the U.S. (hereinafter, "New Standards") may result in changes which could affect the financial ratios. The Company undertakes to notify the Lenders, through the Facility Agent, of any instance of New Standards in the Company and at any time in the event it becomes evident to the Lenders that the changes which occurred and/or are to occur in the Financial Statements of the Company and/or Bezeq as a result of the implementation of the New Standards so require, the Lenders may, after consulting with the Company, but without requiring its consent, notify the Company of the changes they require to the financial ratios, in order to adjust such ratios in accordance with the aforementioned changes, with the intention of making them consistent with the original economic purpose on the basis of which the financial ratios were determined (hereinafter, the "Amended Financial Ratios"). In the event the Facility Agent notifies the Company of the Amended Financial Ratios, these shall obligate the Company as of the date of issuance of the Facility Agent's notice. However, in the event the Amended Financial Ratios are determined as a result of New Standards, as aforementioned, the Company shall be entitled to continue to issue the Lenders an a djustment statement signed by a certified accountant from one of the Big Four accounting firms in Israel, with respect to the accounting principles applied in the Company prior to the Company's transition to New Standards, and the adjustment report shall continue to be evaluated in accordance with the criteria determined in this Agreement.

21.16.

Provide the Lenders, through the Facility Agent, the Financial Statements of the Company and the Parent Company, as set forth below, prepared by an certified external auditor in accordance with generally accepted accounting principles in Israel:

21.16.1.

Audited annual Financial Statements – no later than 100 days after the end of each calendar year; and also

21.16.2.

Reviewed quarterly Financial Statements – no later than 70 days after the end of each calendar quarter (in this respect, the end of a quarter is on March 31, June 30, September 30 and December 31);

In addition, in the event Bezeq makes the solo Financial Statements of Bezeq and/or of Pelephone Communications Ltd. and/or Bezeq International Ltd. available to its shareholders, and there is no preclusion at Law to transfer them to the Lenders, then the Company shall provide the Lenders, through the Facility Agent, the aforementioned Financial Statements upon receiving them.

21.17.

As long as the Eurocom Communications Guarantee Letter provided to the Lenders, as set forth in Section 16.2.2.6 above is in effect, to provide the Financial Statements of Eurocom Communications as of December 31 to the Facility Agent, who shall be entitled to present (but not transfer) them to the Lenders, immediately after they have been prepared, which shall not be later than August 31 of each year for the previous year.

21.18.

The Company undertakes, from time to time, to provide the Lenders, through the Facility Agent, an approval signed by external auditor of the Company confirming the financial ratios set forth in Section 21.15 above and the method of calculation thereof, within thirty days of the publication of the Financial Statements of Bezeq.

21.19.

The Company undertakes to notify the Lenders, through the Facility Agent, of the occurrence of the following events, immediately upon becoming aware thereof:

21.19.1.

Any instance in which an attachment is imposed on the Purchased Shares or any instance in which an attachment is imposed on the Company's assets for a debt exceeding NIS 100,000. The Company undertakes to immediately notify the party imposing the attachment of the lien in favor of the Lenders and to take all measures immediately and at its expense to remove the attachment. The Company further undertakes to immediately notify the Facility Agent of any instance in which a right is claimed in connection with the Collaterals or of any execution proceeding pertaining to and/or prohibitory injunctions and/or mandatory injunctions and/or attachment orders and/or other proceedings instituted for Realization of the Collaterals, and to immediately notify the party taking such action of the lien in favor of the Lenders, and to take action immediately and at its expense, and without delay, to cancel such action;

21.19.2.

The occurrence of an Event of Default, without taking into account cure and/or waiting periods, to the extent determined;

21.19.3.

Any change of its name and/or address;

21.20.

Without derogating from undertakings to provide information to the Lenders which are imposed on the Company pursuant to any other provision of any of the Credit Documents, the Company shall provide the following to the Lenders, through the Facility Agent, without delay:

21.20.1.

Notification of any claim, arbitration, or administrative or regulatory proceedings against and/or pertaining to the Company (including notification of any threats of lawsuit, arbitration or proceedings, as aforementioned, to be provided to the Facility Agent immediately after the Company becomes aware of the threat), including in connection with the necessary Permits;

21.20.2.

Any Financial Statement or other document which is received by 012 Smile or a company in its control (for the avoidance of doubt, including the Company) in accordance with or in connection with the Purchase Agreement;

21.20.3.

Notification of any Event of Default of any of the Credit Documents (without taking into account cure and/or waiting periods, if and to the extent agreed upon) with a reasonable details therefore and of the measures taken or being taken (if at all) for the remedy thereof.

21.20.4.

Subject to the provisions of any Law, the Company undertakes to provide the Lenders, through the Facility Agent, any further information and/or document and/or other report in connection with the Company, as required, upon receiving a written demand thereof from the Facility Agent.

21.20.5.

The Company undertakes to provide the Lenders, through the Facility Agent, with a copy of any demand and/or notice it receives from any authority, including the Ministry of Communications and the Securities Authority in connection with its business, including holding the Purchased Shares, and in connection with the Permits required by Law.

21.21.

Until such time as the Eurocom Communications Guarantee Letter, as defined in Section 16.2.2.6 above, is terminated by the Lenders through the Security Trustee:

21.21.1.

If Eurocom Communications ceases to repay its debts and/or to conduct its business and/or is required to repay any of the debts and/or obligations which it owes and/or may owe other financial creditors (i.e. banks or debenture holders), in an aggregate amount which exceeds 10% of Eurocom Communications' equity capital as it appears in the last Financial Statements presented to the Facility Agent pursuant to the provisions of this Agreement, by means of early repayment and/or immediate payment and/or repayment other than in accordance with the original Amortization Schedule of such debts and/or obligations; and/or

21.21.2.

Upon the occurrence of one of the instances enumerated in Sections 24.4 through 24.10, 24.12 and 24.14 to Eurocom Communications, with changes adjusted to circumstances.

Then, without derogating from the Lenders' rights under the Eurocom Communications Guarantee Letter, the Company undertakes to deposit into the Company's Account the amounts secured under the Eurocom Communications Guarantee Letter, as part of the encumbered monies in the Company's Account, within seven days of receiving a written demand from the Lenders, through the Facility Agent. In accordance with the provisions of the Eurocom Communications Guarantee Letter, it is clarified that if the Company fails to deposit the aforementioned amounts in the Company's Account during the aforementioned seven-day period, Eurocom Communications shall be required to deposit the aforementioned amounts in the Company's Account within 21 days of the demand to the Company, as set forth above.

Chapter D – the Collaterals

22.	Collaterals

22.1.

To secure full and accurate repayment of any amount which the Company owes and/or is to owe the Lenders with respect to and/or in connection with the Credit Amounts, the Collaterals set forth below shall be created and recorded in favor of the Security Trustee, on behalf of the Lenders, and shall be first-ranking and unlimited in amount, in the form attached hereto as Appendices 22.1.1, 22.1.2 and 22.1.3:

Creation of Lien by Parent Company

22.1.1.

Subject to the provisions of the Lien Permit and any Law, a first-ranking fixed charge and assignment by way of the lien on all the shares of the Company which are held by the Parent Company and the profits, consideration, proceeds and alternative distributions thereof, and all the Parent Company's rights and other means of control in the Company (including the right to receive Dividends of any type, bonus shares, and the right to repayment of the Shareholder Loans (including the Parent Company Loan) and to receive Management Fees, with the exception of the Management Fees as set forth in Section 21.3 above) and the encumbrance of its rights towards the Trust Company, all in accordance with the Debenture a copy of which is attached hereto as Appendix 22.1.1.

As part of the foregoing lien, the Parent Company's shares of the Company shall be transferred to the Trust Company's name, which shall serve as trustee for the Parent Company as owners, of the first part, and for the Lenders, through the Security Trustee, as holders of the lien, of the second part. The Company shall be exempt from paying the Trust Company a fee for such services.

Creation of Liens by the Company

22.1.2.

A floating charge on all the Company's assets, property (current and fixed) and its present and future rights (with the exception of the Additional Shares) and a first-ranking fixed charge on the share capital of the Company, which has not yet been realized and/or which has been exercised and not yet realized, on the Company's goodwill and its rights to a tax exemption and/or relief and/or dispensation under Law, all in accordance with the Debenture a copy of which is attached hereto as Appendix 22.1.2.

22.1.3.

A fixed lien, assignment by way of lien and a floating charge on the rights and assets of the Company, as set forth below, all in accordance with the Debenture, a copy of which is attached hereto as Appendix 22.1.3.

22.1.3.1 (a)

Subject to the provisions of the Lien Permit and any Law, all of the Purchased Shares which the Company owns in Bezeq, as well as the profits, consideration, proceeds and alternative distributions thereof, and all the Company's rights and other means of control in Bezeq which arise from the Purchased Shares (including the right to receive Dividends of any type, bonus shares, and the right to repayment of the Shareholder Loans and to receive Management Fees). For the avoidance of doubt, it is clarified that the Additional Shares shall not be encumbered in favor of the Lenders or a third party, and shall be Free and Clear, and the Company shall be entitled to purchase, sell and transfer them at its discretion.

(b)

As part of the aforementioned lien, the Purchased Shares shall be recorded under the name of the Trust Company, which shall serve as trustee for the Company as owner, of the first part, and for the Lenders, through the Security Trustee, as holders of the lien, of the second part. The Company shall be exempt from paying the Trust Company a fee for such services.

(c)

As part of the aforementioned lien, the Company and the Lenders, through the Security Trustee, shall irrevocably instruct the Trust Company, as part of the Lower Trust Agreement, to transfer all the monies, monetary rights and other payments of any type, which the Trust Company is entitled and/or shall be entitled to receive from Bezeq with respect to the Purchased Shares for any reason, to the Company's Account.

22.1.3.2

All of the Company's rights in the Company's Account, and all the monies and/or assets deposited and/or located and/or to be deposited and/or located in the Company's Account and/or credited and/or to be credited thereto, including securities and income and proceeds which the Company has and is to have with respect to and in connection with the Company's Account, the aforementioned monies, securities and/or assets, and the profits, all with the exception of the Additional Shares.

22.1.3.3

The Company's rights under the Purchase Agreement.

22.1.3.4

A floating charge on all the monies which the lien holder is and/or shall be entitled to receive from Bezeq on account of the Shareholder Loans.

22.1.3.5

All the Company's rights under the Management Agreement.

22.1.3.6

Encumbrance of its rights toward the Trust Company.

22.1.3.7

As part of the lien set forth in this Section 22.1.3, the Lenders, through the Security Trustee, shall be issued an irrevocable instruction of the Company, signed and authorized by Bezeq, for the transfer of all the monies, monetary rights and payments of any type which the Company is entitled and/or shall be entitled to receive from Bezeq on account of Shareholder Loans of any type and/or in connection with a management agreement to be executed between the Company and Bezeq, into the Company's Account, in the form attached as Appendix B to the Debenture attached hereto as Appendix 22.1.3.

22.1.4.

The Parent Company shall execute an irrevocable letter of undertaking in favor of the Lenders, through the Security Trustee, a copy of which is attached hereto as Appendix 22.1.4.

22.2.

It is explicitly agreed that the Collaterals documents set forth in this Agreement, including the foregoing in this Section, constitute an integral part of this Agreement, and all the provisions, terms, representations and undertakings including in the aforementioned Collaterals documents constitute an integral part of this Agreement and are included herein. It is further explicitly agreed that any undertaking and/or other declaration signed by the Company and/or Parent Company and/or on their behalf and/or by Eurocom Communications shall be in addition to, and not in derogation from the foregoing.

22.3.

All the Collaterals provided and/or to be provided to the Lenders by the Company and/or the Parent Company and/or Eurocom Communications (if and to the extent provided by Eurocom Communications) and/or by others on their behalf to secure repayment of the Credit Amounts and/or fulfillment of all their undertakings hereunder, shall be cumulative and independent of one another, and shall not affect the other Collateral held or to be held by the Lenders, nor shall they be affected by such Collateral and shall be used as continuing Collaterals until full payment of all the Credit Amounts. The Lenders may realize the Collaterals according to the order to be determined by them, and Realization of one of the Collaterals shall not harm or diminish any other Collateral.

23.	Type of Collaterals

23.1.

The Collaterals provided and/or to be provided to the Lenders to secure repayment of the Credit Amounts are of a continuous nature and shall remain in effect until such time as the Security Trustee authorizes in writing – on behalf of the Lenders – the termination thereof. The Security Trustee shall authorize the termination thereof, as aforementioned, and shall sign any document so required for the termination and removal thereof from any register, immediately after the full repayment of the Credit Amounts.

23.2.

In the event the Lenders and/or the Lenders, through the Security Trustee, were and/or are to be provided other Collaterals and/or guarantees for repayment of the Credit Amounts and/or a portion thereof, all of the Collaterals and guarantees shall be independent of one another.

23.3.

In the event the Lenders, through the Facility Agent, settle or provide an extension or dispensation to the Company and/or the Parent Company and/or Eurocom Communications and/or any of the guarantors of the Company, or the Lenders modify any of their undertakings in connection with the Credit Amounts, or release or waive other collateral or guarantees – the foregoing shall not affect the nature of the Collateral created and/or to be created to secure the Credit Amounts, and all the Collaterals and undertakings provided in favor of the Lenders shall remain in full force and effect.

Chapter E – Immediate Repayment of the Credit

24.	Immediate Repayment

Upon the occurrence of one or more of the events enumerated below – and these events exclusively – the Lenders may, by a decision passed by a Special Majority of the Lenders, demand the immediate repayment of all or part of the Credit Amounts. Notice of the demand for immediate repayment shall be provided by the Lenders, through the Facility Agent, after it receives appropriate instructions from the Lenders, based on the agreements herein and in the Inter-Creditor Agreement.

In such instance, the Company undertakes to pay the Lenders, at their demand, all or part of the Credit Amounts with respect to the Credit provided to the Company, the repayment of which is demanded by the Lenders, through the Facility Agent. The Lenders, through the Facility Agent, may charge the Company's Account for all or part of the Credit Amounts, and may take all the measures they deem necessary to collect such amounts, in particular to realize all or part of the Collaterals, at their discretion, in any manner permitted by Law at the Company's expense, all subject to any Law.

The following are the events:

24.1.

If the Company breaches and/or fails to perform: (a) any condition of the Credit Documents, which, in the discretion of the Lender, through the Facility Agent, is a material condition; or (b) any other undertakings which the Company undertook and or is to undertake towards the Lenders, whether under this Agreement or under any of the other Credit Documents, which, in the discretion of the Lender, through the Facility Agent, is a material undertaking, all, if the aforementioned breach is not remedied within 45 days of receiving notice of the breach (for the avoidance of doubt – the provisions of this Section 24.1 do not apply to the specific instances set forth in the remaining subsections of this Section 24 below, with respect to which the specific arrangements provided in any of the aforementioned subsections shall apply).

Notwithstanding the foregoing in this Section 24.1, the Lenders, through the Facility Agent, shall be exempt from providing such notice and/or from waiting for the conclusion of the notice period if the Lenders, through the Facility Agent, believe that providing the notice and/or waiting to the end of the notice period may cause the Lenders immediate and substantial damage, including any instance in which the Lenders, through the Facility Agent, believe that provision of the notice and/or waiting to the end of the notice period may derogate from the Lenders' possibility of Realizing the encumbered assets and/or taking measures for the collection thereof. In the event the Lenders elect to act as set forth above, they shall provide the Company written notice regarding such decision and the reason for their decision, closely after reachi ng such decision.

24.2.

If it becomes evident that any of the Company's representations in this Agreement or the appendices hereto and/or the Credit Documents which the Lenders, through the Facility Agent, believe to be material is incorrect or inaccurate, and, at the discretion of the Lenders, through the Facility Agent, the breach caused harm or may cause harm to the Lenders' rights if not remedied; provided that the Company does not remedy the breach within 35 days of the date the Lenders, through the Facility Agent, notify the Company of the breach.

24.3.

If: (a) the Company receives a decision to Restructure; or if (b) Bezeq receives a decision to Restructure, which may affect the Lenders' rights.

24.4.

The Company and/or Bezeq decide upon voluntary dissolution.

24.5.

If a motion for liquidation is filed against the Company and/or Bezeq or a liquidation order is issued against the Company and/or Bezeq; and/or a temporary, permanent or other liquidator and/or special manager and/or trustee is appointed over the Company and/or Bezeq and/or a motion for a stay of proceedings is filed with respect to the Company and/or Bezeq and/or such an order for a stay of proceedings is issued; provided that to the extent the provisions of this subsection pertain to motions which were not filed by the Company and/or Bezeq and/or to orders issued ex parte without the Company's and/or Bezeq's consent respectively, the Company shall be provided a cure period of 30 days to cancel the motion and/or order, as applicable.

24.6.

Negotiations take place for the formulation of and/or a motion is filed for an arrangement or a settlement proposal, as these terms are defined in Section 350 of the Companies Law, between the Company and its creditors and/or its shareholders or between the Company and a particular class thereof and/or if the aforementioned arrangement and/or settlement proposal is approved, all with the exception of internal re-organization or technical changes in capital; provided that to the extent the provisions of this subsection pertain to a motion for an arrangement and/or settlement which is not filed at the initiative and/or with the agreed participation of the Company and/or negotiations in which the Company did not participate with its consent, then the Company shall be provided a cure period of 30 days to cancel the negotiations and/or the aforementioned motions for an arrangement and/or settlement, as applicable;

Or –

If negotiations take place for the formulation of and/or a motion is filed for an arrangement or a settlement proposal, as these terms are defined in Section 350 of the Companies Law, between Bezeq and its creditors and/or its shareholders or between Bezeq and a particular class thereof and/or if such arrangement or settlement proposal is approved, all, with the exception of an internal re-organization or technical changes in capital; provided that to the extent the provisions of this subsection pertain to a motion for an arrangement and/or settlement which is not filed at the initiative and/or with the agreed participation of the Company and/or Bezeq and/or with respect to negotiations in which the Company or Bezeq did not participate with their consent, the Company shall be provided with a 30-day cure period to cancel the negotiatio ns and/or the aforementioned motions for an arrangement and/or settlement, as applicable;

24.7.

The Company and/or Bezeq are removed from the records of the Registrar of Companies.

24.8.

The Company and/or Bezeq are registered in the Registrar of Companies records as a company in breach as such term is defined in Section 362A of the Companies Law, and such breach is not remedied within 7 Business Days of the date the Company is provided notice of the breach by the Lenders, through the Facility Agent.

24.9.

A motion is filed for the receivership of the Company's property and/or all or a Substantial Portion of Bezeq's Property and/or such a receivership order is issued and/or a permanent and/or temporary and/or other receiver is appointed over the Company's property and/or over all or a Substantial Portion of Bezeq's Property; provided that to the extent the provisions of this subsection pertain to motions that were not filed by the Company and/or Bezeq and/or to orders issued ex parte, then the Company shall be provided a cure period of 45 days to cancel the aforementioned motion and/or order, as applicable.

With respect to this subsection and Section 24.10 below:

"A Substantial Portion of Bezeq's Property" shall mean 10% of the value of Bezeq's activity, with the value of activity being calculated, exclusively for the purpose of this definition, by multiplying Bezeq's EBITDA by 5.7.

24.10.

An attachment is imposed or similar execution proceedings are instituted with respect to the Company's property and/or all or a Substantial Portion of Bezeq's Property (as defined above);

And/or

An attachment is imposed or similar execution proceedings are instituted with respect to one of the Collaterals that were provided and/or to be provided to the Lenders by the Company and/or on its behalf to secure repayment of the Credit Amounts, all or a substantial portion thereof,

[The foregoing is] provided that to the extent the provisions of this subsection pertain to orders issued ex parte, the Company shall be provided a cure period of 45 days to remove the attachment.

24.11.

The Company is late in paying an amount under this Agreement, and such breach is not remedied within 14 (fourteen) days. It is hereby clarified that failure to pay the consideration for the Option due to the fact that the Company's Account contains an insufficient balance from the sources intended for payment of the Option (as set forth in Section 16.5 above) shall not constitute an Event of Default or delay in payment under the provisions of this Agreement.

24.12.

There is a Change in Control, as such term is defined in Section 2 above, at any time, for any reason.

24.13.

The Company breaches its undertakings under Section 21.21 above and Eurocom fails to complete the necessary amount pursuant to the provisions of the Eurocom Communications Guarantee Letter, provided that in such instance, the Lenders may demand the immediate payment of the Credit Amounts up to the amounts secured under the Eurocom Communications Guarantee Letter, as defined in Section 16.2.2.6 above.

24.14.

The Company fails to provide the Facility Agent with balance sheets, periodic Financial Statements, accounting books and other documents pertaining to its state of affairs, as set forth in Sections 21.16 and 21.20 above and Section 41 below, within 21 days of the date the Lenders provide written notice of the breach, or if the Company breaches the instructions of the competent authorities to furnish and/or publish various reports and documents required by Law, and the Company fails to remedy such breach within the time prescribed by the relevant authority.

24.15.

There is a change to the incorporation documents of the Company which, in the Lenders' absolute discretion, will harm the Lenders' rights in connection with the Credit and/or the Lenders' rights under the Credit Documents and/or the Company's liabilities towards the Lenders under this Agreement and the Credit Documents.

24.16.

The incorporation documents of Bezeq are modified contrary to the provisions of Section 21.2 above.

24.17.

If (a) the number of shares which the Company holds in the issued share capital of Bezeq is, at any time, lower than 814,211,545 ordinary shares, or any number in lieu of these shares in the event of a consolidation or Distribution; or (b) the Company shall cease to hold control of Bezeq, as "control" is defined in the Communication Law; or (c) the percentage of Purchased Shares out of Bezeq's issued share capital shall be less than the following: (1) until such time as at least 25% of the Original Credit Principal Balance (as such term is defined in Section 16.1.1 above) is repaid (by means other than Realization of the Collaterals in favor of the Lenders) – 29.1% (on a Fully Diluted basis); (2) following repayment of at least 25% of the Original Credit Principal Balance (by means other than Realization of any of the Collaterals in favor of the Lenders) – 28.5% (on a Fully Diluted basis), and, follo wing the repayment of at least 45% of the Original Credit Principal Balance (by means other than Realization of any of the Collaterals in favor of the Lenders) – 28% (on a Fully Diluted basis).

24.18.

In the event: (a) any of the financial ratios set forth in Sections 21.15 above with respect to Bezeq's Financial Statements are not satisfied; or (b) at any time as of the end of six (6) Months from the closing of the transaction, the Company's Debt Coverage Ratio is less than 1.1;

If any of the financial ratios set forth in this subsection above is not satisfied, the Company shall furnish the Lenders with a plan for remedy of the breach, to the Lenders' satisfaction, within 30 days of the earlier of: (1) the date on which the Company first becomes aware of such breach or potential breach; or (2) the date of publication of Bezeq's and the Company's quarterly or annual Financial Statements, as applicable.

If the Company provides the Lenders with a plan for remedy of the breach in a timely manner and the Lenders do not notify the Company in writing that such plan is unacceptable to them within seven days of being furnished the Company's plan, the breach shall be remedied within 60 days of the submittal of the aforementioned plan for remedy of the breach. In the event the breach is not remedied by the deadline provided in the plan, the Lenders may demand the immediate repayment of the outstanding balance of the Credit.

In the event the Company fails to provide the Lenders a plan within 30 days or the Lenders notify the Company in writing that the plan they were furnished is unacceptable, as applicable, the Lenders may demand the immediate repayment of the outstanding balance of the Credit.

