Report of Foreign Issuer (6-k)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

F O R M 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934

For the month of September 2015

INTERNET GOLD-GOLDEN LINES LTD.

(Name of Registrant)

2 Dov Friedman Street, Ramat Gan 5250301, Israel

(Address of Principal Executive Office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F ☒ Form 40-F ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes ☐ No ☒

If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- __________

Internet Gold-Golden Lines Ltd.

EXPLANATORY NOTE

The following exhibits are attached:

99.1

The attached exhibits pertain to Bezeq The Israel Telecommunication Corp. Ltd., (the “Group”) a controlled subsidiary of B Communications, the Registrant’s controlled subsidiary: Full Financial Statements (Unaudited), Periodic Reports and additional accompanying information of the Group as at June 30, 2015.

The Hebrew version was submitted by the Group to the relevant authorities pursuant to Israeli law, and represents the binding version and the only one having legal effect. This translation was prepared for convenience purposes only.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	INTERNET GOLD-GOLDEN LINES LTD.
	(Registrant)

	By	/s/ Doron Turgeman
		