Notwithstanding the foregoing in this Section, if at any time during the period for remedy of the breach, as set forth in this subsection above, the Lenders, through the Facility Agent, believe that such a cure period may cause immediate and substantial damage to the Lenders, including in the event the Lenders, through the Facility Agent, believe that provision of the notice could derogate from the Lenders' ability to realize the encumbered assets and/or to demand immediate repayment of the Credit Amounts and/or take measures for the collection thereof; if another instance of breach occurs during this period, the Facility Agent may demand the immediate repayment of the outstanding Credit balance immediately upon reaching such a decision, or upon the occurrence of an additional instance of breach, as applicable.

24.19.

Bezeq's shares are, for any reason, not traded on any of the following stock exchanges for a consecutive period of thirty (30) days: the Stock Exchange, the London Stock Exchange (LSE) or any stock exchange in the United States.

24.20.

The General License is adversely modified in a manner which constitutes a Material Change to the Nature of Activity, or the General License is cancelled and/or any other permit granted and/or to be granted to Bezeq under the Communications Law is cancelled or adversely modified in such a manner that would constitute a Material Change to the Nature of Activity, all except if the circumstances described in this Section occurred as a result of an act or omission of any of the Lenders.

24.21.

Any of the agreements, permits, licenses or approvals set forth in Section 8.3.2(j) above (including permits the Company received in order to hold means of control in Bezeq) expire, are cancelled or terminate (without being renewed) or cease to be fully valid for any reason or are modified without the Lenders' consent, all except if the circumstances described in this Section occurred as a result of an act or omission of any of the Lenders. For purposes of this Section, "control" and "means of control" are as defined in the Communications Law.

24.22.

One of the instances enumerated in Sections 24.4; 24.5; 24.6; 24.7; 24.12, with the changes adjusted to circumstances, occurs to the Parent Company in such a manner that would affect the Lenders' rights and status as holders of the lien, as set forth in Section 22.1.1 above.

24.23.

An event, or series of events occurs which constitute a sale and/or transfer, in any manner, of Bezeq's Material Activity.

24.24.

An event, or series of events occurs which constitute a Material Change to the Nature of Activity of Bezeq's.

24.25.

Bezeq and/or Pelephone Communications Ltd. and/or Bezeq International Ltd. failed to make a timely payment in accordance with the amortization schedules to debenture holders and/or Bezeq and/or Pelephone Communications Ltd. and/or Bezeq International Ltd. breached an undertaking to make a payment to any bank, in an amount that shall not be less than NIS 300 million.

All [The foregoing] if the aforementioned non-payment or breach is not cured within 30 days of such non-payment or breach.

For the avoidance of doubt, it is clarified that the Lenders' right to demand the immediate payment of the Credit Amounts and to take action against the Company to collect the Credit Amounts with respect to each of the instances set forth in this Section, including all the subsections hereof, is a separate right, and the occurrence of one of the events set forth above is sufficient for the Lenders' aforementioned right to be exercised.

Chapter F –Lenders' Rights and Undertakings

25.	The Lenders' Rights and Undertakings

Subject to the provisions of the Permits and any Law:

25.1.

The Lenders, through the Facility Agent, have rights of possession, lien, set off and encumbrance over all the monies (whether in Israeli or foreign currency), assets, marketable papers, non-marketable papers, deposits, collateral, securities, and all the bonds, guarantees, liens and pledges of any type provided and/or to be provided to any of the Lenders by the Company, and all the rights, assets and monies of any type deposited and/or to be deposited in the Company's name in the Company's Account and/or the Trust Company's Account (hereinafter in this Section 25, the "Assets") against any Liability of the Company towards the Lenders under the Credit Documents, and, with respect to the right of possession – all without the need for prior notice, including if the repayment date of a particular right of the Company's in the Company's Account has not ye t arrived or the repayment date of a particular obligation of the Company in the Company's Account, in whole or in part, including in the event reference is made to a contingent charge and the condition or conditions for applying it do not yet exist, under the Credit Documents. The Company is aware that in the event the Lenders, through the Facility Agent, perform such set off, [the Company's] rights in connection with the Company's Account with respect to which the set off was performed, may be harmed (such as its rights to Interest, linkage differentials, representative rate differences, grants or loans, exemptions or relief from income tax or deductions at source, if it has such rights according to the terms of such account), and the Company undertakes to bear all the expenses and payments customary of the Facility Agent at the time in connection with such set off.

Notwithstanding the foregoing, the set off of any Credit Balance of the Company against any debt of the Company towards the Lenders under the Credit Documents is conditional upon the debt having become due (including by way of a demand for the immediate payment thereof).

In addition, set off or exercise of the lien right by the Lenders or any one of them, through the Facility Agent, is subject to the Facility Agent notifying the Company 7 business days prior to the set off or exercise of the lien right of its intention to perform such action, unless the Lenders believe that such notice may affect their ability to collect the Credit.

25.2.

The Facility Agent may, at any time, charge the Company's Account for any amount due from it under the provisions of this Agreement.

25.3.

Upon the occurrence of one of the events set forth in Section 24 above, without taking into account cure and/or waiting periods, the Lenders, through the Facility Agent, may hold all or part of the Assets, at their discretion, until the breach is remedied by the end of the cure period, to the extent periods of this type exist and subject to the provisions of Section 24.1 above; or, if not remedied – until such time as all the Company's undertakings towards the Lenders are satisfied, including payment of all Credit Amounts (including in the event of a conditional obligation and the condition or conditions for its payment do not yet exist) and/or, upon the lapse of the cure periods set forth above, to the extent any such period exists, and subject to the provisions of Section 24.1 above, to sell the Assets and/or to realize them at the Company's expense and for the payment of all its obligations under the Cr edit Documents, including by way of set off.

25.4.

In the event one of the events set forth in Section 24 above occurs, without taking into account waiting and/or cure periods, and the Company has foreign currency assets, including as a result of the Realization of the Collaterals provided and/or to be provided to the Lenders by the Company and/or on behalf thereof and for the purpose of paying Credit Amounts, in Israeli currency, the Company hereby gives the Lenders irrevocable instructions and authorization in advance, if the cure period passes without the breach being remedied, to the extent time periods of this type exist and subject to the provisions of Section 24.1 above, to sell the Assets, or any one of them, at their discretion, at a customary sale rate and to credit the consideration against the outstanding Credit Amounts.

25.5.

The Company is aware that in instances in which the Facility Agent exercises the rights of set off, as set forth in this Section 25, prior to the repayment date of all or part of a deposit of the Company, adverse changes may occur to its rights with respect to or in connection with such deposit (i.e. with respect to interest rates, linkage differentials, representative rate differences, rights to grants or loans, exemptions or relief from income tax or deductions at source – if it had such rights under the terms of such deposit).

25.6.

The Company undertakes to bear all the expenses and payments customary at the Facility Agent at the time in connection with any set off action as set forth in this Section 25.

25.7.

The Lenders' rights under this Section 25 shall be exercised through the Facility Agent, and are in addition to any existing and/or future right they may have in connection with the Company's Account and any Liability of the Company with respect to and in connection with the Credit Documents, under Law and/or agreement, including the Company's Account Opening Documents.

25.8.

Immediately after the execution of this Agreement, the Lenders undertake to make their best efforts to do what is reasonably required to fulfill the condition precedent provided in Section 8.2.1(b) above. The Lenders shall keep the Company informed of the Lien Permit issuance process, and shall notify the Company upon receiving the Lien Permit no later than one Business Day after receiving the Permit (or following the authorities' notice that the language of the Lien Permit has been agreed to).

25.9.

Bank Hapoalim declares that following an examination of the information it requested from the Company and its controlling shareholders, it does not know of any limitations existing under Regulation 313 of the Proper Conduct of Banking Regulations. In addition, Bank Hapoalim shall not deviate from the limitations imposed by Regulation 313 of the Proper Conduct of Banking Regulations as a result of the Provision of the Credit.

Chapter G – Lenders and Position Holders

26.	The Position Holders

It is clarified that the provisions of this Section 26 regarding the relationship of the Lenders amongst themselves and without harming the rights of the Company under this Agreement, shall be subject to and as set forth in the Inter-Creditor Agreement.

26.1.

The Facility Agent

26.1.1.

The Lenders hereby appoint Bank Hapoalim as Facility Agent and hereby irrevocably authorize it to manage the Credit and all associated matters (including the administration of the Option Agreements), and exercise the rights and powers granted to the them under this Agreement and the Collaterals documents, all as set forth in this Agreement below, on their behalf and on behalf of any of their transferees (Bank Hapoalim as Facility Agent shall hereinabove and hereinafter be referred to as the "Facility Agent").

26.1.2.

For the purpose of performing the duties of its position, the Lenders grant the Facility Agent the following authority (subject to the provisions of the Permits and any Law):

(a)

To exercise the rights, authority, authorization, powers and discretion explicitly granted to the Facility Agent, itself, by the Lenders in this Agreement, and any related or associated authority, power and discretion. Nothing in the foregoing shall derogate from the provisions of Section 1.8 above.

(b)

At any time and to the extent the Facility Agent believes it is so desirable or necessary, to grant any person or persons employed by it or acting on its behalf, by power of attorney or in another manner, all or part of the authority granted to the Facility Agent, provided that doing so shall not derogate from the Facility Agent's direct liability under the provisions of this Agreement and/or pursuant to the provisions of any Law. Without derogating from the provisions of the foregoing, in the event the financial ratios set forth in Sections 24.18 and 21.15, respectively, are not satisfied, the Facility Agent may appoint an agent to examine the Company's state of affairs, business and activities. Upon signing this Agreement, the Company consents to such appointment (provided that the agent so appointed does not have a conflict of interest with the Company or Bezeq and is not a related party to a competitor of th e Company or Bezeq), and undertakes to cooperate with the Facility Agent's agent in all matters related to such position, subject to the provisions of any Law.

(c)

To convene meetings of the Lenders for the purpose of receiving their instructions with respect to this Agreement.

(d)

To take any action necessary in connection with an Event of Default, in accordance with the Lenders' instructions as agreed amongst the Lenders in the Inter-Creditor Agreement, including instructing the Security Trustee to take the necessary steps to enforce any rights in connection with the Collaterals, and any other instruction to the [Security] Trustee in connection with this Agreement.

(e)

Subject to the provisions of this Agreement above, the granting of consent, approval or a waiver, as applicable, by the Facility Agent in accordance with the provisions of this Agreement (whether pursuant to the Lender's instructions or at its sole discretion, as applicable) shall constitute consent, approval or waiver, as applicable, from each of the Lenders for all intents and purposes. Nevertheless, it is clarified that for purpose of the internal relationship of the Lenders amongst themselves (and without the Company being required to perform any action or examination in this respect), the Facility Agent shall not agree to any amendments to this Agreement or waivers without receiving instructions from the Lenders, as agreed by them in the Inter-Creditor Agreement, and as set forth in this Agreement.

(f)

To charge the Company's Account for the Option, subject to prior written coordination with the Company.

26.1.3.

Subject to the provisions of the Permits and any Law: the Facility Agent shall only exercise any right or authority granted to it under this Agreement which [the Agreement] provides is to be performed by the Lenders, through the Facility Agent, at the written instructions of the Lenders, to be granted thereto as agreed by them in the Inter-Creditor Agreement, in accordance with the majority determined with respect thereto. It is clarified that the provisions of this Section are for the purpose of the internal relationship of the Lenders amongst themselves (and without the Company being required to perform any action or examination in this respect).

26.2.

Security Trustee

Subject to the provisions of the Permits and any Law:

26.2.1.

It is hereby agreed that in order to enable the Lenders and any of their transferees to hold the Collaterals as security for repayment of the Credit Amounts and to enable the Lenders to transfer their rights in connection with the Collaterals to third parties in an optimal manner (in the event of assignment of the Lenders' rights in the Credit and subject to the provisions of this Agreement), the Collaterals, including all proceeds therefrom, shall, during the entire Credit period, be vested and registered in favor of the Lenders, through Bank Hapoalim, which shall serve as Security Trustee for all the Lenders and any of their future transferees (Bank Hapoalim in its capacity as security trustee shall hereinabove and hereinafter be referred to as the "Security Trustee"). In addition, the Purchased Shares and the Parent Company's shares of the Com pany shall be registered in the name of the Trust Company, as applicable, and the Trust Company shall serve as trustee for the Company or the Parent Company, as applicable, as a shareholder and for the Lenders, through the Security Trustee, as lien holder[s]. The Security Trustee hereby accepts the trust under this Agreement and undertakes to hold the Collaterals in trust for the Lenders (including itself), all as agreed in the Credit Documents. The Security Trustee shall be obligated to the Lenders under this Agreement and nothing herein constitutes an agreement by the Security Trustee to serve as trustee, according to its meaning in the Securities Law and/or other Law.

26.2.2.

The Lenders hereby grant the Security Trustee the following authority for the purpose of performing the duties of its position:

(a)

To sign the Collaterals documents, as necessary, on behalf of the Lenders.

(b)

To exercise the rights, authority, authorization, powers and discretion explicitly granted to it by the Lenders in this Agreement, and any related or associated authority, power and discretion.

(c)

At any time and to the extent the Security Trustee believes it is so desirable or necessary, to grant any person or persons employed by it or acting on its behalf, by power of attorney or in another manner, all or part of the authority granted to the Security Trustee, provided that doing so shall not derogate from the Security Trustee's direct responsibility pursuant to the provisions of any Law.

(d)

With respect to the Collaterals documents, the Security Trustee shall only act in accordance with written instructions of the Lenders, through the Facility Agent, and the Lenders shall be regarded as hereby irrevocably authorizing it to act exclusively in accordance with the instructions of the Lenders, through the Facility Agent. For the avoidance of doubt, the Security Trustee shall not take any action for the enforcement and/or Realization of any Collateral without written instruction from the Lenders, through the Facility Agent.

26.2.3.

The Security Trustee may refrain from exercising any right or authority granted thereto under this Agreement, unless – and until such time as – it receives instructions from the Lenders, through the Facility Agent, in connection with a course of action or abstention from taking action pursuant to such right or authority.

26.2.4.

The Security Trustee shall transfer any sum of money and/or asset it receives in connection with the Realization of the Collaterals to the Company's Account, in order for it to be distributed by the Lenders, through the Facility Agent, in accordance with the provisions of this Agreement, as soon as possible after receiving such [sum of money and/or asset] or at such other time as instructed by the Lenders, through the Facility Agent.

26.2.5.

In the event that in accordance with the provisions of this Agreement, the Lenders, through the Facility Agent, notify the Security Trustee that it has been resolved to demand the immediate repayment of all or part of the Credit or to realize any of the Collaterals (fully or in installments), the Lenders, through the Facility Agent, may, at their discretion, and subject to the provisions of this Agreement and the Inter-Creditor Agreement, instruct the Security Trustee to transfer and/or act vis-à-vis the Trust Company [to cause it] to transfer the Collaterals in the Lenders' name and/or in the name of a third party or third parties, as so instructed by the Lenders, through the Facility Agent, and the Security Trustee shall act in accordance with all the instructions of the Lenders, through the Facility Agent.

26.2.6.

The trust arrangement under this Agreement has been made for an unlimited amount of time and shall continue to be binding and in full force and effect until such time as the Lenders, through the Facility Agent, provide the Security Trustee written notification of the termination of the trust, as set forth in Section 26.2.9 below.

26.2.7.

The Lenders, through the Facility Agent, shall furnish the Security Trustee written notice of any change in the Lenders under this Agreement, and shall furnish the [Security] Trustee with the name and address of any new Lender.

26.2.8.

Subject to any Law, the Security Trustee shall be removed from its position and shall be replaced exclusively by another bank from within the Lenders, at the instructions of the Lenders. It is clarified that in circumstances in which the Security Trustee is removed from its position and the Lenders do not agree on an alternate trustee, the Facility Agent shall be entitled to determine the identity of the alternate [Security] trustee, at its discretion, provided that [such trustee] will be another bank from within the Lenders.

26.2.9.

In the event the Security Trustee is removed from its position, as aforementioned, it shall transfer the Collaterals recorded in its favor in connection with this Agreement and shall execute the documents required for the transfer thereof to such alternate trustee as instructed by the Facility Agent, who shall comply with the Lenders' instructions as agreed by them in the Inter-Creditor Agreement.

27.	Provisions Applying to a Position Holder

It is clarified that the provisions of this Section 27 regarding the relationship of the Lenders among themselves, and without derogating from the Company's rights hereunder, are subject to and as set forth in the Inter-Creditor Agreement.

27.1.

Subject to the provisions of the Permits and any Law, a Position Holder may exercise the rights granted thereto under this Agreement at any time it so determines, at its sole discretion. The rights and remedies granted to a Position Holder hereunder are cumulative and do not derogate from any right available to them under Law or agreement.

27.2.

No waiver, extension, discount delay in performing an action (hereinafter, "Waiver") on the part of a Position Holder shall be deemed to be a waiver of any of its rights, but rather as consent limited to the special circumstances in which it was granted.

27.3.

A Position Holder may, but is not obligated to rely on any information, approval, legal opinion or other document it determines to be reliable or authentic, as applicable.

27.4.

Without derogating from the generality of the foregoing in Section 26.12 Subsection (b) and Section 26.2.2.2 Subsection (c), while performing the duties of its position, a Position Holder may, but is not obligated to delegate authority and appoint an agent (without any conflict of interest with the Company or Bezeq or related to a party competing with them) to act on its behalf and to perform various actions which are to be performed as part of the duties of its position, but without derogating from its direct liability in any circumstances, including any obligations of the Position Holder under the provisions of this Agreement or any Law.

27.5.

The Position Holder may, unless it receives a written notice to the contrary from any of the Lenders or the Company, presume as follows:

27.5.1.

All of the Company's declarations and representations in this Agreement and in connection herewith are true and correct;

27.5.2.

The Company is not in breach of any of its undertakings hereunder, and no Event of Default has occurred.

27.6.

A Position Holder may (without further examination) rely on any notice, approval or any document presented to it by the Lenders and/or the Company which appear to be original or certified as "true to the original," and which also appears to be signed by the party so authorized.

27.7.

For the avoidance of doubt, a Position Holder shall not be obligated to perform a searching examination regarding fulfillment by the Company and/or its shareholders and/or anyone on their behalf, as well as any third party, of all their undertakings under this Agreement or any undertaking connected or pertaining to this Agreement and regarding the aforementioned parties' compliance with all the declarations, representations, conditions, terms and provisions pertaining hereto, and regarding the occurrence of an Event of Default or circumstances amounting to an anticipated breach, and the Position Holder shall not be presumed to have knowledge about any of the foregoing – until such time as notified otherwise in writing by the Company or any of the Lenders.

27.8.

A Position Holder shall not be responsible for the accuracy and completeness of any representation, declaration, information and/or undertaking appearing in the Credit Documents, any notice provided thereby and/or in any document executed in connection therewith, nor shall it be responsible for the validity and admissibility of any of the Credit Documents and any document executed in connection therewith.

27.9.

A Position Holder, with the exception of the Facility Agent, may resign from its position by written notice to the parties to the financing (and, in the event such party holds more than one position – it may resign from all or a portion of its duties), provided that such resignation does not constitute a violation of the Lien Permit. The resignation shall take effect after the appointment of an alternate trustee, and after the alternate trustee provides written notice to the parties to the financing of its intention to assume the position (hereinafter, the "Successor"). The Position Holder shall take all reasonable necessary measures to assist the Successor in performing its duties hereunder. For the avoidance of doubt, it is clarified that the Facility Agent shall not be entitled to resign from its position, nor shall it be dismissed therefrom (notwi thstanding any other provision in the Agreement or agreement among the Lenders).

27.10.

A Position Holder may refrain from performing any instructions given by the Lenders which, at its sole discretion, constitutes or is likely to constitute a violation of the Law and/or this Agreement and/or which may give rise to a cause of action for a party against the Position Holder. The Position Holder may perform any action (including duties to report to competent authorities) which, in its sole discretion, is required by Law.

27.11.

It is hereby clarified that the duties of the Position Holder are, as set forth hereinabove, technical and administrative in nature. Without derogating from the generality of the foregoing, and for the avoidance of doubt, nothing in the use of the terms "Facility Agent" or "trustee" and similar terms herein shall impose any further obligations on the Position Holders in addition to those set forth in this Agreement. In addition, use of such terms should not be construed as imposing on the Position Holders any duties of trust or fiduciary duties or an agency relationship vis-à-vis any party.

27.12.

It is clarified that the fact that the same legal entity serves as both Position Holder and Lender shall not add to or derogate from its obligations and rights as Lender under the provisions of the Credit Documents.

27.13.

A Position Holder shall not be required to perform any action which imposes monetary Liability on it, unless it is guaranteed, to its full satisfaction, coverage for such monetary Liability by the Lenders if it is not paid by the Company.

27.14.

Notwithstanding the provisions in this Agreement hereinabove and hereinbelow, whenever this Agreement requires one Position Holder to provide a document, notice, instruction or directions to another Position Holder (hereinafter, "Contact Between Position Holders"), then if, and as long as one legal entity performs the duties of the Facility Agent and Security Trustee (including by means of various entities within the same legal entity) the Contact Between Position Holders need not take place in a formal manner, including in writing, unless explicitly provided otherwise in the Credit Documents, including as set forth at the end of Section 26.2.2 Subsection (d).

Chapter H – Non-Reliance, Release from Liability and Indemnification

28.	Limitation of Liability

It is hereby clarified and agreed that a Position Holder shall only have those rights and obligations explicitly provided in this Agreement, hereinabove and hereinbelow. Other than as set forth herein, the Position Holder shall have no obligations, rights or liability whatsoever towards any party, pursuant to and/or in connection with the Credit Documents.

It is clarified that this Section 28 shall remain in effect including subsequent to the repayment of the Credit and/or completion of the parties' undertakings hereunder.

29.	Company's Representations and Warranties Towards the Position Holders

The Position Holders, and their officers, employees, advisors, agents and attorneys shall have no liability towards the Company in connection with the provisions of this Agreement, and the Company hereby releases all the aforementioned parties from liability for any damage or loss it may suffer as a result of an action or omission of the aforementioned parties, except in the case of an action by the aforementioned parties which amounts to gross negligence. This Section shall be construed as granting rights to the Position Holders and their officers, employees, advisors, agents and attorneys, who shall be entitled to rely on the provisions hereof.

Nothing in this Section derogates from any of the Lenders' undertakings under the provisions of this Agreement.

Chapter I – Lenders' Liability

30.	Lenders' Liability; A Lender in Breach

30.1.

As set forth in Section 6 above, the entire Credit Amount shall be provided by the Lenders, through the Facility Agent. With respect to the relationship of the Lenders amongst themselves, each Lender shall provide an amount equal to the Lender's Portion of the Credit, according to the various types thereof, as set forth in Appendix B2 hereto.

30.2.

Full underwriting – Notwithstanding the foregoing and the distribution of the amounts among the Lenders in Appendix B, Bank Hapoalim shall be responsible towards the Company for the transfer of the full Credit Amount to the Company, on the Closing Date, and shall, on the Closing Date, supplement any difference in amount which is created (to the extent created) for any reason (including the failure of one of the other Lenders to obtain a Permit), and, in such instance the provisions of Section 8.7.4 and 8.7.6 above shall apply exclusively with respect to Bank Hapoalim.

31.	Relationship Between Lenders

31.1.

Unless stated explicitly otherwise herein:

31.1.1.

All the Lenders' undertakings under this Agreement, towards the Company and towards the Facility Agent (including payment of fees, expenses and indemnification) shall rank pari passu without preference to one Lender over another, and shall be performed, pro rata, by each Lender, in accordance with such Lender's Portion.

31.1.2.

All payments or return of principal, Interest and linkage differentials, to the extent they exist, with respect to the Credit, whether received by the Facility Agents for the Lenders or whether received by the Lenders themselves, shall be distributed pari passu among the Lenders without preference to one Lender over another, pro rata to such Lender's Portion.

31.2.

The provisions of Sections 31.1.2 – 31.1.1 above may be modified and/or amended with the Lenders' consent, without requiring the Company's consent, provided that no new obligations or liabilities are imposed on the Company as a result of the modifications and/or amendments.

Chapter J – Credit Repayment and Payment Management

32.	Credit Repayment

32.1.

It is agreed that payment of the Credit by the Company or any third party, whether by way of ongoing repayment, early repayment or in any other manner, and the payment of any amount owed by the Company pursuant to the provisions of this Agreement, shall be made exclusively by way of depositing such amounts in the Company's Account and final settlement of the payment which has become due and payable (without derogating from the Company's right, as set forth in Section 18.2 above).

32.2.

Each of the Lenders hereby undertakes to refrain from demanding or accepting from the Company or any third party any payment of amounts payable thereto under or by virtue of this Agreement other than by way of the deposit of the payment amounts in accordance with the Facility Agent's instructions, for the purpose of being distributed among the Lenders by the Facility Agent, in accordance with the provisions of Section 32.4 below. The payment amounts shall be deposited, as aforementioned, in disregard of any right of set off, lien, encumbrance and so forth, to the extent the Lender has such a right vis-à-vis the other Lenders, and to the extent it is not explicitly permitted in this Agreement.

32.3.

Each of the Lenders hereby undertakes to provide the Facility Agent immediate, written notice of any amount it receives from the Company and/or a party on its behalf in connection with the Credit, regardless of the source thereof, including as set forth in Section 25 above (including by way of set off), and, at the Facility Agent's instructions, to transfer such amount immediately upon receipt, to be distributed among the Lenders through the Facility Agent, as set forth in Section 32.4 below.

32.4.

If and when an amount is received into the Company's Account on account of the Credit repayment, such amount shall be utilized to pay the amounts due to the Lenders under this Agreement, in accordance with the order provided in Section 20 above, by means of the Credit Accounts.

Chapter K – Collection of Credit Which Has Become Immediately Due and Payable and Realization of Collaterals

33.	The Lenders' Rights to Demand Immediate Repayment of the Credit

Subject to the provisions of the Permits and any Law, and subject to the provisions of this Agreement:

33.1.

In the event immediate payment of the Credit is demanded upon the occurrence of one of the events set forth in Section 24 above, the Security Trustee, at the instructions of the Facility Agent may (subject to the provisions of the Inter-Creditor Agreement and Section 24 regarding the majority required to pass such decision) take all the measures it deems necessary to collect the Credit Amounts and realize all the Lenders' rights hereunder, including full or partial Realization of the Collateral and using the proceeds to repay the Credit Amounts, without the Security Trustee being required to first realize other guarantees or Collaterals, if any such exist in its favor, for the Lenders. For the avoidance of doubt, the Lenders may not act, directly or indirectly, to collect the Credit Amounts owed by the Company other than through a Position Holder.

33.2.

Subject to the provisions of Section 26.2 above regarding the Security Trustee's obligation to comply with the instructions of the Facility Agent and any Law, the Security Trustee may:

(a)

With respect to assets which are not subject to the Lien Permit: as the power of attorney of the Company and for purposes of this Section, the Company hereby irrevocably appoints the Security Trustee as its power of attorney to realize any of the Collaterals and/or to sell any asset and/or any portion thereof which is encumbered in its favor for the purpose of securing any of the Company's undertakings and/or liabilities, in a public or other auction, alone or by means of others, for Cash or in installments or in another manner, for the price and on the terms determined at the Security Trustee's discretion. In addition, the Security Trustee may, alone or by means of the court or Execution Office, realize any such encumbered property,inter alia, by appointing a receiver and manager and/or assets receiver and/or trustee and/or special manager on behalf of the Lenders, and which, inter alia, may:

33.2.1.

Sell or agree to the sale of all or part of an encumbered property, or transfer it or agree to the transfer thereof in any other manner on the terms it so determines.

33.2.2.

Make any other arrangement in connection with encumbered property or any portion thereof, as it so determines.

33.2.3.

Apply for and receive tax exemptions with respect to the encumbered property which would have been due to us [the Company] had the Company performed a transaction, including a sale transaction, with respect to the encumbered property.

(b)

With respect to assets subject to the Lien Permit: act in accordance with the provisions of the Lien Permit and Debenture, the form of which is attached hereto as Appendix 22.1.3.

33.3.

If upon the sale of encumbered or other property any of the Credit Amounts have not become due and payable or are payable to the Lenders only conditionally (hereinafter, "Future Repayment Amounts"), the Lenders, through the Security Trustee, may collect, from the proceeds of the sale and/or from anything it receives under Section 33.2 above, an amount sufficient to cover the Company's Liability towards the Lenders in connection with this Agreement, including coverage of Future Repayment Amounts, and the amount collected which has not yet been allocated towards payment of a Liability of the Company towards the Lenders shall be encumbered in favor of the Lenders, through the Security Trustee, to secure fulfillment of any Company's Liability towards the Lenders under this Agreement, including repayment of all the Credit Amounts, and inclu ding for payment of all the Future Repayment Amounts, and shall remain in the Security Trustee's possession until the foregoing are fully paid.

33.4.

Any consideration received by the Facility Agent and/or the Security Trustee as a result of the collection of the Credit Amounts and/or all the proceeds received by the receiver from the encumbered property, as well as any consideration received by the Lenders and/or the receiver from the sale of the encumbered property and/or in any other manner following the immediate demand of payment of the Credit, shall be applied as follows:

33.4.1.

First, to cover expenses associated with Realization of the Collaterals which are not yet covered, including payment of all the expenses incurred and to be incurred in connection with the collection of the Credit and/or other amounts, including the receiver's expenses and wages, all as approved by the court or the Execution Office.

33.4.2.

The consideration to remain in the Company's Account shall be allocated in accordance with the order of distribution provided in Section 20.1 above, pro rata to each Lender's Portion.

Chapter L – Transfer of Rights and Obligations

34.	Right of Transfer; Disclosure of Information

34.1.

In this Section, the following terms shall have the meanings as set forth below:

34.1.1.

"Transfer" – the sale and/or endorsement and/or assignment of all or part of the obligations and rights in the Credit, directly or by means of a Special Purpose Company, and by means of the sale of the loan participation rights and in any other manner so determined by a Lender. A transfer may be made to one or a number of transferees, at the same time or from time to time;

34.1.2.

"Information" – any information in the Lenders' possession presently and/or in the future, including information provided by the Company to the Lenders and/or the Facility Agent and/or information about the Company which, at the Lender's discretion, is essential or desirable to transfer in connection with the transfer of the rights and obligations in the Credit, including information regarding the Credit provided hereunder, information regarding the liens and Collaterals provided and/or to be provided to secure the Credit [such information];

34.1.3.

"Potential Transferee" – a Permitted Transferee with whom the Lender (alone or through the Facility Agent) may hold negotiations for the transfer of the rights and obligations in the Credit thereto;

34.1.4.

"Rights and Obligations in the Credit" – Lender's rights and obligations:

34.1.4.1.

In connection with the Credit under this Agreement; and

34.1.4.2.

Pursuant to the liens and Collaterals provided and/or to be provided to the Lenders for performance of their undertakings in connection with the Credit and/or under this Agreement.

34.1.5.

"Advisors" – advisors on behalf of the Lender and/or any Potential Transferee;

34.2.

The Company agrees that it shall not be entitled to transfer to another party any of its rights and/or obligations in connection with the Credit it is provided under this Agreement without the prior written consent of the Lenders, through the Facility Agent.

34.3.

Subject to the provisions of the Permits and any Law, a Lender may, at any time, at its sole discretion, and without requiring the Company's consent, transfer the Rights and Obligations in the Credit to a transferee who is a Permitted Transferee, subject to the provisions of Subsection 34.8 below, and subject to the satisfaction of all the following conditions, and, in any event:

The Transfer shall be performed on the following terms:

(a) Bank Hapoalim shall remain the Lender of over 30% of the outstanding balance of each Credit type, unless agreed otherwise by the Company and Bank Hapoalim; (b) the Permitted Transferee shall have received all the permits required by Law for the transfer of the rights and obligations in the Credit; (c) the Transfer shall not preclude the provision of Credit or the continued existence of the Credit, as applicable; and (d) following the Transfer, the Permitted Transferee shall hold at least one hundred million shekels (NIS 100,000,000) of the Credit (or undertaking to provide the Credit, as applicable).

In addition to the foregoing, the Transfer (whether performed prior to or following the provision of the Credit) shall be subject to the following conditions: (i) the Transfer shall not harm or modify any of the Company's rights or obligations hereunder, including any tax implications; and (ii) the Permitted Transferee shall assume all the obligations and undertakings hereunder.

For the avoidance of doubt, this Section, including the restrictions herein, shall also apply to the sale of participation rights, as set forth below.

It is clarified that a Transfer of Rights and Obligations in the Credit, as set forth in this Section, shall not mean a transfer of rights and obligations in the Option (with respect to which the rights and obligations shall be transferred exclusively in accordance with the Option Agreements).

34.4.

For the avoidance of doubt, it is clarified that only a Lender may hold an Option or rights to receive money as a result of the realization of the Option.

34.5.

The Company undertakes to cooperate and to perform any action required, to the extent required, but not at its expense, for the aforementioned transfer of the Rights and Obligations in the Credit, including to execute any document so required in this respect, including the Transfer of any of the Collaterals in connection with the Rights and Obligations in the Credit, as aforementioned.

34.6.

A Lender may, at any time, disclose information in connection with the Transfer of the Rights and Obligations in the Credit to any Potential Transferee and/or Advisors.

34.7.

The information shall be disclosed subject to execution of a confidentiality undertaking attached hereto as Appendix 34.7 (or in a similar form) by the Potential Transferee and/or Advisors, as applicable, towards the Company.

34.8.

Any Transfer, as set forth above, shall be subject to the terms set forth in the Inter-Creditor Agreement, and, inter alia, shall be subject to execution of a transfer of rights and obligations letter, as agreed in the Inter-Creditor Agreement.

34.9.

In the event the Facility Agent receives such a transfer letter, the Facility Agent shall update Appendix B hereto and shall furnish each of the Lenders with a copy of the updated appendices, with a copy to the Company. It is clarified that the Facility Agent will not examine whether the Transfer under the transfer letter provided thereto, as aforementioned, complies with the terms of this Agreement, and it shall have no responsibility towards the Lenders in this respect.

34.10.

The following provisions shall apply to any sale of participation rights in the aforementioned rights, in addition to the other provisions of this Section 34 [which are to apply], with the exception of the provisions of Subsection 34.8 above:

34.10.1.

The purchaser of the participation rights shall not replace the Lender who is selling the participation rights, in the contractual relationship pursuant to this Agreement;

34.10.2.

The Lender selling the participation rights shall continue to be bound by all the undertakings under this Agreement towards the remaining Lenders and the Facility Agent;

34.10.3.

The purchaser of the participation right shall not have any right towards the other Lenders and/or towards the Facility Agent and/or towards the Company under this Agreement.

For the avoidance of doubt, with respect to the relationship of the Lenders amongst themselves, no Lender's Portion shall be affected by the sale of the participation rights to a third party by such Lender, as set forth in this Section 34.10 above. In the event of a sale of participation rights, as aforementioned, the participation amount shall continue to be included as part of the Lender's Portion selling the participation [rights].

Chapter M – General

35.	Facility Agent's Books as Evidence

The Company and the Lenders affirm that the Facility Agent's Books and accounts shall be used as prima facie evidence of all the details thereof, inter alia, with respect to the calculation of the Credit Amounts, the guarantees and the other Collaterals and any other matter related to this Agreement.

The Facility Agent's Books shall include details regarding the rights and obligations in the Option warrants, including the amounts which the Company's Account was charged or shall be charged in connection with the Option on a particular date, and the identity of the Lender who was credited or shall be credited for the relevant amount.

36.	Use of Information

The Company confirms that the Lenders have notified it of the following, pursuant to the Privacy Protection Law, 5741-1981:

36.1.

All the details it provided and/or shall provide the Lenders shall be used by the Lenders as customary in their ongoing work, at their sole discretion and for the purpose for which they were provided;

36.2.

All the details it provided and/or shall provide the Lenders shall be stored, based on the Lenders' needs, in the databases of the Lenders and/or of the party who provides the Lenders computer, data processing and database services from time to time, and the Company hereby acknowledges its consent to the foregoing.

37.	Disclosure of Information Between Lenders and Facility Agent, and to Authorities

37.1.

Without derogating from the generality of the foregoing in Section 34 above, each Lender may disclose details regarding the Company to another Lender or the Facility Agent, including information in connection with the Company's accounts at the Lender, credits the Lender provided the Company and the Company's state of affairs. The Company hereby waives towards the Lenders its banking confidentiality exclusively with respect to the disclosure of information as set forth above.

37.2.

Each Lender may disclose to the Bank of Israel, Supervisor of Banks and/or the Ministry of Finance or any other person acting under their authorization, or any other competent authority to which the Lender is subordinate, or any other person acting under the authorization of such authority, details of the Company, or [details] pertaining to the Credit or any portion thereof and/or the Credit Documents and/or this Agreement, whether at the demand of such competent authorities or by Law.

38.	Company's Obligation to Provide Notice

The Company undertakes to provide the Facility Agent with written notification of any disagreement or objection it has, if any, in connection with the Company's Account and/or the Credit.

39.	Indemnification for Court Ruling

39.1.

The Company hereby undertakes to indemnify the Lenders:

39.1.1.

For damage to be caused to the Lenders as a result of a ruling or decision of a court and/or execution office and/or court order and/or execution order (hereinafter, the "Rulings") to be issued for payment of any of the Credit Amounts whose payment currency is determined in the Rulings as a currency different from the Credit Currency (hereinafter, the "Ruling Currency"); and

39.1.2.

For any loss which may be caused to the Lenders as a result of any change in the Credit Currency exchange rate against the Ruling Currency exchange rate, during the period of time between the Agreed Repayment Date of such amount in this Agreement and the Actual Repayment Date of such amount.

39.2.

The Company's indemnification undertaking, as set forth in this Section above, is a separate and independent undertaking and shall remain in effect including unconnected to the waiver granted to the Company by the Lenders from time to time, and such undertaking shall remain in effect and its validity shall not be affected and/or diminished as a result of any such Ruling, decision or order.

39.3.

Nothing in this Section above shall derogate from the Company's duty to prevent in advance the act and/or omission as a result of which the Lenders may suffer a loss, as aforementioned.

40.	Tax Charges and Mandatory Payments

40.1.

If and to the extent stamp duty applies in connection with this Agreement and/or any other request to the Lenders in furtherance of this Agreement, it shall be borne by the Company and it undertakes to pay such duty.

40.2.

The Facility Agent may charge the Company's Account for the purpose of performing this Section above.

41.	Provision of Balance Sheets and Periodic Financial Statements

41.1.

The Company is aware that a precondition to receiving the Credit and/or the continued provision thereof is the Lawful provision of balance sheets and periodic financial statements (hereinafter, the "Financial Statements") to the Facility Agent, as required pursuant to the instructions of the Supervisor of the Banks and/or Bank of Israel and/or the provisions of any Law and/or a competent authority.

41.2.

The Company undertakes to provide the Financial Statements at its expense, in the form determined by Law and the generally accepted accounting principles, and without delay, all as set forth in Section 21.16 above.

41.3.

Upon the demand of the Lenders, through the Facility Agent, from time to time, the Company shall make available to [the Facility Agent] and/or to Lenders and/or their representatives for inspection during ordinary work hours any balance sheet, Financial Statement, account ledger, cards and/or ledger cards, film, books, references and other documents and any information in connection with its financial and/or operating and/or business condition.

42.

Waiver

Without derogating from any of the provisions of this Agreement, no waiver, extension, discount, silence, abstention from performing an action (hereinafter, "Waiver") on the part of the Lenders and/or a Position Holder with respect to the non-fulfillment or partial or incorrect fulfillment of any of the Company's undertakings hereunder shall be deemed to be a waiver of any of their rights, but rather as consent limited to the special circumstances in which it was granted. No waiver granted by the Lenders to any party to a deed held by any of the Lenders to secure the repayment of any of the Credit Amounts shall affect any of the Company's undertakings and/or any of the undertakings of its guarantors in any manner.

43.	Modification

Without derogating from any of the provisions of this Agreement, any modification of the Company's undertakings towards the Lender shall require the prior written consent of the Lenders, and shall be subject to the provisions of the Lien Permit. Any other agreement, whether verbal or by Waiver and/or abstention from acting and/or in any other manner which is not in writing shall not be deemed to be any consent at all.

44.	Validity of Agreement

In case any one of the provisions contained in this Agreement shall be held to be invalid, illegal or unenforceable, this shall not affect the validity of this Agreement, but only the validity of such provision.

45.	Expenses and Fees

The Company undertakes to pay the following expenses and fees:

45.1.

45.1.1.

With respect to Bank Hapoalim's arrangement of the Credit, the Company shall pay Bank Hapoalim an arrangement fee, as set forth in the Fee Letter signed by the Company.

45.1.2.

With respect to the Facility Agent's management of the Credit, as of the Date of Credit and every twelve Months from the Dater of Credit and thereafter, the Company shall pay the Facility Agent annual management fees in a amount in New Israeli Shekels equal to two hundred thousand dollars ($200,000) per year, and which shall be calculated in New Israeli Shekels according to the representative rate on the date of payment.

45.1.3.

Additional fees, as set forth in the Fee Letter signed by the Company.

45.2.

The Company undertakes to pay the Lenders, through the Facility Agent, the expenses and fees set forth below:

45.2.1.

An up-front fee, as set forth in the Fee Letter signed by the Company.

45.2.2.

With respect to the Lenders' undertaking for the period commencing upon the execution of this Agreement and until the Date of Credit or until the termination of this Agreement for any reason whatsoever - a commitment fee at an annual rate of 0.4% (fourth tenths percent) of the Credit (and a relative percentage for portions of the year) to be paid in consecutive payments every 3 (three) Months.

45.2.3.

In the event of an Event of Default (without taking into account any cure periods), the reasonable professional fees of an agent/power of attorney of any of the Position Holders, as set forth in Section 26.1.2 (b), Section 26.2.2 (c) and Section 27.4 above. In any other circumstance, the Company shall pay the aforementioned professional fee after it is agreed with it in advance and in writing.

45.2.4.

The professional fee of the legal advisors of the Lenders, Efrati Galili & Co. Law Offices, in connection with this Agreement, on the terms to be agreed upon with the Company and the Facility Agent.

45.2.5.

The fees set forth in the Appendix to the Credit Request.

Upon signing this Agreement, the Company provides the Lenders, through the Facility Agent, irrevocable instructions to charge the Company's Account for the fees set forth in this Section above.

45.3.

In addition to the foregoing, the Company also undertakes to pay fees and expenses pertaining to the creation of the Collaterals and fees and expenses pertaining to the collection of amounts due and/or to be due to the Lenders under this Agreement and/or in connection with Realization of the Collaterals, including the expenses and professional fee of the receiver and the fees of the attorneys of the Lenders and/or Position Holders and/or any person on their behalf, or their agents or power of attorneys, all – with respect to the collection of amounts and Realization of Collaterals – as authorized by the court or the Execution Office. For the avoidance of doubt, the Company's obligation to make payment for the Collaterals, as set forth in this Section, shall also apply to the Collaterals to be created by the Parent Company under this Agreement.

45.4.

The Company shall be exempt from payment of custody fee pertaining to the securities to be purchased in the Company's Account.

46.	Company's Responsibility

46.1.

The Company shall be responsible for performing all the undertakings included herein and which pertain to the Company, as well as all relevant Credit Requests.

46.2.

The Company's undertakings under this Agreement and/or under the relevant Credit Request shall not be affected by any change in name, structure or composition of the Company.

47.	Notices and Warnings

47.1.

Notices sent to the Company by a Position Holder shall be deemed to be a lawful notice received by the Company within 72 hours after having been sent by regular or registered mail to the address set forth below. A written statement by a Position Holder shall serve as evidence of the date of dispatch of the notice. Notices sent to the Company in any other manner shall be deemed to have been received by the Company upon delivery, or upon publication pursuant to Law. Notices sent to the Lenders by the Company in connection with this Agreement and/or the Credit Documents shall be furnished to the Facility Agent by one of the aforementioned methods, and they shall be deemed to have been delivered to each of the Lenders.

47.2.

The parties hereby agree that any court summons, notice, ruling, legal proceeding or court pleading in connection with legal proceedings pertaining to the Credit Documents and/or this Agreement shall be sent to them according to the addresses set forth below.

The following are the parties' addresses:

B. Communications (SP2) Ltd. (the Company):

2 Dov Friedman Street, Ramat Gan

Attention: Mr. Shaul Elovitch

Fax no: _______________________

Bank Hapoalim Ltd. as Lender:

23 Menachem Begin Road, Tel Aviv

Attention: Trade and Communication Sector, Business Division, Head Management

Fax no: _______________________

Israel Discount Bank Ltd. as Lender:

23 Yehuda Halevi Street, Tel Aviv

Attention: ________________________

Fax no: ___________________________

Mizrahi Tehafot Bank Ltd. as Lender:

7 Jabotinsky Street, Ramat Gan

Attention: ________________________

Fax no: __________________________

HSBC Bank PLC as Lender:

42 Rothschild Blvd., Tel Aviv

Attention:__________________________

Fax no: ___________________________

First International Bank of Israel Ltd. as Lender:

42 Rothschild Blvd., Tel Aviv

Attention: _________________________

Fax no: ___________________________

Union Bank of Israel as Lender:

7 Jabotinsky Street, Ramat Gan

Attention: _________________________

Fax no: ___________________________

Bank Hapoalim Ltd. as Facility Agent:

____________________________ Street

Attention: _________________________

Fax no: ___________________________

Bank Hapoalim Ltd. as Security Trustee:

_____________________________Street

Attention: _________________________

Fax no: ___________________________

48.	Substantive Law and Place of Jurisdiction

48.1.

This Agreement shall be interpreted in accordance with and pursuant to the laws of the State of Israel.

48.2.

The City of Tel Aviv and the competent court in Tel Aviv shall serve as the sole place of jurisdiction for purposes of this Agreement, all subject to any Law.

IN WITNESS WHEREOF, the parties hereto affix their signature:

B. Communications (SP2) Ltd. (the Company):
Bank Hapoalim Ltd. (in its capacity as Lender)		Israel Discount Bank Ltd. (as Lender)
Mizrahi Tehafot Bank Ltd. (as Lender)		HSBC Bank PLC (as Lender)
First International Bank of Israel Ltd. (as Lender):		Union Bank of Israel (as Lender)
Bank Hapoalim Ltd. (in its capacity as Security Trustee)		Bank Hapoalim Ltd. (in its capacity as Facility Agent)

Confirmation of Company's Attorney

I, the undersigned ______________, Adv., who serves as the legal counsel for B. Communications (SP2) Ltd. (hereinafter, the "Company"), hereby confirm that all the necessary resolutions have been received by the authorized organs of the company, for the purpose of the Company's execution of this Agreement, and that this Agreement was duly executed by the Company, in accordance with its updated incorporation documents and by people authorized to bind it, and [whose] signature on this Agreement obligates the Company for all intents and purposes under this Agreement.


Date		Signature and stamp of attorney

Confirmation of Parent Company

We agree to the undertakings we shall explicitly undertake, pursuant to the provisions of the appendices to be signed by us on the Closing Date, i.e. the Debenture attached hereto as Appendix 22.1.1 and the letter of undertaking attached hereto as Appendix 22.1.4. Other than as set forth above, the Lenders shall have no right of claim against us or any right to receive payment out of our assets:


Date		B. Communications (SP1) Ltd.

I, the undersigned ______________, Adv., who serves as the legal counsel for B. Communications (SP1) Ltd. (hereinafter, the "Parent Company"), hereby confirm that all the necessary resolutions have been received by the authorized organs of the company for the purpose of the Parent Company's execution of the confirmation as set forth above, and that the Parent Company's confirmation is lawful, in accordance with its updated incorporation documents and by people authorized to bind it, and [whose] signature on this Agreement shall obligate the Parent Company for all intents and purposes under this Agreement.


Date		Signature and stamp of attorney

EX-4.9 7 exhibit_4-9.htm EXHIBIT 4.9 exhibit_4-9.htm

Exhibit 4.9

Loan Agreement

Entered into in Petach Tikva as of the 18th day of February 2010

By and between

	Entities Within the Migdal Insurance and Financial Holdings Ltd. Group Pro Rata Among Themselves All as set forth in Appendix A to the Agreement Whose address is 4 Efal Street, Kiryat Arye, Petach Tikva Each severally, with respect to its portion of the Loan, as set forth in the Appendix (and not jointly and severally) (hereinafter, the "Lender")

	Of the first part;

And

B Communications (SP1) Ltd. Company No. 514405414

Whose address is 2 Dov Friedman Street, Ramat Gan

(Hereinafter, the "Borrower")

Of the second part;

WHEREAS, on October 25, 2009, 012 Smile. Communications Ltd., Company No. 512832742 ("Smile") entered into an agreement (and on February 8, 2010, an addendum to the Agreement was executed) for the purchase (by means of the Purchaser, as defined below) of 814,211,545 ordinary shares par value NIS 1 per share of Bezeq The Israel Telecommunications Corporation Ltd., Company No. 520031931 ("Bezeq"), which, as of February 17, 2010, represent approximately 30.6% of the issued capital of Bezeq (approximately 29.6%, on a fully diluted basis) which shall grant Smile indirect control of Bezeq, as the term "Control" is defined in the Communications Law (Bezeq and Broadcasts), 5742-1982 in effect from time to time (the "Bezeq Purchase Agreement," the "Purchased Shares" and "Control of Bezeq"); and

WHEREAS, the Borrower is a special purpose company, which was established under the full ownership and control of Smile, exclusively for the purpose of holding the Purchaser and performing actions in connection therewith; and

WHEREAS, pursuant to the provisions of the Bezeq Purchase Agreement, concurrently with the provision of the Loan to the Borrower pursuant to this Agreement, Smile intends to complete the acquisition of Control of Bezeq by means of B Communications (SP2) Ltd., Private Company No. 514405398 (the "Purchaser"), a special purpose company (SPC) wholly owned and controlled by the Borrower, whose sole purpose is the acquisition, holding, sale and management of shares of Bezeq, and the performance of all associated and related actions; and

WHEREAS, the Purchaser entered into finance agreements to receive bank financing for the acquisition of Control in Bezeq; and

WHEREAS, the Borrower wishes to receive the Loan (as defined below) from the Lender, which shall be utilized for the Purchaser's purchase of Control of Bezeq and for the purpose of current liquidity balance; and

WHEREAS, the Lender has agreed to provide the Borrower with the Loan, as defined below, against the Borrower's undertakings under this Agreement and subject to the remaining provisions of this Agreement; and

WHEREAS, the parties wish to set forth their agreements in connection with the foregoing in writing;

NOW, THEREFORE, the parties stipulate and agree as follows:

General

1.1.

The preamble and appendices hereto constitute an integral part hereof.

1.2.

The headings of this Agreement are for convenience only and are not to be considered in interpreting this Agreement.

2.	Definitions

In this Agreement, the following terms shall have the meanings as set forth below:

2.1.	"Event of Default"	Each of the events on account of which the Lender may demand the immediate repayment of the Loan, in accordance with the provisions of Section 9 hereof.
2.2.	"Internet Gold"	Internet Gold – Golden Lines Ltd., Company No. 520044264.
2.3.	"Bezeq"	As defined in the preamble hereto.
2.4.	"Collateral"	The encumbrance in favor of the Lender on the Encumbered Account, to secure repayment of the Loan and remaining amounts due to the Lender from the Borrower, and the fulfillment of the Borrower's remaining obligations towards the Lender under this Agreement and under any law.
2.5.	"Bank"	The financing entities (bank/s and/or institutional bodies) with which the Purchaser entered into the Bank Financing Agreement, and all parties on their behalf or in lieu thereof and their transferees, pursuant to the Bank Financing Agreement.
2.6.	"Interested Party"	As defined in the Securities Law, 5728-1968.
2.7.	Law ["din"] -	As defined in the Interpretation Law, 5741-1981, including any relevant permit or license granted by a competent authority and any order or instruction issued by such competent authority.

2.8.	"Loan"	A loan (or loans) in an aggregate amount that shall not be less than NIS 300,000,000 (Three Hundred Million) and shall not exceed NIS 500,000,000 (Five Hundred Million) (principal) which the Lender shall provide the Borrower pursuant to the provisions of this Agreement, and whose repayment terms are as set forth in this Agreement.
2.9.	"Bank Financing Agreement"	An agreement executed by the Purchaser on February 11, 2010, in connection with the provision of the Bank Debt to the Purchaser, including documents signed and/or to be signed by virtue thereof.
2.10.	"Three Parties Agreement"	An agreement dated February 8, 2010, between Smile and the Purchaser (as a company in formation) and between the Borrower (as a company in formation).
2.11.	"Bezeq Purchase Agreement"	As defined in the preamble to this Agreement.
2.12.	"Group Companies"	All of the following companies: Eurocom, Internet Gold, Smile, the Borrower and the Purchaser.
2.13.	"Bank Debt" or "Bank Financing"	Bank financing in the aggregate (principal) amount of up to NIS 4.6 billion, to be provided to the Purchaser by the Bank for the purpose of acquiring Control of Bezeq, in accordance with the Bank Financing Agreement.
2.14.	"Communications Law"	The Communications Law (Telecommunications and Broadcasts), 5742-1982, as amended from time to time.
2.15.	"Encumbered Account"	A current savings account which the Borrower shall open in a bank in Israel, written details of which it shall provide to the Lender prior to the date of provision of the Loan, and which shall be encumbered in favor of the Lender, in accordance with the provisions of this Agreement.
2.16.	"Bank Account"	A current savings account which the Borrower shall open in a bank in Israel, written details of which it shall provide the Lender prior to the date of provision of the Loan.
2.17.	"Banking Business Day"	Sundays through Thursdays (inclusive) on which most of the commercial banks in Israel are open for business.

2.18.	"Eurocom"	Eurocom Communications Ltd., Company No. 510823164.
2.19.	"Borrower"	As defined in the preamble hereto.
2.20.	"Sellers"	The sellers under the Bezeq Purchase Agreement.
2.21.	"Closing Date"	The date of performance and consummation of the purchase transaction pursuant to the Bezeq Purchase Agreement, which shall occur on April 24, 2010, or at an earlier date to be agreed upon by Smile and/or the Purchaser and the Sellers, provided that the Lender is provided at least three (3) business days' prior written notice. The Company may, from time to time, provide the Lender written notice at least 14 days in advance that the Closing Date has been postponed to a date that is later than April 24, 2010, provided that the Closing Date occurs no later than June 30, 2010.
2.22.	"Date of Provision of the Loan"	The date on which the first Installment is provided to the Borrower, in accordance with the provisions of Section 7.2 hereof.
2.23.	"Lender"	As defined in the preamble hereto.
2.24.	"Installment"	As defined in Section 7.1 of this Agreement.
2.25.	"Collateral Documents"	The Debenture set forth in Section 6.3.1.
2.26.	"Free and Clear"	Free and clear of all pledges, encumbrances, attachments, liens, rights of first refusal, tag-along rights, debt, claim, lock-up arrangements (other than pursuant to the Communications Law, Communications Order, and the permits and licenses granted and/or to be granted pursuant thereto) or any third party right.
2.27.	"Smile"	As defined in the preamble hereto.
2.28.	"Repayment of the Loan"	Repayment of the Loan principal, the interest and the linkage differentials and payment of all of the additional amounts which the Borrower is required to pay the Lender under this Agreement and any law.

2.29.	"Communications Order"	The Communications (Telecommunication and Broadcasts) (Determination of Essential Service Provided by Bezeq The Israeli Telecommunications Corporation Ltd.), 5757-1997, as amended from time to time.
2.30.	"Quarter"	Calendar quarter.
2.31.	"Purchaser"	As defined in the preamble hereto.
2.32.	"Interest"	Stipulated annual interest at a rate to be determined in accordance with the provisions of Section 8.3 of this Agreement.
2.33.	" Arrears Interest"	The Interest plus 3% annually. The arrears interest shall be added to the principal at the end of every six months.
2.34.	"Control"	Except with respect to the term "Control of Bezeq" - as defined in the Securities Law, 5728-1968.
2.35.	"Control of Bezeq"	As defined in the preamble hereto.
2.36.	"Bank's Encumbrances"	The Collateral which the Purchaser and Borrower provided and/or are to provide the Bank to secure repayment of the Bank Debt, as set forth in Section 22 of the Bank Financing Agreement, and the Collateral Documents executed and/or to be executed in accordance therewith.
2.37.	"Term of the Loan"	The term commencing on the Date of Provision of the Loan and ending on the earlier of the following three dates: (a) March 31, 2017; (b) sixty (60) days prior to the agreed repayment date of the entire amount of Credit D, as such term is defined in the Bank Financing Agreement, including in the event the repayment date of Credit D has been advanced, as set forth in Section 5.17.2 of this Agreement; or (3) in any instance of early repayment of the entire amount of the Loan hereunder, on the Early Repayment Date.

3.	The Transaction

The Lender shall provide the Borrower with the Loan on the date and on the terms set forth in this Agreement, subject to the Borrower's satisfaction of its representations and warranties hereunder, all in accordance with the provisions of this Agreement.

4.	Representations and Warranties of Borrower

Without diminishing and/or derogating from any declaration and/or representation and/or undertaking of the Borrower under this Agreement and/or any other agreement and/or document provided and/or to be provided to the Lender in connection with the Loan, the Borrower declares and warrants to the Lender, as of the date of execution of this Agreement, as follows:

4.1.

The Borrower is a private company, which was duly incorporated and is existent and active and registered pursuant to the laws of the State of Israel. The incorporation documents of the Borrower are attached as Appendix 4.1.

4.2.

The Purchaser is a private company, which was duly incorporated, and is existent and active and registered pursuant to the laws of the State of Israel. The incorporation documents of the Purchaser are attached as Appendix 4.2.

4.3.

The Borrower's issued and paid up share capital is 15,000,000 ordinary shares par value NIS 1 per share, and is wholly owned by Smile. In addition, the Borrower has not issued any securities which are convertible into shares and/or has not in any manner undertaken to issue any securities which are convertible into shares. The holdings in the Borrower are (and, at all times until Repayment of the Loan, shall be) Free and Clear.

4.4.

The issued and paid up share capital of the Purchaser is 15,000,001 ordinary shares par value NIS 1 per share, and is wholly owned by the Borrower, and the Purchaser has not issued any securities which are convertible into shares and/or has not in any manner undertaken to issue any securities which are convertible into shares. The Borrower's holdings in the Purchaser are (and, at all times until Repayment of the Loan, shall be) Free and Clear, other than pursuant to the Bank's Encumbrances. The Borrower is the Controlling shareholder of the Purchaser.

The Lender is aware of and agrees that the Bank's Encumbrances also include a lien on shares of the Purchaser and the rights attached to such shares, as set forth in the Bank Encumbrance documents, and that such liens are non-recourse to the Borrower.

4.5.

The Borrower does not operate and/or manage a business and/or activities of any type whatsoever, alone and/or together with another, nor does it hold shares or capital of other companies and/or rights and/or interests in any business, all with the exception of holdings of shares of the Purchaser.

4.6.

The Purchaser does not operate and/or manage a business and/or activities of any type whatsoever, alone and/or together with another, nor does it hold shares or capital of other companies and/or it rights and/or interests in any business, all with the exception of the Purchased Shares.

4.7.

The Borrower does not have any existent, contingent or future obligation or undertaking of any type towards another party, with the exception of (a) undertakings in connection with its execution of the Three Parties Agreement; and (b) undertakings under the Bank Financing Agreement. In addition, the Borrower is not a guarantor in favor of any third party, with the exception of the encumbrance of the shares of the Purchaser pursuant to the Bank Financing Agreement.

4.8.

The Purchaser has no existent, contingent or future obligation or undertaking of any type towards another party with the exception of (a) the Bank Debt; and (b) undertakings under the Three Parties Agreement. In addition, the Purchaser is neither authorized nor permitted to receive credit of any type from any party with the exception of Loans from the Borrower and with the exception of the Bank Debt. In addition, the Purchaser is not a guarantor in favor of any third party and is not authorized or permitted to serve as guarantor for any third party for the repayment of obligations of another/others.

4.9.

The Borrower is not authorized or permitted to employ employees.

4.10.

The Purchaser is not authorized or permitted to employ employees.

4.11.

The Borrower's sole purpose is to wholly own the Purchaser and to act in connection therewith, and it is neither authorized nor permitted to act for another purpose.

4.12.

The Purchaser's sole purpose is to purchase, hold and sell shares of Bezeq, and to manage the aforementioned holdings and perform all related actions, and it is not authorized or permitted to act for any other purpose. It is clarified that the Purchaser may, but is not obligated to purchase additional shares of Bezeq, in addition to the Purchased Shares, in accordance with the provisions of the Bank Financing Agreement ("Additional Shares").

4.13.

The Borrower possesses the legal authority, power and rights to enter into this Agreement and fulfill all the provisions and terms hereof.

4.14.

The Borrower received all the agreements, authorizations, permits and approvals necessary under its incorporation documents and/or applicable law and/or the instruction of any authority, in connection with its execution of this Agreement and for the purpose of realizing its undertakings hereunder, and it is not necessary to receive any further agreements and/or permits and/or approvals, except as required under the provisions of this Agreement.

4.15.

All the Borrower's undertakings pursuant to, as part of and/or in connection with this Agreement are lawful and in full force and effect, and are binding and enforceable against it, pursuant to the terms hereof and the terms of the appendices hereto.

4.16.

The Borrower is not in breach of any contract, document or undertaking to which it is a party.

4.17.

The Borrower's execution of this Agreement and the performance of the undertakings set forth herein do not and will not incur a breach of any contract, document or undertaking to which the Borrower is a party and/or do not constitute and shall not constitute a breach and/or deviation from any provision of the Borrower's incorporation documents.

4.18.

To the best of the Borrower's knowledge, Bezeq has been duly incorporated and validly exists and is registered in accordance with the laws of the State of Israel. In addition, Bezeq's shares are listed for trade on the Tel Aviv Stock Exchange and the Purchased Shares are listed for trade on the Tel Aviv Stock Exchange.

4.19.

To the best of the Borrower's knowledge: (a) subject to receiving the permits and remaining approvals required to complete the purchase of the Purchased Shares pursuant to Law and the Bezeq Purchase Agreement, which [approvals] are to be received prior to the Provision of the Loan, the Bezeq Purchase Agreement, including all the terms thereof, is lawful, valid and binding upon the parties thereto; (b) as of the Closing Date, the Purchaser is entitled to purchase the Purchased Shares pursuant to the Bezeq Purchase Agreement and is entitled to all the rights and shall be bound by all the obligations of the Purchaser under the Purchase Agreement; and (c) with the exception of payment of the consideration for the purchase of the Purchased Shares, as aforementioned, and receipt of the aforementioned permits and approvals, all the terms set forth in the Bezeq Purchase Agreement, which, according to the conditions of t he Bezeq Purchase Agreement, are to be satisfied by the date of execution of this Agreement, have been fully satisfied.

4.20.

The Purchaser has met all the terms of the Bezeq Purchase Agreement; it has not breached the Purchase Agreement and, to the best of the company's knowledge, no breach of the Bezeq Purchase Agreement has occurred.

4.21.

To the best of the Borrower's knowledge, the Sellers have no right to cancel the Purchaser's purchase of all or part of the Purchased Shares, and, to the best of the Borrower's knowledge, they have no grounds to assert rescission of the Bezeq Purchase Agreement.

4.22.

As of the Date of Provision of the Loan and thereafter, the Purchased Shares shall be wholly owned by the Purchaser, Free and Clear (however, with respect to the period following the Date of Provision of the Loan, the term "Free and Clear" in this respect shall not include actions not in the Borrower's control, such as attachments and claims, without derogating from the Borrower's undertakings in this respect), with the exception of the Bank's Encumbrances, and the Purchaser has not assigned any right or performed any other similar action which diminishes the value of the Purchased Shares.

4.23.

No events and/or circumstances have occurred that constitute – or which, over time or after notice or warning is provided, will constitute – an event due to which the Lender may demand the immediate repayment of the Loan, pursuant to the provisions of this Agreement.

4.24.

The Bezeq Purchase Agreement and Three Parties Agreement constitute the sole agreements existing in connection with the purchase of the Purchased Shares, and, apart from the foregoing agreements no other written or verbal agreements exist between the Sellers and Smile and/or anyone on its behalf and/or the Borrower and/or the Purchaser, directly and/or indirectly, in connection with the Purchaser's purchase of the Purchased Shares.

4.25.

With the exception of the Bezeq Purchase Agreement, the Bank Financing Agreement and the Three Parties Agreement, no agreement and/or document has been executed or is to be executed which contain provisions that affect or may affect the Borrower's rights in connection with its shares of the Purchaser and/or the rights in connection with the Purchased Shares and/or the Lender's rights hereunder and/or the Borrower's liabilities towards the Lender and/or the Purchaser's liabilities towards the Bank, including a management agreement, control agreement, voting agreement and/or loan agreement and/or shareholder agreement; and the Borrower hereby undertakes towards the Lender, subject to the provisions of Section 5.4 and Section 5.17 below, that no such agreement or document shall be signed without the Lender's prior written consent.

4.26.

The holdings in the Borrower are as set forth in the shareholdings chart attached as Appendix 4.26. The Group Companies (to the exclusion of Eurocom) are controlled by Eurocom, as set forth in the chart.

4.27.

Attached are reports of the Registrar of Companies with respect to the Borrower and the Purchaser (Appendix 4.27(a)) and updates submitted to the Registrar of Companies and bearing the stamp "received" from the Registrar of Companies (Appendix 4.27(b)). The aforementioned documents, together, correctly reflect the legal and factual status of the Borrower and the Purchaser with respect to the matters set forth in the report.

4.28.

The assets of the Borrower and Purchaser are free of any attachment, lien, claim, undertaking or any third party right, other than pursuant to the Bank Financing Agreement and the Bank's Encumbrances.

4.29.

No shareholder loans of the Purchaser have been provided to Bezeq.

4.30.

The Bank Financing Agreement is in the form attached as Appendix 4.30. The Agreement was duly executed by the Purchaser and, to the best of its knowledge and belief, is signed by the Bank and the Borrower is not aware of any preclusion to receiving the complete Bank Debt in a timely manner, for the purpose of completing the acquisition of Control of Bezeq, subject to satisfaction of all the conditions precedent set forth therein.

4.31.

No action has been made for the liquidation or removal of either of the Borrower or Purchaser from the records of the Registrar of Companies, nor have any motions to liquidate it or for receivership been filed against it, and no appointment of a temporary or permanent special manager, receiver, trustee or other functionary over the Borrower or all or part of its assets has been sought, and the Borrower is not aware of any reason for or intention to institute such proceedings.

4.32.

The Borrower and/or Purchaser are not parties to agreements (written, verbal, by behavior or otherwise) with the interested party/parties therein, with the exception of (a) the Three Parties Agreement; (b) the Bezeq Purchase Agreement; and (c) pursuant to the Bank Financing Agreement.

4.33.

No legal civil or criminal proceedings are pending against the Borrower and Purchaser or against any of their officers, in their status as such, including as part of an arbitration or administrative proceedings, and no investigations of any authorities are being conducted against them, in their status as such, and there are no pending administrative decisions or rulings against them. In addition, the Borrower, Purchaser and their managers, in their status as such, have not received written notice of any intention to file a claim or institute any legal proceedings or initiate an investigation against them in connection with them and/or their activities. The Borrower and the Purchaser are not in breach of the provisions of any Law and/or ruling or decision of any competent court and/or government authority and/or municipal authority.

4.34.

No attachments are imposed on the assets of the Borrower or the Purchaser. No execution proceedings and/or receivership and/or dissolution proceedings (whether temporary or permanent) have been instituted against the Borrower or the Purchaser.

4.35.

As of the execution of this Agreement, Smile has cash and financial assets valued at NIS 600,000,000 (Six Hundred Million Shekels) at least.

4.36.

Prior to the Provision of the Loan, the Borrower has provided and/or shall provide the Purchaser equity capital in an aggregate amount of NIS 1,555,000,000 (One Billion Five Hundred Fifty Five Million Shekels) (the "Equity").

4.37.

The Equity, together with the Bank Financing and together with the Loan, equal or exceed the full amount required to complete the Purchaser's purchase of Control of Bezeq pursuant to the Bezeq Purchase Agreement.

4.38.

The Borrower's representations and warranties under this Section 4 are cumulative, and, in any case do not derogate from one another.

4.39.

The representations and warranties included in this Agreement are correct, complete and accurate.

5.	Undertakings of Borrower

Until such time as the Loan is fully repaid, the Borrower undertakes towards the Lender (or undertakes to cause the following, as applicable), as follows:

5.1.

(a) Any proceeds and/or monies payable to the Borrower from any individual and/or company at any time, with the exception of Smile and/or Internet Gold, shall be paid exclusively to the Encumbered Account; (b) the Borrower shall not withdraw any funds from the Encumbered Account, with the exception of the Permitted Expenses, as defined in Section 5.7, and other than in accordance with the provisions of Sections 6.6 and 5.28.3 of this Agreement.

5.2.

Not to agree to any modification to the Purchaser's incorporation documents which contradict the provisions of this Agreement without the Lender's prior written consent.

5.3.

The Borrower may not declare, pay, distribute or (as applicable) perform or undertake to declare, pay, distribute or perform any management fees and/or dividends and/or other distribution and/or any payments (principal, interest or any other payment) including on account of shareholders loans and/or management fees and/or fees, however they are titled, directly or indirectly, in cash, cash equivalent or in any other manner and/or provide loans of any type whatsoever except (a) subject to performance of the provisions of Section 6.6 of this Agreement regarding the release of funds from the Encumbered Account and the release of funds from the Bank Account, as set forth in Section 6.6.9; and (b) with the exception of the Permitted Expenses, in accordance with the provisions of Section 5.7; and (c) other than pursuant to the provisions of Section 5.28.3.

5.4.

(a) The Borrower shall not have obligations and undertakings except as set forth in Section 4.7 and 5.7 of this Agreement; and (b) the Borrower shall not provide loans or other financing and/or act as guarantor for any third party to guarantee payment of third party obligations and undertakings, without the prior written consent of the Lender, and the Borrower has not provided such loans or signed any guarantees in favor of any third parties or undertaken to provide any such loans or guarantees. The provisions of this Section above shall not apply to (i) a shareholder loan to the Purchaser, which may be provided to the Purchaser on the Closing Date for the purpose of completing the acquisition of control transaction, and additional shareholder loans which the Borrower may provide to the Purchaser from time to time (hereinafter, the "Purchaser's Shareholder Loans"); and (ii) the Borrower's obligations and undertakings towards Smile or Internet Gold, including in connection with Shareholder Loans (principal, interest and linkage differentials, to the extent any exist), which shall be subordinate to the Lender's debt hereunder, and, in any case, shall not be secured by any Collateral, and no proceedings shall be instituted with respect thereto by Smile or Internet Gold, as applicable, and they shall not be repaid, except after the full repayment of the Lender's debt under this Agreement or out of funds to be released from the Encumbered Account, pursuant to the provisions of Section 6.6 of this Agreement (and, to the extent written agreements are executed with Smile and/or Internet Gold in connection with such Loans, the Borrower undertakes to cause the foregoing to be expressed in these agreements); and (iii) by virtue of the Bank's Encumbrances (which are non-recourse to the Borrower, with the exception of the right to realize the lien over the Purchaser's shar es).

5.5.

The Purchaser's Shareholder Loan Agreement shall provide that repayment of such loans, which shall be out of the amounts which the Purchaser shall be entitled to release from its bank account, in accordance with the provisions of the Bank Financing Agreement (hereinafter, the "Purchaser's Surpluses") may be demanded "on call" upon the Borrower's demand. The Borrower shall present the Purchaser with a demand for repayment of the amounts, as aforementioned, upon the Lender's demand, provided that the Lender's aforementioned demand is only issued as required for performing the Borrower's undertakings under this Agreement.

5.6.

(a) The Purchaser shall not have any obligations or undertakings, except as set forth in the Bank Financing Agreement, the Three Parties Agreement and the Bezeq Purchase Agreement; (b) the Purchaser shall not provide loans or any other financing and/or act as guarantor in favor of any party to guarantee repayment of third party obligations and undertakings, without the Lender's prior written consent; and (c) the Purchaser has not provided any such loans or signed any guarantees in favor of any third party, nor has it undertaken to provide any loans or guarantees.

5.7.

With the exception of payments to the Borrower, which shall be paid exclusively into the Encumbered Account, and with the exception of the Permitted Expenses, as defined below, the Purchaser shall not make any payment to any party.

In this Agreement, the "Permitted Expenses" mean: (a) obligations and undertakings of the Purchaser and/or the Borrower in connection with management agreements limited to payment of management fees in an amount that shall not exceed an aggregate of NIS 10,000,000 (Ten Million Shekels) per year; and (b) obligations and undertakings of the Purchaser and/or the Borrower in connection with expenses set forth in Sections 21.1(b)(ii) and (iv) of the Bank Financing Agreement; and (c) obligations and undertakings of the Purchaser and/or the Borrower under law.

On the Date of Provision of the Loan and as a condition to providing the Loan, the Borrower shall provide the Lender with irrevocable instructions from the Purchaser to the bank in which the Purchaser's account is managed, authorized by such bank, for payment of the Purchaser's Surpluses exclusively into the Encumbered Account.

It is agreed that out of the monies to be deposited in the Encumbered Account, the Borrower may, without limitation, release the Permitted Expenses deposited therein, provided that prior to such date no provisions of this Agreement shall have been breached and no grounds for demanding the immediate repayment of the Loan shall exist, in accordance with Section 9 of this Agreement (and no circumstances shall have occurred which, upon the lapse of the periods of time stipulated in Section 9, if stipulated, may give rise to grounds for demanding the immediate repayment of the Loan) (including the Waiting Period, as defined in Section 9, during which the Borrower may only release from the Encumbered Account those expenses out of the Permitted Expenses which are set forth in Section 21.1(b)(ii) of the Bank Financing Agreement).< /font>

5.8.

Other than the Bank's Encumbrances, the Borrower shall not create any floating charge of any rank and/or any fixed charges of any rank over its assets (or any portion thereof), and, without derogating from the generality of the foregoing, over the shares of the Purchaser, and it shall not enable the existence of any such floating charge or fixed charge without the Lender's prior written consent.

5.9.

Other than the Bank's Encumbrances and/or encumbrances in favor of the Bank on Additional Shares of Bezeq which shall be held by the Purchaser, if held, the Purchaser shall not create any floating charge of any rank and/or any fixed charges of any rank over its assets (or any portion thereof), and, without derogating from the generality of the foregoing, over the Purchased Shares, and it shall not enable the existence of any such floating charge or fixed charge without the Lender's prior written consent.

5.10.

The Borrower shall not (a) engage and shall not be involved, directly or indirectly, in any occupation or activity of any field, type and form, other than holding shares of the Purchaser and actions related to the foregoing; and (b) without derogating from the generality of the foregoing, it shall not decide upon, approve or agree to any merger or restructuring of (all or part of) its assets or business.

5.11.

The Purchaser shall not (a) engage and shall not be involved, directly or indirectly, in any occupation or activity of any field, type and form, other than holding the Purchased Shares and Additional Shares of Bezeq (to the extent purchased by it) and actions related to the foregoing; and (b) without derogating from the generality of the foregoing, it shall not decide upon, approve or agree to any merger or restructuring of (all or part of) its assets or business.

5.12.

The Borrower and Purchaser shall fulfill all the undertakings and terms in accordance with the consents, permits, licenses and approvals referred to in Section 21.7 of the Bank Financing Agreement, and, to the extent it is within its control, shall ensure that (a) none of such consents, permits, licenses or approvals expires, is cancelled, suspended or terminates (without being renewed) or ceases to be fully valid for any other reason or is materially altered without the Lender's consent; and (b) the Borrower and Purchaser do not violate the terms or provisions of any such consents, permits, licenses or approvals. Without derogating from any provision granting the Borrower and/or Purchaser a remedy period under this Agreement, it is hereby clarified that a violation of the aforementioned terms and provisions which is remedied by the Borrower and/or Purchaser during a cure and/or waiting period, to the extent tha t such a period exists, shall not be regarded as a breach of an obligation under this Agreement as well.

5.13.

The Borrower and Purchaser shall duly report and submit reports to the tax authorities in a timely manner, all in accordance with the requirements of any law, arrangement or taxation decision and shall pay all the taxes payable by them pursuant to such reports and reporting, or according to a conclusive assessment or taxation arrangement prepared with respect thereto.

5.14.

[Deleted.]

5.15.

Refrain from taking any action or performing any act which may result in the cancellation of the purchase of the Purchased Shares or harm the Purchaser's property rights as owner of the Purchased Shares and/or harm the Lender's rights under this Agreement and/or in connection with the Loan.

5.16.

No modification of the Bezeq Purchase Agreement shall be agreed upon which, in the Lender's opinion may harm its rights, without the Lender's prior written consent, which consent shall not be unreasonably withheld. The Lender shall furnish the Borrower with a written response to the request to modify the provisions of the Bezeq Purchase Agreement (which request shall be furnished to it in writing) within ten (10) Business Days after the Lender receives the Borrower's request in this respect. Notwithstanding the foregoing, it is agreed that a change in the Closing Date, in accordance with the definition of such term in Section 2 above, shall not require the Lender's approval or consent.

5.17.

Modifications to the Bank Financing Agreement

5.17.1.

No direct or indirect modification to the Bank Financing Agreement and/or any document signed and/or to be signed in connection therewith or pursuant thereto and/or addendum to the Bank Financing Agreement shall be agreed upon which, in the Lender's opinion may harm its rights, without the Lender's written consent, which shall not be unreasonably withheld. The Lender shall provide the Borrower with a response to the request to modify the provisions of the Bank Financing Agreement (which request shall be furnished to the Lender in writing) within ten (10) Business Days after the request is furnished to the Lender. Notwithstanding the foregoing, the Lender hereby agrees in advance to the following modifications to the Bank Financing Agreement: (a) release of collaterals; (b) the Bank's waivers and dispensations to the Purchaser; (c) reduction of the interest rate, expenses or fees; (d) an increase of th e debt, exclusively for the purpose of distributing it to the Borrower; (e) deferment of payments of the interest and principal and the increase of interest periods; (f) changes to the Purchaser's minimum shareholdings in Bezeq and/or the method of calculating the Purchaser's shareholdings in Bezeq (without derogating from the provisions of Section 5.22). To the extent the actions set forth in this Section 5.17 result in the receipt of Special Proceeds, as defined in Section 6.6.4.5, the provisions of Section 6.6.4.5 shall apply to the Special Proceeds.

5.17.2.

Notwithstanding the foregoing, the Borrower and the Purchaser may agree to improve the terms of the Bank Debt in favor of the Bank, compared with the form of the Bank Financing Agreement, in one of the following matters, including without the Lender's consent, provided that as a condition thereto, the Borrower provides the Lender, with respect to the Loan, the same improvements in the same proportions by which the terms of the Bank Financing were improved: (a) additional monetary compensation (including interest, fees, kickers and so forth); and (b) shortening the average duration or term of the Credit (other than as part of the mechanisms currently provided in the Bank Financing Agreement).

5.17.3.

Notwithstanding the provisions of Sections 5.17.1-5.17.2, until the Date of Provision of the Loan, the Borrower may perform modifications to the Bank Financing Agreement without limitation, provided that the Borrower provides the Lender written notification of the modifications it wishes to perform to the Bank Financing Agreement at least seven (7) Business Days prior to the Closing Date or the effective date of the modification, whichever is earlier. In such instance, if reference is made to modifications to which the Lender does not agree (including in the event they are modifications agreed pursuant to Section 15.7.1 or modifications pursuant to Section 15.7.2), the Lender may notify the Borrower of the termination of this Agreement, and, inter alia, the Borrower's [the Lender's] obligation to provide the Lender [the Borrower] with the Loan&# 160; pursuant to this Agreement shall expire, and the parties shall have no disputes against one another.

5.17.4.

This Section 5.17 shall not apply to modifications to the Bank Financing Agreement which are technical in nature, which the Borrower shall be entitled to perform without limitation.

5.18.

Provide the Lender with a copy of any notice which the Lender [the Borrower] and/or Purchaser receive from and/or provide the Sellers, and which is required under the provisions of the Bezeq Purchase Agreement, and which has or may have implications for the Lenders' rights hereunder, immediately upon being received by the Borrower and/or the Purchaser or immediately upon being sent to the Sellers, respectively.

5.19.

The Borrower agrees that in the event any of the financial ratios are not satisfied, as such [financial ratios] are set forth in Sections 21.15 and/or 24.18(b) the Bank Financing Agreement in effect as of the date of execution of this Agreement, including all the relevant definitions and provisions contained therein, the provisions of Section 5.20 of this Agreement shall apply.

5.20.

In the event the financial covenants set forth in Section 5.19, or any portion thereof, are breached:

(a)

If the Bank demands the immediate repayment of all or part of the credit pursuant to the Bank Financing Agreement, the breach of the financial covenants shall be deemed to be a breach of this Agreement, including all the implications thereof;

(b)

If the Bank does not demand the immediate repayment of the credit pursuant to the Bank Financing Agreement, the foregoing shall not constitute a breach of this Agreement, nor shall it constitute grounds for demanding the immediate repayment of the Loan, including all the implications thereof. However, in such instance, and as long as the financial covenants are breached: (i) no monies shall be released from the Encumbered Account, as set forth in Section 6.6 hereof; and (ii) the Minimum Financial Cushion shall be increased to a total of 10% of the principal balance of the Loan linked to the index, in accordance with the provisions of Section 8.5 below. The Borrower shall supplement the required amounts to increase the financial cushion to such amount within twenty two (22) Business Days of the Lender's demand. The Borrower's breach of its undertakings under this Section (ii) shall constitute a fundamental breach of this Agreement, and shall grant the Lender full rights, include the right to demand the immediate repayment of the Loan.

(c)

It is clarified that nothing in the increase of the Minimum Financial Cushion, as set forth in Subsection (b), shall derogate from the Lender's rights to act pursuant to Subsection (a), to the extent that the Bank demands the immediate repayment of the Loan at any time.

5.21.

With respect to the shareholding structure attached hereto as Appendix 4.26, the following changes shall not apply ("Change in Control in the Group"): (a) Mr. Shaul Elovitch and Mr. Yosef Elovitch (or thereafter, their family members) shall not cease to directly and/or indirectly hold Control of Eurocom, Internet Gold and Smile; (b) Smile shall not cease to directly hold 100% of the issued capital of the Borrower; (c) the Borrower shall not cease to directly hold 100% of the issued capital of the Purchaser. Without derogating from the generality of the foregoing, there shall be no change in the Borrower's shareholdings in the Purchaser, whether by way of sale, issuance of rights of any type (including shares, options, convertible debentures and so forth) or in any other manner.

5.22.

The Purchaser shall remain the Controlling Shareholder of Bezeq, as such term is defined in the Communications Law (Bezeq and Broadcasts), 5742-1982, as may be in effect from time to time. With the exception of the foregoing, there shall be no restrictions on the sale of shares of Bezeq held by the Purchaser. The proceeds from the aforementioned sale shall be deemed to be Special Proceeds, and the provisions of Section 6.6.4.5 shall apply with respect thereto.

5.23.

The Borrower shall have only two bank accounts; the Bank Account and the Encumbered Account.

5.24.

The following actions shall not be performed by the Borrower, nor shall they be authorized by the competent organ within the Borrower or deemed to be valid without the Lender's prior written consent: (a) issuance of shares in the Lender, with the exception of an additional issuance of shares to Smile, against a capital investment in the Borrower; (b) the transfer of shares of the Borrower; (c) taking out a loan in addition to the Loan that is the subject of the Agreement, with the exception of inferior loans from Smile or Internet Gold, as set forth in Section 5.4; (d) provide guarantees, except pursuant to the Bank's Encumbrances; (e) modify the incorporation documents of the Borrower. Subject to the Bank's consent, the Borrower shall amend its Articles by and no later than the Date of Provision of the Loan, in such a manner as to reflect the foregoing.

5.25.

The Purchaser may act with respect to its Account and cash flow it receives from Bezeq, as set forth in the Bank Financing Agreement (subject to the Borrower's undertaking under this Agreement).

5.26.

The Borrower shall not initiate any proceedings which may harm the Lender's rights under this Agreement and/or the Collateral and/or the Lender's ability to realize its rights under this Agreement and/or the Collateral.

5.27.

Neither the Borrower nor the Purchaser (a) shall take any action for the voluntary dissolution thereof; and (b) they shall not be a party to any split-off or merger, or restructuring, and (c) shall not submit any motion for an arrangement with their creditors and/or for a stay of proceedings against them, all without the Lender's prior written consent.

5.28.

Financial Cushion

5.28.1.

The Borrower undertakes that as of the Date of Provision of the Loan, the Encumbered Account shall, at all times, contain a total of not less than NIS 22,500,000 (Twenty Two Million Five Hundred Thousand New Israeli Shekels), plus linkage differentials, as defined in Section 8.5 below (the Base Index is the last index published prior to the date of execution of this Agreement; hereinafter the "Minimum Financial Cushion").

5.28.2.

In the event the amount deposited in the Encumbered Account is less than the amount of the Minimum Financial Cushion, as it may be at the time (taking into account the provisions of Section 5.20(b)(ii) of this Agreement) for any reason, the Borrower undertakes to redeposit the required amount in the Encumbered Account within 22 Business Days.

5.28.3.

In the event the amount deposited in the Encumbered Account exceeds the Minimum Financial Cushion, as it may be at the time (taking into account the provisions of Section 5.20(b)(ii) of this Agreement) due to the profits accumulated thereon, the Borrower may withdraw the difference, subject to the satisfaction of the following cumulative conditions: (a) prior to such date, no provisions of this Agreement shall have been breached and no grounds shall exist for demanding the immediate repayment of the Loan, in accordance with the provisions of Section 9 to this Agreement (and no circumstances shall exist which, following the periods of time stipulated in Section 9, to the extent stipulated, may become grounds for demanding the immediate repayment of the Loan) (including during the Waiting Period, as defined in Section 9); and (b) there shall be no preclusion at Law to release the requested monies; and (c) there sh all be no preclusion to release the monies, pursuant to Section 5.20(b)(i) of this Agreement.

5.28.4.

The Minimum Financial Cushion shall be deposited in (a) an interest-bearing deposit and/or (b) a government bond investment and/or (c) a Treasury Bill (Makam) and/or (d) bonds assigned a rating of at least AA, issued by a Bank in Israel and/or an insurer in Israel, unless approved otherwise by the Lender in writing.

6.	Collateral

6.1.

To secure the complete and timely fulfillment of all the Borrower's obligations towards the Lender under this Agreement and any Law, as a necessary (but not sole) condition precedent to providing the Loan, the Borrower shall provide the Lender with a single first-ranking fixed charge and floating charge, unlimited in amount, over the Borrower's rights in connection with the Encumbered Account.

The Borrower shall instruct the bank in which the Encumbered Account is managed to provide the Lender with all the information which the Lender requests in connection with the Encumbered Account, including by means of the information on the Internet. The Borrower shall not cancel the aforementioned instructions to the Bank until after such time as the Loan is repaid.

The Borrower may not release funds from the Encumbered Account without the prior written consent of the Lender for each release, which consent shall be granted upon the satisfaction of the conditions provided in Section 6.6 (however, it is clarified that in the relationship between the Borrower and the bank in which the Encumbered Account is managed, the Borrower's instructions shall be sufficient for the aforementioned withdrawal of funds, subject to the irrevocable instructions set forth in Section 6.3.3).

In the event immediate payment of the debt is demanded, pursuant to the Lender's right under Section 9 below, and if the Company fails to repay the debt with respect to which the Lender demanded immediate payment, then, without derogating from the Lender's remaining rights, the Lender shall be entitled to receive (and the Lender shall provide the Bank instructions accordingly) the appropriate amount out of the monies in the Encumbered Account at the time, on account of any amount the Borrower owes and/or may owe to the Lender pursuant to the provisions of this Agreement.

Funds shall be released from the Encumbered Account exclusively in accordance with the provisions of Section 5.28.3, Section 6.6 and Section 5.7.

It is agreed that nothing in this Agreement and/or the documents executed pursuant hereto, including the Debenture set forth in Section 6.3.1, shall directly or indirectly create a lien on the means of control in Bezeq, as defined in the Communications Law, and, inter alia, on the right to receive dividends due from Bezeq.

6.2.

The Borrower undertakes to provide the Collateral to the Lender by the date of Provision of the Loan, at the latest.

6.3.

In the relationship between the parties to this Agreement, the Collateral shall be deemed to have been provided to the Lender on the date the following documents are furnished to the Lender:

6.3.1.

The Debenture, signed by the Borrower, together with a "details of mortgages and encumbrances" form signed by an officer of the Borrower, as required. The Debenture shall be in the form to be agreed upon by the Borrower and the Bank within the Bank Financing Agreement, with the changes to be agreed upon by the parties' legal representatives, suited to the nature of the encumbered asset and the provisions of this Agreement. The "details of mortgages and encumbrances" form shall be in the form to be agreed upon by the parties.

6.3.2.

A copy of the Registrar of Companies records, produced prior to the Date of Provision of the Loan, attesting (a) to the registration of the Collateral within 21 days of the execution of the aforementioned Debenture; and (b) that no lien is recorded on the Borrower's assets, with the exception of the encumbrance of the Purchaser's shares and the rights pursuant thereto in favor of the Bank.

6.3.3.

A letter from the bank in which the Encumbered Account is managed, in the form to be agreed upon by the parties' legal representatives, containing a waiver by the aforementioned bank of rights of set off and lien in connection with the Encumbered Account, as well as irrevocable instructions, pursuant to which upon receipt of the Lender's notice demanding the immediate repayment of the Loan, the Bank will not enable the Borrower to act with respect to the Encumbered Account without the Lender's written consent.

In the event the Collateral is recorded in the Registrar of Companies prior to the Date of Provision of the Loan, then, on the date of recording the Collateral, the Lender shall provide the Borrower's legal representative with a power of attorney for deleting the record in the event the Loan is not provided to the Borrower by the Closing Date, for any reason whatsoever. The power of attorney shall expire automatically and be returned to the Lender on the Date of Provision of the Loan and as a condition to providing the Loan.

6.4.

In the event the immediate payment of the Loan is demanded, as set forth in Section 9 below, then, without derogating from its remaining rights, the Lender may realize all or part of the Collateral, at its discretion, and receive all the amounts which the Borrower is required to pay to the Lender under this Agreement and any Law, including, without derogating from the generality of the foregoing, the Lender's reasonable expenses associated with this Agreement, the collection of the Loan and the realization of the Collateral, as set forth herein.

6.5.

It is clarified that each of the Collaterals is separate and independent, and is not dependent on any other Collateral provided and/or to be provided to the Lender in connection with this Agreement.

6.6.

Release of Funds from the Encumbered Account

6.6.1.

The Borrower may withdraw monies from the Encumbered Account exclusively subject to the Lender's approval, pursuant to the provisions of this Agreement. In the event such approval is granted, the Borrower may withdraw from the Encumbered Account the monies with respect to which the approval was granted, as of the date of the approval and thereafter.

6.6.2.

Twice per year, by May 20 and November 20 of each year, the Borrower may issue the Lender an indicative letter of request for the withdrawal of funds from the Encumbered Account ("Indicative Request"). The amount stipulated in the Indicative Request shall be based on the Borrower's non-binding estimate of the amounts expected to be deposited in the Encumbered Account by June 10 and December 10, respectively (or close to such time).

The Borrower may request the release of funds from the Encumbered Amount more than two times per year and/or on the various dates stipulated above with the Lender's prior written consent, which shall not be unreasonably withheld.

6.6.3.

By June 20 and December 20 of each year (but not before two (2) Business Days prior to the Interest repayment date under this Agreement), the Borrower may issue the Lender a binding letter of request to withdraw funds from the Encumbered Account ("Binding Request"). For the avoidance of doubt, in the event no Binding Request is submitted by such date, the request submitted in accordance with Section 6.6.2 shall have no validity.

6.6.3a.

Notwithstanding the provisions of Section 6.6.2 and 6.6.3, with respect to Special Proceeds, as defined below, there shall be no limitation with respect to the dates of issuance of the Indicative Request and the Binding Request, provided that the Binding Request is submitted at least fifteen (15) days after the date of submittal of the Indicative Request, but not more than thirty (30) days after the date of submittal of the Indicative Request. For the avoidance of doubt, in the event no Binding Request is submitted with respect to any Special Proceeds by such date, the Indicative Request issued with respect thereto shall have no validity.

6.6.4.

In the event all the cumulative conditions set forth above, as applicable, and below, are satisfied, the Lender shall grant written approval for the release of funds from the Encumbered Account ("Lender's Approval"):

6.6.4.1.

Prior to such date, no provisions of this Agreement are breached and no grounds exist for demanding the immediate repayment of the Loan, in accordance with Section 9 of this Agreement (and no circumstances existed which, following the periods of time stipulated in Section 9, to the extent stipulated, may become grounds for demanding the immediate repayment of the Loan) (including during the Waiting Period, as defined in Section 9); and

6.6.4.2.

No preclusion exists at Law to release the requested funds;

6.6.4.3.

No preclusion exists to release the funds, in accordance with Section 5.20(b)(i) of this Agreement.

6.6.4.4.

The Borrower's Total Debt to EBITDA Ratio as of the relevant examination date, on the basis of financial statements, the last of which are the financial statements for the last quarter ending prior to the examination date, and following the release of the funds as requested by the Borrower, does not exceed 3.70 (three and seven tenths), and the Borrower provides the Lender an approval signed by an external accountant confirming the aforementioned financial ratio and the method of calculation thereof.

For purposes of this Section, the "Borrower's Total Debt to EBITDA Ratio" shall mean: (1) Bezeq's Net Financial Debt plus: the number obtained by dividing (a) the Purchaser's and Borrower's credit amounts (the outstanding balance thereof as of the relevant examination date) less the Cash in the possession of the Purchaser and Borrower; by (b) the percentage which the Purchased Shares and Additional Shares, to the extent any exist, represents out of Bezeq's issued and registered capital on the date of calculation; by (2) Bezeq's EBITDA less the EBITDA components pertaining to YES. For the avoidance of doubt, such deduction shall apply as long as YES is not consolidated under Bezeq's financial statements; all – as of the Closing Date and thereafter. For the avoidance of doubt, as of the Closing Date and up to the end of four cons ecutive quarters, Bezeq's EBITDA shall include results which precede the Closing Date.

The following terms shall have the meaning ascribed to them in the Bank Financing Agreement: "Cash," "YES," "EBITDA," "Net Financial Debt," with the following change: whenever these terms contain the word "Company" in the Bank Financing Agreement, it should be read as the "Borrower and Purchaser."

All the foregoing terms which have not been explicitly defined shall be interpreted in accordance with the Bank Financing Agreement, the generally accepted accounting principles applying to Bezeq and/or the Borrower and/or the Purchaser and/or under Law.

An example for calculating the Borrower's Total Debt to EBITDA Ratio is attached hereto as Appendix 6.6.4.4.

6.6.4.5.

Notwithstanding the provisions of Section 6.6.4.4 above, with respect to the release of funds from the Encumbered Account which originate in (i) Payment by the Purchaser to the Borrower, whether as a dividend, reduction of capital, repayment of shareholder loans and/or in any other manner, which originates in a cash dividend deriving from profits which are not from Bezeq's ongoing operations, which Bezeq distributed to the Purchaser; or (ii) an increase of the Bank Financing by the Purchaser; or (iii) a realization of shares of Bezeq (each of the foregoing: "Special Proceeds"), the amounts to be released to the Borrower out of each Special Proceeds shall be determined as follows:

If the Borrower's Total Debt to EBITDA Ratio as of the relevant examination date and after the release of the Special Proceeds from the Encumbered Account exceeds 3.7 (three and seven tenths), no funds shall be released out of every [payment of] Special Proceeds for the Borrower's use.

If the Borrower's Total Debt to EBITDA Ratio as of the relevant examination date and after the release of the Special Proceeds from the Encumbered Account does not exceed 3.7 (three and seven tenths), 25% out of every [payment of] Special Proceeds shall be released for the Borrower's use.

If the Borrower's Total Debt to EBITDA Ratio as of the relevant examination date and after the release of the Special Proceeds from the Encumbered Account does not exceed 3.4 (three and four tenths), 50% out of every [payment of] Special Proceeds shall be released for the Borrower's use.

If the Borrower's Total Debt to EBITDA Ratio as of the relevant examination date and after the release of the Special Proceeds from the Encumbered Account does not exceed 3.15 (three and fifteen hundredths), 75% out of every [payment of] Special Proceeds shall be released for the Borrower's use.

With respect to the calculation of the financial ratios provided in this Section, notwithstanding the provisions of Section 6.6.4.4, the calculation shall be made on the basis of the last financial statements which the Borrower was required to furnish to the Lender under this Agreement (including in the event they are not the statements for the last quarter ending prior to such date).

The monies from any Special Proceeds which the Borrower may not release from the Encumbered Account, pursuant to the provisions of this Section, shall be applied towards the early repayment of the Loan principal, without any early repayment fee, unless the Lender notifies the Borrower, as part of the Lender's Approval, that it does not desire the aforementioned monies to be utilized for early repayment, as aforementioned, and in such instance, the Borrower may release the monies from the Encumbered Account.

6.6.4.6.

The amounts which the Borrower seeks to release from the Encumbered Account shall be in an amount that shall not exceed the amounts deposited in the Encumbered Account at the time, less the Minimum Financial Cushion.

6.6.5.

The Lender's Approval shall be provided within the following deadlines:

(a)

With respect to a Binding Request which does not deviate from the Indicative Request, or with respect to a Binding Request which deviates from the Indicative Request by up to 25% of the amount provided in the Indicative Request – within two (2) Business Days after the Lender receives the Borrower's request, together with all the details pursuant to Section 6.6.4.

(b)

With respect to a Binding Request which deviates from the Indicative Request by 25% of the amount provided in the Indicative Request or more – within fifteen (15) days after the Lender receives the Borrower's request, together with all the details pursuant to Section 6.6.4.

(c)

With respect to a Binding Request which is submitted without an Indicative Request first being issued – within fifteen (15) days after the Lender receives the Borrower's request, together with all the details pursuant to Section 6.6.4.

In its Approval under this Section, (a) to the extent it does not relate to Special Proceeds, the Lender shall specify whether or not it requests the Borrower to make early repayment of the amounts on account of the Loan principal, pursuant to Section 8.12; (b) to the extent it relates to Special Proceeds, the provisions of the last paragraph of Section 6.6.4.5 shall apply.

6.6.6.

In the event that the conditions set forth in Section 0 for the release of all or part of the funds from the Encumbered Account are not satisfied, no funds shall be released from the Encumbered Account other than as set forth in Sections 5.7 and 5.28.3.

6.6.7.

In any event, the Lender shall not release funds from the Encumbered Account other than in a manner such that at least the Minimum Financial Cushion, as it may be at the time, remains in the Encumbered Account (taking into account the provisions of Section 5.20 hereof).

6.6.8.

[Deleted]

6.6.9.

Whenever the Borrower may not release monies from the Encumbered Account due to the fact that the conditions provided in Section 6.6.4 for doing so are not satisfied, the Borrower may, by ten (10) days' prior written notice to the Lender, make early repayment of amounts equal to the amount to be deposited in the Encumbered Account at the time, less the Minimum Financial Cushion, without an early repayment fee.

Notwithstanding the foregoing, the Lender may notify the Borrower that despite the non-existence of the conditions for releasing the monies from the Encumbered Account, as aforementioned, the Borrower may withdraw monies exceeding the Minimum Financial Cushion from the Encumbered Account, and in such instance, the Borrower's aforementioned right to make early repayment of such amounts shall expire, other than pursuant to the provisions of Section 8.11.

6.6.10.

In the event funds are released from the Encumbered Account and transferred to the Bank Account, the Borrower may perform any action in the Bank Account, including, inter alia, payment of the funds in the Bank Account, without limitation.

7.	Provision of the Loan to the Borrower

7.1.

The Loan shall be provided to the Borrower in up to three (3) installments, as elected by the Borrower (each of these shall hereinafter be referred to as an "Installment"), provided that the amount of the first Installment shall not be less than a total of NIS 300,000,000 (Three Hundred Million Shekels).

7.2.

The first Installment shall be provided to the Borrower on the Closing Date, to the extent it occurs, concurrently with the provision of the Bank Debt to the Purchaser, and subject to the satisfaction of the following cumulative conditions:

7.2.1.

Prior to such date, no provisions of this Agreement shall have been breached and no grounds shall exist for demanding the immediate repayment of the Loan, in accordance with Section 9 hereof (and no circumstances existed which, following the periods of time specified in Section 9, if specified, may become grounds for demanding the immediate repayment of the Loan);

7.2.2.

There is no preclusion at Law to provide the Loan;

7.2.3.

The Lender is provided the Collateral, in accordance with the provisions of Section 6.1 hereof;

7.2.4.

The Lender is provided a letter from the Borrower's attorney, in the form to be agreed upon between the parties;

7.2.5.

The Borrower furnishes the Lender a resolution to amend its Articles, pursuant to Section 5.24, bearing a "received" stamp by the Registrar of Companies, and attorney confirmation attesting to the validity of such resolution;

7.2.6.

The Borrower provides the Lender with a copy of irrevocable instructions from the Purchaser to the bank in which its account is managed, authorized by such bank, for payment of the Purchaser's Surpluses exclusively into the Encumbered Account, as set forth in Section 5.7.

7.2.7.

At least 5 Business Days prior to the Closing Date, the Borrower provides the Lender with a withdrawal request, in accordance with the provisions of Section 7.1 (the "Withdrawal Request"), for an amount which does not exceed the Loan amount (principal).

7.2.8.

The Borrower provides the Lender with the indicative amortization schedule and the interest rates, as set forth in Section 8.3.1 below.

7.2.9.

The Borrower returns to the Lender the power of attorney which was provided to the Borrower's legal representative pursuant to Section 6.3.

7.3.

In the event that the Lender does not receive the Withdrawal Request for the first Installment by the Closing Date, this Agreement shall automatically expire and become null and void.

7.4.

Each additional Installment of the Loan shall be provided to the Borrower within 5 Banking Business Days after the Borrower provides the Lender with a Withdrawal Request with respect thereto, provided that (a) the Withdrawal Request is received by the Lender within 180 days of the execution of this Agreement; and (b) prior to such date, this Agreement was not breached and no grounds existed for demanding the immediate repayment of the Loan, in accordance with Section 9 of this Agreement (and no circumstances existed which, following the periods of time specified in Section 9, if specified, may become grounds for demanding the immediate repayment of the Loan); and (c) no preclusion exists under law; and (d) the Installment amount, together with the Installments provided to the Borrower up to such date (principal), does not exceed the (principal) amount of the Loan.

It is clarified that at the end of 180 days from the execution of this Agreement, the Lender's undertaking to provide the Loan to the Borrower under the terms of this Agreement shall finally and irrevocably expire, with respect to monies on account of the Loan principal which have not yet been provided to the Borrower.

7.5.

Each Installment shall be provided to the Borrower by bank transfer to the Bank Account. Notwithstanding the foregoing, a total of NIS 22,500,000 (Twenty Two Million Five Hundred Thousand Shekels) out of the first Installment shall be provided to the Borrower by bank transfer to the Encumbered Account, and shall serve as the Minimum Financial Cushion.

7.6.

The date on which the amount is deposited in the Bank Account in accordance with the foregoing shall, for all intents and purposes, be regarded as the date on which the Lender provided the Borrower with such Installment.

7.7.

The Borrower declares that it is entitled to provide the Loan to the Borrower under the provisions of this Agreement, and that no preclusion exists under Law to provide the Loan.

8.	Interest, Linkage Differentials and Loan Repayment Dates

8.1.

The outstanding balance of the Loan, as it shall be from time to time, shall bear the Interest and linkage differentials as of the Date of Provision of the Loan (or the date of provision of the Installment, as applicable) up to the end of the Term of the Loan.

8.2.

The Borrower hereby undertakes to repay the Loan (including the Interest and linkage differentials) to the Lender on the dates and the remaining terms as set forth below:

8.3.

The Interest

8.3.1.

The Interest shall be the Base Interest rate, as defined below (the "Base Interest") plus 1.5% annually, but shall not exceed an annual rate of 6.95% (including in the event there is additional interest, in accordance with the provisions of Section 8.13 of this Agreement) and shall not be less than an annual rate of 6.25%.

In this respect, the "Base Interest" shall mean the weighted internal rate of return for Credits B, C and D, as defined in the Bank Financing Agreement, assuming that these Credits were taken at an index-linked interest rate (including if in practice, they were taken at a different mechanism). Such rate shall be calculated on the Closing Date in accordance with the future (aggregate) payment schedule for such Credits, in accordance with the mandatory amortization schedule provided in the Bank Financing Agreement, together with the fees to which the Bank is entitled (with the exception of fees and payments for arranging, underwriting, and management to which Bank Hapoalim Ltd. is entitled for its role of arranger, manager and underwriter); i.e. together with credit provision fees for the aforementioned Credits (at a rate of 0.5%) and p ayment due in connection with the Option in an amount of NIS 62,500,000, to be calculated on the basis of the presumption that the Option will be realized on a single date and paid in five equal installments as of May 2013.

An Excel file for calculating the Base Interest (both as an electronic file for performing the calculation and as example of the calculation) is attached hereto as Appendix 8.3.1.

Up to 5 Business Days prior to the Closing Date, and as a condition for providing the Loan on such date, the Borrower shall provide the Lender with an indicative, non-binding, amortization schedule and interest rates of Credits B, C and D, as provided to the Borrower by Bank Hapoalim Ltd. in its capacity as Facility Agent (and without Bank Hapoalim assuming any responsibility for such data). In addition, within 30 days of the Date of Provision of the Loan, the Borrower shall furnish the Lender with the aforementioned amortization schedules and interest rates which would have been binding had the Credits all been taken at an index-linked interest rate, for the purpose of calculating the Base Interest.

8.3.2.

Notwithstanding the foregoing, the Interest on the portion of the Loan which is provided to the Borrower after April 30, 2010, shall, in any event, not be less than the average rate (simple accounting) of the gross return of the prices of Galil 0418 and 5472 bonds, as of the date of provision of such portion of the Loan, plus 4.9% per year (and it is clarified that in such instance, no restriction shall apply to the maximum interest rate).

8.3.3.

The Interest shall be calculated as the number obtained by multiplying any relevant amount by the Loan interest rate, divided by 365 or 366 days (based on the year) and multiplied by the number of days in the period with respect to which the calculation is made.

8.4.

Repayment Dates

8.4.1.

The Loan principal shall be repaid in a single payment at the end of the Term of the Loan.

8.4.2.

The Interest shall be paid in an ongoing manner, once every six months, on June 10 and December 10 of each relevant year, up to the end of the Term of the Loan, and at the end of the Term of the Loan together with repayment of the Loan principal.

8.4.3.

Closely after the Provision of the Loan (or each Installment), the Lender shall provide the Borrower with an amortization schedule for the Loan in accordance with the provisions of this Agreement, with respect to each Installment separately, and the amortization schedule shall bind the Borrower. Notwithstanding the foregoing, with respect to the first Installment, the Lender shall provide the Borrower with the amortization schedule closely after the Lender is furnished with the amortization schedule and interest rates prepared by Bank Hapoalim Ltd., as set forth in Section 8.3.1.

8.5. Linkage Differentials

8.5.1.

The principal and the Interest (including the Arrears Interest) under this Agreement shall be linked to a rise in the Index in comparison with the Base Index, in accordance with the provisions of this Section (in this Agreement, "Linkage Differentials"):

8.5.2.

Any payable amount shall be increased by a percentage equal to the ratio of the Determining Index to the Base Index.

8.5.3.

In this Section:

	"Index"	Means the Consumer Price Index (the general index) including vegetables and fruit, published by the Central Bureau of Statistics. In the event this Index is no longer published by the Central Bureau of Statistics, it shall be replaced by an index which is identical or similar in nature which shall be published by the Central Bureau of Statistics (in the ratio to be determined, if determined) or such other index as determined by the Lender.
	"Base Index"	The last index published prior to the provision of each Installment (according to the basis average for 2009).
	"Determining Index"	The last index published prior to each repayment date, but not less than the Base Index (it is clarified that the Determining Index may be lower than indices published with respect to previous months, but in any event not less than the Base Index).

8.6.

In the event that a particular repayment date of the principal and/or interest is not a Banking Business Day, the repayment date of the relevant payment shall be deferred to the next subsequent Banking Business Day.

8.7.

Any repayment on account of the Loan shall be made by the Borrower via bank transfer to the Bank Account of each party [comprising] the Lender, whose details shall be provided to the Borrower by the Lender in writing at least 5 Banking Business Days prior to the first repayment date of the principal and/or interest, or such other details to be provided thereafter (hereinafter, "Lender's Bank Account"), by 12:00 p.m. of each repayment date. By and no later than 5:00 p.m. of the date on which the bank transfer is performed, the Borrower shall provide the Lender with a copy of the bank transfer form, signed by the Borrower's bank.

8.8.

It is agreed that only amounts deposited in the Lender's Bank Account shall be deemed to be amounts actually repaid by the Borrower on account of the Loan, and that the repayment date of each payment to be made by the Borrower shall be regarded as the date on which the Lender's Bank Account was actually credited for such payment.

8.9.

It is clarified that the Lender is under no obligation to send any notice or demand to the Borrower in connection with the repayment date of any payment on account of the Loan which the Borrower is required to repay in accordance with the Loan amortization schedule or in connection with the amount thereof. However, the Lender may send the Borrower such a notice without the foregoing imposing any obligation or liability on the Lender.

8.10.

Without derogating from any right and/or other relief available to the Lender and/or the Borrower, any amount on account of the principal and/or interest which the Borrower does not pay the Lender on the relevant repayment date shall bear interest at the Arrears Interest rate as of the relevant repayment date and up to the actual repayment date. Notwithstanding the foregoing, to the extent the Borrower pays the amounts in arrears within seven (7) days of the date on which it was required to make the payment, the amount in arrears shall not bear Arrears Interest during such seven days.

8.11.

Early Repayment at the Borrower's Request

8.11.1.

The Borrower may not make early repayment of the Loan or any portion thereof, other than in accordance with the provisions of this Section or the provisions of Section 6.6.9 above:

8.11.2.

With respect to each Installment, during the period commencing from the provision of the Installment and for three (3) years after the date of provision of such Installment, the Borrower may not make early repayment of such Installment or any portion thereof.

8.11.3.

With respect to each Installment, as of three (3) years from the date of provision of each Installment, the Borrower may make early repayment of such Installment, subject to the following conditions:

8.11.3.1.

The Borrower provides the Lender with an early repayment request in writing, at least fifteen (15) days prior to the requested date of early repayment.

8.11.3.2.

The principal amount to be repaid early (each time) shall not be less than a total of NIS 30,000,000 (Thirty Million Shekels).

8.11.3.3.

The Borrower shall pay the Lender an early repayment fee, which shall be equal to the difference (positive only) between the gross return on index-linked Israeli government bonds for a similar average duration for the Term of the Loan as it shall be on the Date of Provision of the Loan, plus 0.85%, and the gross return on index-linked Israeli government bonds for a similar average duration for the remainder of the Term of the Loan, as it shall be on the early repayment date, multiplied by the principal amount of the Loan which was repaid early, and multiplied by the average duration of the remaining Term of the Loan, as it shall be on the early repayment date.

8.11.3.4.

Amounts repaid early under this Section shall be allocated in accordance with the order of allocation set forth in Section 12.

8.12.

Early Repayment Pursuant to Lender's Notice

8.12.1.

In the event the Borrower submits a Binding Request to release monies from the Encumbered Account, as set forth in Section 6.6.3 (and, for the avoidance of doubt, with the exception of a request to release monies from the Encumbered Account which are Special Proceeds), then, as part of the Lender's Approval granted under Section 6.6.5, the Lender may notify the Borrower that it is required to make early repayment of the principal, as set forth in this Section below. No notice by the aforementioned date shall be deemed to be a waiver of the right to demand early repayment of such payment.

8.12.2.

The amount with respect to which the Lender may demand early repayment in accordance with Section 8.12 shall be the higher of:

(a)

NIS 7,500,000 (Seven Million Five Hundred Thousand Shekels), linked to the Index (the Base Index in this respect shall be the last index published prior to the execution of this Agreement);

(b)

25% (Twenty Five Percent) of the amount which the Borrower requests to withdraw, as aforementioned, less the interest paid by the Borrower on the last Interest payment date preceding the date of early repayment.

8.12.3.

Early repayment in accordance with the Lender's notice shall be made within 10 days of the Lender's notice, which is to be issued in accordance with Section 8.12.1, out of the monies in the Encumbered Account, and, in any event, as a condition for releasing the monies from the Encumbered Account pursuant to Section 6.6.

8.12.4.

As of three (3) years from the provision of the first Installment, the Lender may, up to fourteen (14) days prior to each of the interest repayment dates, demand that the Borrower repay, on the next interest repayment date, a Loan principal amount of up to NIS 7,500,000 (Seven Million Five Hundred Shekels) linked to the index (with the Base Index in this respect being the last index published prior to the execution of this Agreement), including in the event the Borrower did not seek to release monies from the Encumbered Account (for the avoidance of doubt, a demand under this Section shall be alternative to the demand under Section 8.12.2).

8.12.5.

It is clarified that:

8.12.5.1.

The principal Loan amounts with respect to which the Lender did not demand repayment as set forth in this Section above, shall only be repaid at the end of the Term of the Loan, without derogating from the Borrower's rights under Section 6.6.9 or Section 8.11.

8.12.5.2.

Early repayment under this Section shall not incur any fee or penalty.

8.12.5.3.

In the event the Lender fails to issue the aforementioned notice on at least one of the dates it was entitled to do so, the Lender shall be entitled to special interest from the Borrower, as set forth below.

8.12.5.4.

The amounts to be paid under this Section 8.12 shall be credited exclusively towards repayment of the principal.

8.13.

Special Interest

8.13.1.

On the last Loan repayment date, the Borrower shall pay the Lender additional special interest, such that the internal rate of return of the Loan principal, without Linkage Differentials ("Target Rate of Return") shall be equal to the rate to be calculated according to the following formula, provided that in any event, the internal rate of return for the Loan principal, without Linkage Differentials, shall not exceed the internal rate of return derived from the stipulated interest rate of 6.95%, payable in accordance with the terms of this Agreement:

X - Target Rate of Return.

A - Loan interest.

C - The ratio of the total principal amount which was repaid as of the payment date of the additional interest (by early repayment, at the Lender's demand as set forth in Section 8.12) to the total principal amount the payment of which the Lender was entitled to demand under Section 8.12 above, as of the payment date of the additional interest.

8.13.2.

The amount payable under Section 8.13.1 shall bear Linkage Differentials, with the Base Index being the last index published prior to the Date of Provision of the Loan.

8.13.3.

An example for calculating the Special Interest under this Section is attached as Appendix 8.13.3.

9.	Demand for Immediate Repayment of the Loan

Exclusively upon the occurrence of one or more of the following events, the Lender may demand the immediate repayment of all or part of the Loan.

In case a portion of the Loan is transferred to entities not included in the Migdal Group, as set forth in Section 13.2.2, a resolution to demand immediate repayment and realization of the Collateral is passed by a majority of parties holding at least 70% of the outstanding balance of the Loan.

Notwithstanding the foregoing, upon the occurrence of an event set forth below, which also constitutes grounds for demanding immediate repayment under the Bank Financing Agreement; and, which, despite the existence thereof, the Bank did not demand immediate repayment, the Lender shall not demand the immediate repayment of the Loan, as aforementioned, other than one hundred (100) days after the date on which the Lender notifies the Borrower that the circumstances set forth in this Section 9 (disregarding waiting or cure periods, to the extent any exist) (the "Waiting Period") have occurred. During the Waiting Period, the Borrower may make early repayment of the full Loan, without penalties or fees, by thirty (30) days' prior written notice to the Lender. Notwithstanding the forego ing, in the event that at any time during the Waiting Period and not less than fifteen (15) days after the date on which it receives the Borrower's notice regarding its desire to make early repayment of the Loan, the Lender notifies the Borrower in writing that it waives its right to demand immediate repayment upon the conclusion of the Waiting Period, the Borrower's right to make early repayment, as aforementioned, shall expire. For the avoidance of doubt, the foregoing is subject to the provisions of Section 5.20 hereof.

In the event of immediate repayment, as aforementioned, the Borrower undertakes to pay the Lender, at its demand, all or part of the Loan amount the payment of which is demanded by the Lender. The Lender may take all the measures it deems necessary to collect the Loan, in particular to realize all or part of the Collateral, in its discretion, in any manner so permitted by Law and at the Borrower's expense, all subject to applicable Law.

The following are the events:

9.1.

If the Borrower breaches and/or fails to perform: (a) any condition of this Agreement and/or the Collateral Documents which, in the discretion of the Lender, is a material condition; or (b) any other undertaking which the Borrower undertook and/or is to undertake towards the Lender, whether under this Agreement or under any of the Collateral Documents, which, in the discretion of the Lender, is a material undertaking - all, if such breach is not remedied within 45 days of receiving notice of the breach (for the avoidance of doubt, the provisions of this Section 9.1 do not apply with respect to the specific circumstances set forth in the other Subsections of this Section 9 below, with respect to which the specific arrangements provided in any of the aforementioned Subsections shall apply).

Notwithstanding the provisions of this Section 9.1, the Lender shall be exempt from providing such notice and/or from waiting for the conclusion of the notice period if the Lender believes that providing the notice and/or waiting until the end of the notice period may cause the Lender immediate and material damage, including any instance in which the Lender believes that providing notice and/or waiting until the end of the notice period may derogate from the Lender's possibility of realizing the Collateral. In the event the Lender elects to act as set forth above, it shall provide the Borrower written notice regarding such decision and the reason for its decision, closely after reaching such decision.

9.2.

If it becomes evident that any of the Borrower's representations in this Agreement or the appendices hereto and/or the Collateral Documents which the Lender believes to be material are incorrect or inaccurate, and, at the discretion of the Lender, the breach caused harm or may cause harm to the Lender's rights if not remedied; provided that the Borrower does not remedy the breach within 35 days of the date the Lender notify the Borrower of the breach.

9.3.

If: (a) The Borrower receives a decision to restructure; or (b) the Purchaser receives a decision to restructure; or if (c) Bezeq receives a decision with respect to a merger, as defined in the Companies Law, 5759-1999, in which Bezeq is the target company, and the foregoing may harm the Lender's rights.

9.4.

If the Borrower and/or Bezeq decide upon voluntary dissolution.

9.5.

If a motion for liquidation is filed against the Borrower and/or the Purchaser and/or Bezeq and/or a liquidation order is issued against the Borrower and/or Purchaser and/or Bezeq; and/or a temporary, permanent or other liquidator and/or special manager and/or trustee is appointed over the Borrower and/or Purchaser and/or Bezeq and/or a motion for a stay of proceedings is filed with respect to the Borrower and/or Purchaser and/or Bezeq and/or an order for such a stay of proceedings is issued, provided that to the extent the provisions of this subsection pertain to motions which were not filed by the Borrower and/or Purchaser and/or Bezeq and/or orders issued ex parte without the consent of the Borrower and/or Purchaser and/or Bezeq, respectively, the Borrower and/or Purchaser and/or Bezeq, as applicable, shall be provided a cure period of 30 days to cancel the motion and/or order, as applicable.

9.6.

If negotiations take place for the formulation of and/or a motion is filed for an arrangement or a settlement proposal, as these terms are defined in Section 350 of the Companies Law, between the Borrower and/or Purchaser and the creditors and/or shareholders of any of the foregoing or between the Borrower and/or Purchaser and a particular class of thereof and/or if such an arrangement or settlement proposal is approved, all, with the exception of internal re-organization or technical changes in capital; provided that to the extent the provisions of this subsection pertain to a motion for an arrangement and/or settlement which is not filed at the initiative and/or with the agreed participation of the Borrower and/or the Purchaser and/or with respect to negotiations in which the Borrower and/or the Purchaser did not participate with its consent, then the Borrower and/or Purchaser, as applicable, shall be provided a cure period of 30 days to cancel the negotiations and/or the aforementioned motions for an arrangement and/or settlement, as applicable;

Or –

If negotiations take place for the formulation of and/or a motion is filed for an arrangement or a settlement proposal, as these terms are defined in Section 350 of the Companies Law, 5759-1999, between Bezeq and its creditors and/or its shareholders or between Bezeq and a particular class thereof and/or if such an arrangement or settlement proposal is approved, all, with the exception of an internal re-organization or technical changes in capital; provided that to the extent the provisions of this subsection pertain to a motion for an arrangement and/or settlement which is not filed at the initiative and/or with the agreed participation of the Borrower and/or Purchaser and/or Bezeq and/or with respect to negotiations in which the Borrower and/or Purchaser and/or Bezeq did not participate with its consent, the Borrower shall be provid ed a cure period of 30 days to cancel the negotiations and/or the aforementioned motions for an arrangement and/or settlement, as applicable;

9.7.

The Borrower and/or Purchaser and/or Bezeq are removed from the records of the Registrar of Companies.

9.8.

The Borrower and/or Purchaser and/or Bezeq are registered in the Registrar of Companies records as a company in breach, as such term is defined in Section 362a of the Companies Law, 5759-1999, and such breach is not remedied within 7 Business Days of the date the Borrower is provided notice of the breach by the Lender.

9.9.

A motion is filed for the receivership of the Borrower's property and/or the Purchaser and/or all or a Substantial Portion of Bezeq's Property and/or such a receivership order is issued and/or a permanent and/or temporary and/or other receiver is appointed over the Borrower's property and/or Purchaser and/or over all or a Substantial Portion of Bezeq's Property; provided that to the extent the provisions of this subsection pertain to motions that were not filed by the Borrower and/or Purchaser and/or Bezeq and/or to orders issued ex parte, the Borrower shall be provided a cure period of 45 days to cancel the aforementioned motion and/or order, as applicable.

With respect to this subsection and Section 9.10 below:

9.10.

An attachment is imposed or similar execution proceedings are instituted with respect to the Borrower's property and/or Purchaser and/or all or a Substantial Portion of Bezeq's Property (as defined above);

And/or

An attachment is imposed or similar execution proceedings are instituted with respect to one of the Collaterals provided and/or to be provided to the Lender, all or a substantial portion thereof.

[The foregoing is] provided that to the extent the provisions of this subsection pertain to orders issued ex parte, the Borrower shall be provided a cure period of 45 days to remove the attachment.

9.11.

The Borrower is late in paying an amount under this Agreement, and such breach is not remedied within 14 (fourteen) days.

9.12.

There is a Change in Control of the Group (as such term is defined in Section 5.21 above), at any time, for any reason.

9.13.

The Borrower fails to provide the Lender with balance sheets, periodic financial statements, accounting books and other documents pertaining to its state of affairs, as set forth in this Agreement, within 21 days of the date the Lender provides written notice of the breach, or if the Borrower and/or Purchaser breach the instructions of the competent authorities to furnish and/or publish various reports and documents required by Law, and the Borrower and/or Purchaser, respectively, fail to remedy such breach within the time prescribed by the relevant authority.

9.14.

There is a change to the incorporation documents of the Borrower and/or Purchaser which, in the Lender's absolute discretion, will harm the Lender's rights in connection with the Loan and/or the Lender's rights under this Agreement and/or the Collateral Documents and/or the Borrower's liabilities towards the Lender under this Agreement and the Collateral Documents. It is clarified that nothing in the foregoing derogates from the provisions of Section 5.25.

9.15.

Bezeq's shares are, for any reason, not traded on any of the following stock exchanges for a consecutive period of thirty (30) days: the Tel Aviv Stock Exchange, the London Stock Exchange (LSE) or any stock exchange in the United States.

9.16.

The general license for the provision of domestic fixed line telecommunication services which was granted to Bezeq pursuant to the Communications Law ("General License") is adversely modified in a manner which constitutes a Material Change to the Nature of Activity, or the General License is cancelled and/or if any other permit granted and/or to be granted to Bezeq under the Communications Law is cancelled or adversely modified in such a manner that would constitute a Material Change to the Nature of Bezeq's Activity, as defined in Section 9.18, all except if the circumstances described in this Section occurred as a result of an act or omission of the Lender.

9.17.

An event, or series of events occurs which constitute a sale and/or transfer, in any manner, of Bezeq's Material Activity.

For purposes of this Section 9.17, "Bezeq's Material Activity" shall mean any assets and/or rights of Bezeq (and/or of any of the corporations included in its statements) whose relative contribution to the value of Bezeq's activity exceeds 10%. The value of Bezeq's activity shall be calculated, exclusively for the purposes of this definition, by multiplying Bezeq's EBITDA (as defined in Section 6.6.4.4) by 5.7.

9.18.

An event, or series of events occurs which constitute a Material Change to the Nature of Bezeq's Activities, which is any change with respect to Bezeq's areas of activity such that Bezeq ceases all or a substantial portion of its operations in any of the three following areas of activity: the domestic telecommunications sector, the cellular sector, the international calling and internet services sector ("Material Change to the Nature of Bezeq's Activity").

9.19.

9.20.

Whenever immediate repayment of the Bank Debt is demanded pursuant to the terms of the Bank Financing Agreement.

For the avoidance of doubt, it is clarified that the Lender's right to demand the immediate repayment of the credit amounts and to take action against the Borrower to collect the credit amounts with respect to each of the instances set forth in this Section, including all the subsections hereof, is a separate right, and the occurrence of one of the events above is sufficient for the Lender's aforementioned rights to be exercised.

10.	Undertaking to Provide Reports and Information

10.1.

The Borrower undertakes to routinely maintain accounting books in accordance with generally accepted accounting principles.

10.2.

The Borrower shall permit the Lender to examine and inspect all the ledgers, financial documents and accounts pertaining to its activity and assets, in a reasonable manner and upon prior coordination with the Borrower.

10.3.

The Borrower shall provide the Lender with the following reports:

10.3.1.

No later than April 10 of each year, the Borrower's audited consolidated financial statements for the previous year, including a profit and loss statement, balance sheet and cash flow statement.

10.3.2.

Within 70 days of the end of each of the first, second and third quarters, the Borrower's reviewed consolidated quarterly statements.

10.3.3.

Within twenty (20) days of the provision of the aforementioned financial statements and with respect to the data included therein, the Borrower shall provide the Lender with an approval signed by it and an external accountant, confirming the financial ratios set forth in Section 5.19 and including the method of calculation thereof.

10.3.4.

Each quarter – a copy of the Borrower's bank account statements documenting all the activity in the account.

10.3.5.

Subject to the provisions of any Law, any other relevant information in connection with the Borrower and the Purchaser and which is in the Borrower's possession which the Lender reasonably requests to receive, at the Lender's request.

10.3.6.

All the audited statements set forth in this Section shall be audited by one of the Big Four accounting firms in Israel, in accordance with generally accepted accounting principles, and while applying a uniform accounting policy.

10.3.7.

Any additional financial statement which the Purchaser furnishes to the Bank in accordance with the Bank Financing Agreement, with the exception of Eurocom's financial statements.

10.4.

In addition to the foregoing, the Borrower undertakes to notify the Lender immediately upon becoming aware of the occurrence of the events set forth below:

10.4.1.

Any imposition of an attachment on the Purchased Shares and/or shares of the Purchaser and/or any imposition of an attachment on the assets of the Borrower and/or Purchaser, with respect to a debt exceeding an aggregate amount of NIS 100,000. The Company further undertakes to immediately notify the Lender of any instance in which a right is claimed in connection with the Purchased Shares and/or shares of the Purchaser and/or any proceeding pertaining to execution and/or prohibitory injunctions and/or mandatory injunctions and/or attachment orders and/or other proceedings instituted for realization of the Purchased Shares and/or shares of the Purchaser, and to take action at its expense, immediately and without delay, to cancel such action;

10.4.2.

The occurrence of an Event of Default, without taking into account cure and/or waiting periods, to the extent determined, with a reasonable description of the details thereof and actions taken or being taken (if at all) for the remedy thereof;

10.4.3.

Any change of its name and/or address;

10.4.4.

Any claim, arbitration, and administrative or regulatory proceedings against the Borrower and/or Purchaser and/or with respect to any one of them (including notification of any threats of lawsuit, arbitration or proceedings, as aforementioned, to be provided to the Lender immediately after the Borrower becomes aware of the threat);

10.4.5.

A notification by the Bank regarding a breach of the Bank Financing Agreement (without taking into account the days included in the waiting and/or cure period, if and to the extent agreed) with a reasonable description of the details thereof and the actions taken or being taken (if at all) for the remedy thereof.

10.4.6.

Any time after the Date of Provision of the Loan, the Borrower undertakes to provide the Lender with a copy of any material demand and/or notice it and/or the Purchaser receives from any authority, including the Ministry of Communications and the Securities Authority, in connection with the management of the Borrower's or Purchaser's business, including holding shares of the Purchaser or the Purchased Shares, and in connection with the permits required by Law with respect thereto.

11.	Lender's Rights and Borrower's Liabilities

11.1.

The Borrower hereby undertakes to sign or to cause to be signed, at the Lender's first demand, all the documents required by Law from time to time to grant validity to any of the provisions of this Agreement and/or any of the appendices hereto.

11.2.

In the event the Lender is entitled to demand the immediate repayment of the Loan, regardless of whether the Lender exercised such right, the Lender may act as it so determines and at its reasonable discretion, but subject to prior written notice to the Borrower, as follows:

11.3.

Perform examinations, alone or by means of its representatives or a third party, regarding any matter pertaining to the Borrower and the Purchaser and their financial condition. The Lender may charge the Borrower for any reasonable expense which may be associated with such action, and the Borrower undertakes to compensate the Lender for such amounts (and the Collateral shall also be utilized to secure repayment of these amounts).

11.4.

Upon demanding the immediate repayment of the Borrower's debt to the Lender pursuant to Section 9 - to take any action against the Borrower as so determined by the Lender, which is available to the Lender under this Agreement and/or the Collateral Documents and/or applicable law.

11.5.

In the event the Lender applies to the judicial courts to collect the amounts due and or to become due to it by the Borrower, the Lender may, as it so determines, split its claim for repayment of all the debts hereunder or a portion of the debts hereunder, and each of the amounts claimed by the Borrower shall constitute grounds which are separate and independent of any other portion of the debts under this Agreement.

11.6.

It is clarified that nothing in the provisions of this Section 11 shall derogate from the Lender's or Borrower's rights under applicable law.

12.	Allocation of Payments

Any payment received under this Agreement in the event the immediate repayment of the Loan us demanded, including as a result of the realization of the Collateral, shall be credited in the following order (the first before the last):

12.1.

Payment of the Lender's expenses in connection with the Loan and/or the collection thereof, including realization of the Collateral.

12.2.

Payment of the Arrears Interest.

12.3.

Payment of the Interest.

12.4.

Payment of the Linkage Differentials.

12.5.

Payment of the Loan principal.

12.6.

Payment of any other amount to which the Lender is entitled from the Borrower.

13.	Transfer of Rights

13.1.

The Borrower may not assign and/or transfer all or part of its rights and/or obligations under this Agreement, and any such assignment and/or transfer shall be invalid.

13.2.

At any time after the Provision of the Loan, the Lender may assign and transfer all or part of its rights and/or obligations under this Agreement, in accordance with the following:

13.2.1.

To the entities set forth in Sections 2 or 3 of the First Addendum to the Securities Law, 5728-1968, which are controlled by Migdal Insurance and Financial Holdings Ltd. – without limitation.

13.2.2.

To banking corporations and/or to entities set forth in Sections 2 or 3 of the First Addendum to the Securities Law, 5728-1968, which are acting on behalf of themselves, provided that (a) following such transfer, the transferee shall hold not less than NIS 100,000,000 (One Hundred Million Shekels); and (b) the Lender and/or entities set forth in Section 13.2.1 shall remain the holders of more than 30% of the outstanding balance of the Loan; and (c) the transfer shall not create a legal preclusion to the continued existence of the Loan.

The transfer, as set forth in this Section 13.2, shall not harm or affect any of the Borrower's rights and/or undertakings under this Agreement, including any tax implications, and the transferee also undertakes towards the Borrower all of the obligations and undertakings hereunder, and shall be entitled to all the rights hereunder.

13.3.

In the event the Lender wishes to transfer the Loan or any portion thereof in accordance with Section 13.2, the foregoing shall be done with the consent of the Borrower, who may object to the foregoing for reasonable reasons to be provided in writing.

14.	Taxes and Mandatory Payments; Bearing Expenses

In the event immediate payment of the Borrower's debt to the Lender is demanded pursuant to the provisions of this Agreement, the Borrower undertakes to pay the expenses associated with the collection of the amounts due and/or to be due to the Lender under this Agreement and the execution thereof (including in connection with the realization of the Collateral), including reasonable legal expenses and attorney fees incurred by the Lender in the event of a breach of this Agreement and/or a demand for immediate repayment of the Loan and which, to the extent a judicial proceeding is conducted for the collection of the debt, are also approved by a court, and the Borrower shall be required to repay the foregoing to the Lender within 7 days of the Lender's first demand, together with interest at the rate stipulated in this Agreeme nt, as of the date of payment thereof by the Lender and up to the actual date of full payment. It is clarified that the Collateral also secures repayment of these amounts.

15.	Miscellaneous

15.1.

The Borrower shall bear its expenses associated with this Agreement, and, on the date of execution of this Agreement, shall pay the Lender's legal expenses to the Amit, Pollak, Matalon & Co. Law Firm in connection with the drafting of this Agreement, as agreed by the parties in advance and in writing.

15.2.

To the extent there are changes to any law pertaining to this Agreement, including, and particularly, the provisions of the Pledge Law, 5727-1967, in a manner which would require the performance of reasonable actions for the purpose of granting validity to the provisions of this Agreement, including, and particularly, the Collateral, the parties shall discuss the necessary changes and, with the Borrower's consent, which shall not be unreasonably withheld, it shall perform any reasonable action and shall sign any document reasonably required in writing by the Lender for such purpose.

15.3.

The parties undertake to perform all the actions and sign any documents required for the performance of this Agreement.

15.4.

Each party undertakes to act in good faith in performing its undertakings and exercising its rights under this Agreement.

15.5.

The headings of this Agreement are for convenience only; they do not constitute any part thereof and are not to be considered in interpreting this Agreement.

15.6.

This Agreement contains, represents, combines and expresses all the terms agreed between the parties. Any promises, guarantees, written or verbal agreements, undertakings or representations regarding the subject matter of this Agreement which were given or made by the parties prior to the execution of this Agreement and which are not explicitly expressed herein shall not add to, derogate from or modify the obligations and rights set forth in this Agreement or arising herefrom, and the parties shall not be bound by them as of the date of execution of this Agreement.

15.7.

No behavior by a party hereto shall be deemed to be a waiver of any of its rights under this Agreement or any law, or as a waiver or consent to any breach or non-fulfillment of a particular term, unless the waiver, consent, deferral, modification, cancellation or addition is made explicitly and in writing.

15.8.

In case any one of the provisions contained in this Agreement shall be held to be unenforceable and/or invalid for any reason, this shall not affect the other provisions of this Agreement, and the parties shall act to perform this Agreement in the spirit and language hereof, including replacing the unenforceable and/or invalid provision with an alternative provision the outcome and effect of which are essentially identical, provided that the foregoing does not affect the economic principles of this Agreement.

15.9.

The Borrower waives any right of set off it may have against the Lender from time to time, if any right so exists.

15.10.

The Lender's [accounting] books shall be used as prima facie evidence in connection with all matters related to this Agreement.

15.11.

The Lender's representative with respect to this Loan Agreement shall be Migdal Insurance Company Ltd. (the "Lender's Representative"), by the Head of the Investment Division as he/she shall be from time to time, and by up to two additional employees of the Lender's Representative of whose appointment for the purposes of this Section the Lender (by the Lender's Representative) shall notify the Company ("Employees of the Lender's Representative"). Until such time as the Lender notifies otherwise, the Employees of the Lender's Representative shall be Marius Boyom and Sarit Finkel.

15.1.1.

Each of the Lenders set forth in Appendix A to this Agreement hereby irrevocably empowers the Lender's Representative for all intents and purposes pursuant to this Agreement, in connection with the provision of instructions, the granting of authorization and receipt of notices under this Agreement.

15.1.2.

In light of the foregoing, the Company's notice to the Lender's Representative shall be deemed to be a notice to all the parties [comprising the] Lender set forth in Appendix A (hereinafter, the "Parties Comprising the Lender"), and a notice by the Lender's Representative to the Company shall be deemed to be a notice sent by all Parties Comprising the Lender.

15.1.3.

The Company shall not accept a notice or other instructions from any of the Parties Comprising the Lender, but only from the Lender's Representative.

15.1.4.

Any action which the Lender may perform in accordance with its rights under this Loan Agreement shall be performed by all Parties Comprising the Lender and in coordination amongst them, and shall be provided to the Company by the Lender's Representative, as aforementioned.

15.1.5.

Whenever the Lender's consent, approval or signature is required, the Lender's Representative's consent, approval or signature shall be deemed to be binding consent, approval or signature received from all the Parties Comprising the Lender. It is hereby clarified that the Lender shall provide the Company a single answer, on behalf of all the Parties Comprising the Lender, to any request which is addressed to it by the Company under the provisions of this Agreement.

15.1.6.

It is clarified that nothing in this Section derogates from the liability of the Parties Comprising the Lender being several and not joint liability as set forth in this Agreement.

15.12.

No modification, amendment and/or addition to this shareholders agreement shall be valid unless made in writing and signed by the parties. No verbal agreement to cancel the provisions of this Section shall be valid unless and to the extent made in writing and duly signed by the parties.

15.13.

The competent court in Tel Aviv with subject-matter jurisdiction shall have the sole and absolute jurisdiction with respect to all matters pertaining to this Agreement, including any dispute pertaining to the validity, interpretation, enforcement etc. of this Agreement.

15.14.

The addresses of the parties to this Agreement shall be as designated in the preamble to this Agreement or any address of which any of the parties notifies the other party. Notices between the parties in connection with this Agreement shall be provided in writing. Notices sent to the address of one of the parties shall be deemed to have been delivered to the addressee within seventy two (72) hours after having been sent by registered mail. Notices sent by facsimile shall be deemed to have been delivered one Business Day after having been transmitted, provided that the transmitting party presents fax confirmation of the transmission of the notice, and, if delivered by hand, upon delivery.

IN WITNESS WHEREOF, the parties hereto affix their signature:

B. Communications (SP1) Ltd.		Migdal Insurance Company Ltd. For profit-participation policies
		Migdal Insurance Company Ltd. For Nostro
		Migdal Makefet Pension and Provident Fund Ltd.
		Migdal Management of Provident Funds Ltd.
		New Makefet Provident Fund Management Ltd.
		Yozma Pension Fund for Self Employed Ltd.

Signature Confirmation

I, the undersigned, Miri Kimhi-Goldstein, Adv., who serves as the legal counsel for the Borrower, hereby confirm that the Agreement was duly executed by the Borrower, by means of Messrs. Or Elovitz, ID No. 038475117 and Amikam Sorer, ID No. 59821983, who are duly authorized to sign on behalf of the Borrower and bind it to this Agreement. The aforementioned parties' signatures on this Agreement obligate the Borrower for all intents and purposes.

___________________________

Signature and stamp

EX-4.10 8 exhibit_4-10.htm EXHIBIT 4.10 exhibit_4-10.htm

Exhibit 4.10

Addendum and Amendment to

Credit Agreement Dated February 11, 2010

Entered into in Tel Aviv as of the 14th day of April 2010


By and between:	The Lenders set forth in Appendix B of the Credit Agreement

	Of the first part;

And:	Bank Hapoalim Ltd.
	In its capacity as Facility Agent
	And in its capacity as Security Trustee

	Of the second part;

And:	B Communications (SP2) Ltd.
	Private Company No. 51-440539-8
	(Hereinafter, the "Company")

	Of the third part;

WHEREAS, on February 11, 2010, the parties executed an agreement for the provision of credit by the Lenders, for the purpose of partially financing the Company's purchase of shares of Bezeq pursuant to the Purchase Agreement, and expenses and additional amounts to be borne by the Company in connection with the Purchase Transaction and in connection with the provision of the Credit and management thereof (hereinafter, the "Credit Agreement"); and

WHEREAS, the parties wish to amend the Credit Agreement, all as set forth in this Addendum below;

NOW, THEREFORE, the parties stipulate and agree as follows:

General

1.1.

The preamble hereto constitutes an integral part hereof and is to be regarded as one of the provisions hereof.

1.2.

Unless stated otherwise, the terms appearing in this Addendum shall have the meaning ascribed to them in the Credit Agreement.

2.	Provision of Credit

2.1.

The Lenders hereby authorize the Facility Agent to sign a protocol for the completion of the transaction contemplated under the Credit Agreement, in the form attached hereto as Appendix 2.1 (hereinafter, the "Closing Protocol"), and the parties agree to act in accordance with the Closing Protocol.

2.2.

It is agreed that notwithstanding the provisions of Section 8.1 of the Credit Agreement, the conditions precedent enumerated in Section 8.2 of the Credit Agreement may be satisfied by the Closing Date (inclusive).

2.3.

It is further agreed that documents which, pursuant to Section 8 of the Credit Agreement, furnishing therefore to the Lender through the Facility Agent is a condition to the provision of the Credit may be furnished by the date set forth in the Credit Agreement to one or more trustees who shall be acceptable to the Facility Agent, or shall be held in another manner by third parties, as set forth in the Closing Protocol, and such documents shall be released to the Lenders, through the Facility Agent, immediately after the Credit is provided and the Purchase Consideration is remitted to the Sellers, all as described in the Closing Protocol.

3.	Repayment of the Principal Amount of Credit B

It is agree that the words "equal and consecutive payments" in Section 9.3 shall be replaced by the words "consecutive payments (Spitzer Amortization Table)."

4.	Addition to Section 20.2 of the Credit Agreement

It is agreed that the following paragraph shall be added to the end of Section 20.2 of the Credit Agreement:

"It is agreed that in the event that any of Credit A and/or Credit B and/or Credit C and/or Credit D partially bears floating interest and partially bears fixed interest, then the order of repayment of the (principal) portion bearing floating interest and the (principal) portion bearing fixed interest of each of such Credits shall be as follows: (a) upon each repayment event, with the exception of a demand for immediate repayment – first, the (principal) portion of the relevant Credit bearing floating interest shall be repaid, and, thereafter, the (principal) portion of the relevant Credit bearing fixed interest shall be repaid; and (b) in the event of a demand for immediate repayment – repayment shall be made in accordance with the pro rata ratio of the (principal) portion of the relevant Credit bearing floatin g interest to the (principal) portion of the relevant Credit bearing fixed interest.

In addition, it is clarified and agreed that in the event (principal) portions of Credit A and/or Credit B and/or Credit C and/or Credit D bear fixed interest at varying rates, then, in the event of early repayment (pursuant to Sections 16 and/or 17), the Company may, at its discretion, determine the order of repayment of the aforementioned Credit portions."

5.	Release of Surpluses from the Company's Account

5.1.

The Company declares that the equity capital which the Parent Company provided the Company together with a shareholder loan which the Parent Company is to provide the Company on the Date of Credit, as set forth in Section 8.7.1 of the Credit Agreement, shall leave a surplus in the Company's Account following payment of the purchase consideration to the Sellers pursuant to the provisions of the Credit Agreement, in the amount of NIS 122 million (hereinafter, the "Surplus Amount"). It is clarified that the Surplus Amount includes a total of NIS 100 million which is set forth in Section 8.3.2(s)(i) of the Credit Agreement.

5.2.

It is agreed that notwithstanding anything to the contrary in the Credit Agreement, including the Collaterals documents, and subject to the terms of the Permits, the following provisions shall apply with respect to the Surplus Amount:

5.2.1.

With respect to a total of NIS 55 million out of the Surplus Amount (hereinafter, the "Surpluses"): (a) the Company shall be entitled to use all or part of the Surpluses to pay transaction fees and expenses, including the aforementioned fees and expenses borne or to be borne by 012 Smile; and (b) the Company may provide all or part of the Surpluses to 012 Smile as a loan. It is clarified that the Company may, at any time, withdraw all or part of the Surpluses from the Company's Account without limitation, as aforementioned.

5.2.2.

With respect to a total of NIS 67 million out of the Surplus Amount, the provisions of the Credit Agreement applying with respect to the amount of NIS 100 million provided in Section 8.3.2(s)(ii) of the Credit Agreement shall apply.

5.3.

At the Company's request, which shall be made at its discretion, the Lenders, through the Facility Agent, shall agree to amend the Articles of Association of the Company to reflect the provisions of Section 5.2.1(b) above.

5.4.

The Company is aware that the foregoing consent to use all or part of the Surpluses, as set forth above, is a one-time consent, exclusive to the above circumstances, and such consent is not to be interpreted in a manner that enables the Company to perform other similar actions if they are not in accordance with the provisions of the Credit Agreement.

6.	Amendment of Collateral Documents

6.1.

It is hereby agreed to make amendments and supplements to the Collateral documents set forth below. The aforementioned documents shall be replaced by the forms attached to this Amendment. The documents are as follows:

6.1.1.

The Letter of Conditions and Encumbrance of Monies and Rights in Connection with the Deposit, attached as Appendix 16.1a to the Credit Agreement (Appendix 6.1.1 hereto).

6.1.2.

The Debenture, including the appendices thereto, for the creation of a lien by the Parent Company, which is attached as Appendix 22.1.1 to the Credit Agreement (Appendix 6.1.2 hereto).

6.1.3.

The Debenture, including the appendices thereto, for the creation of a floating charge over the assets of the Company, which is attached as Appendix 22.1.2 to the Credit Agreement (Appendix 6.1.3 hereto).

6.1.4.

The Debenture, including the appendices thereto, for the creation of encumbrances over the Company's assets, which is attached as Appendix 22.1.3 to the Credit Agreement (Appendix 6.1.4 hereto).

6.2.

In accordance with the amendment of the documents set forth above, the Credit Agreement shall be amended, as follows:

6.2.1.

"Appendix II" shall replace "Appendix III" in Section 8.7.7(d).

6.2.2.

Section 8.7.7(e) shall be replaced with the following language: "Instructions to the Company, with respect to amounts and assets due from the Company, in the form attached as Appendix III to the Upper Trust Agreement, approved by the Trust Company. The Parent Company shall sign the instructions, and the Company shall confirm receipt thereof, in the form attached thereto."

6.2.3.

Section 22.1.3.1(c) shall be cancelled.

6.2.4.

In Section 22.1.3.7, the words "on account of Shareholder Loans of any type and/or in connection with a management agreement to be executed between the Company and Bezeq" shall be deleted; the words "Appendix II" shall replace the words "Appendix B."

7.	Deletion of Reference to the Trust Account

It is agreed to delete from the Credit Agreement the references to the Trust Company's Account. Therefore, the Credit Agreement shall be amended as follows:

7.1.

The term " Trust Company Account" in Section 2 of the Credit Agreement shall be deleted.

7.2.

The words "… subject to the provisions regarding the transfer of monies via the Trust account, as set forth in the Lower Trust Agreement" shall be deleted from the end of the first sentence in Section 21.1(a) of the Credit Agreement.

7.3.

The words "… and/or the Trust Company's Account" shall be deleted from the first paragraph of Section 25.1 of the Credit Agreement.

8.	Completion of Details in the Credit Agreement

8.1.

The parties agree that the details of the "Company's Account" in Section 2 of the Credit Agreement are: account no. 634993 in the Central branch (600) of Bank Hapoalim Ltd.

8.2.

The parties agree that "B. Communications Ltd." shall appear in the definition of "012 Smile" in place of "012 Smile Communication Ltd."

8.3.

The parties agree that their addresses for purposes of the Credit Agreement, as set forth in Section 47.2 of the Credit Agreement, shall be as set forth in Appendix 8.2 hereto.

9.	Except as set forth in this Amendment above, there shall be no change to the remaining provisions of the Credit Agreement.

IN WITNESS WHEREOF, the parties hereto affix their signature:


B. Communications (SP2) Ltd. (the Company)		Israel Discount Bank Ltd. (as Lender)
Bank Hapoalim Ltd. (in its capacity as Lender)		HSBC Bank PLC (as Lender)
Mizrahi Tehafot Bank Ltd. (as Lender)		Union Bank of Israel (as Lender)
First International Bank of Israel Ltd. (as Lender)		Bank Leumi LeYisrael B.M. (as Lender)
Central Benefits Fund of Histadrut Employees Ltd. (under special management) (as Lender)		Makefet Fund Pension and Provident Center - AS Ltd. Pension Fund (as Lender)
Makefet Fund Pension and Provident Center - AS Ltd. (under special management) – Other-Purpose Funds (as Lender)		Mivtachim The Workers Social Insurance Fund Ltd. (under special management) - Pension Fund (as Lender)
Mivtachim The Workers Social Insurance Fund Ltd. (under special management) Illness and Accident Provident Fund (as Lender)		Hadassa Employees Pension Fund Ltd. (under special management) (as Lender)
"Egged" Members Pension Fund Ltd. (under special management) – Pension Track (as Lender)		"Egged" Members Pension Fund Ltd. (under special management) – Full Pension Track (as Lender)
Bank Hapoalim Ltd. (in its capacity as Security Trustee)		Bank Hapoalim Ltd. (in its capacity as Facility Agent)

Signature Confirmation

I, the undersigned, Ami Barlev, Adv., who serves as the legal counsel for B. Communications (SP2) Ltd. (hereinafter, the "Company"), hereby confirm that all the necessary resolutions have been received by the authorized organs of the Company, for the purpose of the Company's execution of this Addendum, and that this Addendum was duly executed by the Company, in accordance with its updated incorporation documents and by means of the parties authorized to bind it, and whose signature on this Addendum obligates the Company for all intents and purposes under this Addendum.

		Ami Barlev, Attorney
April 14, 2010		License No. 43053
Date		Signature and stamp of attorney

EX-4.11 9 exhibit_4-11.htm EXHIBIT 4.11 exhibit_4-11.htm

Exhibit 4.11

Addendum and Amendment No. 1 to the Loan Agreement Dated

February 18, 2010

Entered into in Ramat Gan as of the 14th day of April 2010

By and between

	Entities Within the Migdal Insurance and Financial Holdings Ltd. Group Pro Rata Among Themselves
	All as set forth in Appendix A to the Original Agreement
	Whose address is 4 Efal Street, Kiryat Arye, Petach Tikva
	Each severally, with respect to its portion of the Loan, as set forth in the Appendix (and not jointly and severally)
	(hereinafter, the "Lender")
	Of the first part;

And

	B Communications (SP1) Ltd. Company No. 514405414
	Whose address is 2 Dov Friedman Street, Ramat Gan
	(Hereinafter, the "Borrower")
	Of the second part;

WHEREAS, on February 18, 2010, a Loan Agreement was executed between the parties (hereinafter, the "Original Agreement"); and

WHEREAS, the parties wish to amend and add to the Original Agreement;

NOW, THEREFORE, the parties stipulate and agree as follows:

Provision of the Loan

1.	Unless explicitly stated otherwise in this Amendment No. 1, the terms in this Amendment No. 1 shall have the meaning ascribed to them in the Original Agreement.

2.	Notwithstanding Section 7.5 of the Original Agreement, the Borrower hereby instructs the Lender (subject to the satisfaction of the conditions for providing the First Installment) to provide the Borrower with the Loan in its entirety, in a single installment, in the following manner:

2.1.

A total of NIS 22,500,000 shall be transferred by way of a Real Time Gross Settlement ("RTGS") transfer to the Encumbered Account, as set forth in Section 7.5 of the Original Agreement.

2.2.

A total of NIS 477,500,000 shall be transferred by way of an RTGS to the Purchaser's bank account, the details of which are as follows: account no. [ ] in Bank Hapoalim Ltd., Central Branch (600), IBAN No. [IL790126000000000634993] (hereinafter, the "Purchaser's Account").

Pursuant to the provisions of Section 2.15 of the Original Agreement, the Borrower hereby notifies the Lender that the details of the Encumbered Account are as follows: account no. [ ] in Israel Discount Bank Ltd., Kikar Hayahalom Branch (123), IBAN No. [IL490111230000093053292].

The Borrower represents and warrants that its request to provide a portion of the Loan to the Purchaser's Account, as aforementioned, was designed to facilitate the money transfer process and the actions to be performed on the date of consummation of the transaction under the Bezeq Purchase Agreement, and that the transfer of the Loan in its entirety to the Purchaser's Account and the Encumbered Account is equivalent to the provision of the Loan to the Borrower under the terms of the Original Agreement for all intents and purposes.

Without derogating from the generality of the foregoing, the words "in the Bank Account" in Section 7.6 of the Original Agreement shall be deemed to have been replaced with the words "in the Bank Account and the Purchaser's Account, in accordance with Section 2 of Addendum No. 1 of the Original Agreement."

In addition, in light of the Lender's consent to provide the Loan immediately prior to the provision of the Bank Debt to the Purchaser despite Section 7.2 of the Original Agreement, such that the Loan amounts are held by the Borrower and the Purchaser in trust for the Lender until such time as the Bank Debt is provided to the Purchaser, the Borrower undertakes that in the event the Loan is provided at such time, as aforementioned, and, after the provision thereof AP.SB.AR. Irrevocable Instruction, as defined below, is not performed for any reason whatsoever by 11:59 p.m. on April 14, 2010, then the Borrower shall immediately return to the Lender (on April 15, 2010) the entire Loan amount without the need for any demand or action on the part of the Lender. It shall do so by RTGS transfer to the account whose details are as follows: account no. [ ] at the Montefiore branch (781) of Bank Hapoalim Ltd., under the name of Amit, Pollak, Matalon Trust for Migdal Insurance Company Ltd. (IBAN: IL90-0127-8100-0000-0317-703).

As a condition for the Lender's provision of the Loan and without derogating from the Borrower's above undertaking: (a) the Borrower shall provide the Lender with a letter of undertaking, in the form attached as Appendix A to this Addendum No. 1, signed by the Purchaser, pursuant to which the Purchaser shall return to the Lender a total of NIS 477,500,000 in the aforementioned event; and (b) the Lender shall be provided irrevocable instructions from the Purchaser to Bank Hapoalim Ltd. and to Bank Hapoalim Ltd. (as Facility Agent), in the form attached as Appendix B to this Addendum No. 1, approved by Bank Hapoalim Ltd. The Lender shall sign the aforementioned instructio ns, granting its consent thereto.

In this Section, "AP.SB.AR. Irrevocable Instruction" shall mean irrevocable instructions which the Purchaser shall give to Bank Hapoalim Ltd. (in its capacity as Facility Agent) immediately after the Purchaser's Account is credited, as set forth in Section 2 above, to credit the Sellers' account(s) in consideration for shares of Bezeq which are purchased in accordance with the provisions of the Bezeq Purchase Agreement, upon receiving the approval of Bezeq's secretary for the appointment of directors to the Board of Directors of Bezeq (the form of the Ap.Sb.Ar. Irrevocable Instruction is attached hereto as Appendix C).

Correction of Typing Error

6.	In Section 6.6.6 of the Original Agreement, the digit "0" shall be replaced by the number "6.6.4."

Surpluses in the Purchaser's Account

The Borrower declares that the equity capital it provided to the Purchaser, together with the Loan amount which it shall provide the Purchaser on the Closing Date as a shareholder loan, shall leave a surplus in the Purchaser's Account, after payment of the purchase consideration to the Sellers pursuant to the Bezeq Purchase Agreement, in an amount of NIS 122 million (it is clarified that this amount includes a total of NIS 100 million, which is included in the Permitted Expenses pursuant to Section 5.7(b) of the Original Agreement) (hereinafter, the "Surplus Amount"). As part of the amendment to the Bank Financing Agreement, it is was determined, inter alia, that with respect to a total of NIS 55 million from the Surplus Amount, the Purchaser shall be entitled to provide all or part of such amount as a loan to Smile (the "Loan to Smile").

The Lender consents to the provisions of Section 7 notwithstanding anything to the contrary in the Original Agreement, and it agrees that the Purchaser may provide the Loan to Smile without transferring monies via the Encumbered Account. The Lender shall execute any document reasonably required by the Borrower in order to exclude all or part of the Surplus Amount from the Irrevocable Instruction to pay the Purchaser's Surpluses into the Encumbered Account, which was furnished to the bank in which the Account is managed, pursuant to the provisions of Section 5.7 of the Original Agreement. In the event all or part of the Surplus Amount reaches the Encumbered Account, pursuant to the aforementioned Irrevocable Instruction, it may be released from the Account at the Borrower's discretion.

The Borrower is aware that the foregoing consent for use of all or part of the Surplus Amount, as set forth above, is a one-time consent, exclusive to the above circumstances, and such consent is not to be interpreted in any manner that enables the Company to perform other similar actions if they are not in accordance with the provisions of the Original Agreement.

Miscellaneous

9.	The parties agreed that "B. Communications Ltd." shall replace "012 Smile. Communication Ltd." in the definition of the term "Smile."

10.	For the avoidance of doubt, nothing in this Addendum No. 1 derogates from or modifies the conditions for the provision of the Loan.

11.	There shall be no change to the remaining provisions of the Original Agreement.

IN WITNESS WHEREOF, the parties hereto affix their signature:

(-)		(-)
B. Communications (SP1) Ltd.		Migdal Insurance Company Ltd. For profit-participation policies (-)
		Migdal Insurance Company Ltd. For Nostro (-)
		Migdal Makefet Pension and Provident Fund Ltd. (-)
		Migdal Management of Provident Funds Ltd. (-)
		New Makefet Provident Fund Management Ltd. (-)
		Yozma Pension Fund for Self Employed Ltd.

Signature Confirmation

I, the undersigned, Ami Barlev, Adv., who serves as the legal counsel for the Borrower, hereby confirm that the document entitled "Addendum and Amendment No. 1 to the Loan Agreement Dated February 18, 2010," was duly executed by the Borrower, by means of Messrs. Or Elovitch, ID No. 038475117 and Amikam Shorer, ID No. 059821988, who are duly authorized to sign on behalf of the Borrower and bind it to this Agreement. The aforementioned signatures on this Agreement obligate the Borrower for all intents and purposes.

	(-) Ami Barlev, Attorney License No. 43053
	Signature and stamp

EX-8.1 10 exhibit_8-1.htm EXHIBIT 8.1 exhibit_8-1.htm

Exhibit 8.1

LIST OF SUBSIDIARIES

We own the following subsidiaries:

B Communications (SP1) Ltd., or SP1, an Israeli company and wholly-owned subsidiary.

B Communications (SP2) Ltd., or SP2, an Israeli company and wholly-owned subsidiary. SP2 is directly held by SP1.

We own a 30.44% interest in Bezeq The Israel Telecommunications Corp. Ltd. (TASE:BZEQ), an Israeli company, or Bezeq. Our interest in Bezeq is directly held by SP2.

EX-12.1 11 exhibit_12-1.htm EXHIBIT 12.1 exhibit_12-1.htm

Exhibit 12.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

I, Eli Holtzman, certify that:

1.	I have reviewed this annual report on Form 20-F of B Communications Ltd.;

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

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

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

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

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

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: June 30, 2010

/s/ Eli Holtzman

Eli Holtzman

Chief Executive Officer

* The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.

EX-12.2 12 exhibit_12-2.htm EXHIBIT 12.2 exhibit_12-2.htm

Exhibit 12.2

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

I, Doron Turgeman, certify that:

1.	I have reviewed this annual report on Form 20-F of B Communications Ltd.;

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

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

(a)

(b)

(c)

(d)

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

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: June 30, 2010

/s/ DoronTurgeman

DoronTurgeman

Chief Financial Officer

* The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.

EX-13.1 13 exhibit_13-1.htm EXHIBIT 13.1 exhibit_13-1.htm

Exhibit 13.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of B Communications Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eli Holtzman, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Eli Holtzman

Eli Holtzman

Chief Executive Officer

June 30, 2010

* The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.

EX-13.2 14 exhibit_13-2.htm EXHIBIT 13.2 exhibit_13-2.htm

Exhibit 13.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of B Communications Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Doron Turgeman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Doron Turgeman

Doron Turgeman

Chief Financial Officer

June 30, 2010

* The originally executed copy of this Certification will be maintained at the Company’s offices and will be made available for inspection upon request.

EX-15.1 15 exhibit_15-1.htm EXHIBIT 15.1 exhibit_15-1.htm

Exhibit 15.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

B Communications Ltd. (formerly 012 Smile.Communications Ltd.) :

We consent to the incorporation by reference in the registration statement on Form S-8 (File No. 333-150173) of B Communications Ltd. (formerly 012 Smile.Communications Ltd.) (the “Company”) of our report dated June 30, 2010, with respect to the consolidated statements of financial position of the Company and its subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years in the two-year period ended December 31, 2009, which report appears in the December 31, 2009 annual report on Form 20-F of the Company.

/s/ Somekh Chaikin

Somekh Chaikin

Certified Public Accountants (Israel)

A member firm of KPMG International

Tel Aviv, Israel

June 30, 2010

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Title of each class	Name of each exchange on which registered
Ordinary Shares, NIS 0.1 Par Value	NASDAQ Global Market

U.S. GAAP
Statement of Operations Data:
	Year Ended December 31,
	2005			2006			2007
	(NIS in thousands, except share and per share data)
Revenues		244,376			343,086			1,102,888
Cost of revenues		136,856			224,565			762,205
Selling and marketing		60,595			59,864			157,304
General and administrative		22,859			22,921			57,984
Impairment and other charges		-			10,187			10,433
Operating income		24,066			25,549			114,962
Financial income (expenses), net		(5,342	)		(17,266	)		(52,043	)
Income before income taxes		18,724			8,283			62,919
Income tax expense		6,972			10,315			23,027
Net income (loss)		11,752			(2,032	)		39,892
Basic and diluted earnings (loss) per share		0.64			(0.11	)		2.05
Weighted average number of ordinary shares used in calculation of basic and diluted earnings (loss) per share		18,370,000			18,370,000			19,493,329

U.S. GAAP
Statements of Financial Position Data:
	As at December 31,
	2005		2006		2007
	(NIS in thousands)
Cash and cash equivalents		-		37,987		229,895
Total assets		223,420		1,371,562		1,554,036
Total short-term debt		35,587		343,136		111,698
Total long-term loans (net of current maturities)		10,171		2,871		440,296

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

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


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


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

PART I		1
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	1
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	1
ITEM 3.	KEY INFORMATION	1
	A. Selected Financial Data	1
	B. Capitalization and Indebtedness	3
	C. Reasons for the Offer and Use of Proceeds	3
	D. Risk Factors	3
ITEM 4.	INFORMATION ON THE COMPANY	13
	A. History and Development of the Company	13
	B. Business Overview	16
	C. Organizational Structure	23
	D. Property, Plants and Equipment	23
ITEM 4A.	UNRESOLVED STAFF COMMENTS	23
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	24
	A. Operating Results	24
	B. Liquidity and Capital Resources	32
	C. Research and Development, Patents and Licenses	37
	D. Trend Information	37
	E. Off-Balance Sheet Arrangements	45
	F. Tabular Disclosure of Contractual Obligations	45
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	45
	A. Directors and Senior Management	45
	B. Compensation	47
	C. Board Practices	47
	D. Employees	54
	E. Share Ownership	55
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	56
	A. Major Shareholders	56
	B. Related Party Transactions	57
	C. Interests of Experts and Counsel	62
ITEM 8.	FINANCIAL INFORMATION	62
	A. Consolidated Statements and Other Financial Information	62
	B. Significant Changes	69
ITEM 9.	THE OFFER AND LISTING	69
	A. Offer and Listing Details	69
	B. Plan of Distribution	70
	C. Markets	70
	D. Selling Shareholders	70
	E. Dilution	70
	F. Expense of the Issue	70
ITEM 10.	ADDITIONAL INFORMATION	70
	A Share Capital	70
	B. Memorandum and Articles of Association	70
	C. Material Contracts	74
	D. Exchange Controls	75
	E. Taxation	75
	F. Dividends and Paying Agents	81
	G. Statement by Experts	81
	H. Documents on Display	81
	I. Subsidiary Information	81
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS	81

IFRS
Consolidated Statement of Income Data:
	Year Ended December 31,
	2008			2009			2009
	(NIS in thousands, except share and per share data)						(US$ in thousands, except share and per share data)
Revenues		1,106,203			1,173,094			310,753
Depreciation and amortization		112,027			97,367			25,793
Salaries		161,556			157,876			41,821
General and operating expenses		693,773			748,915			198,388
Other operating expenses		6,705			2,448			648
Operating income		132,142			166,488			44,103
Finance expense		65,083			48,800			12,927
Finance income		(8,039	)		(84,827	)		(22,470	)
Income before income tax		75,098			202,515			53,646
Income tax		22,333			55,215			14,626
Net income for the year		52,765			147,300			39,020
Basic and diluted earnings per share		2.08			5.81			1.54

IFRS
Statements of Financial Position
	As at December 31,
	2008		2009		2009
	(NIS in thousands)				(US$ in thousands)
Cash and cash equivalents		60,652		939,668		248,919
Total assets		1,581,041		2,409,515		638,282
Total current liabilities		477,104		1,146,178		303,623
Non current liabilities		384,430		342,180		90,644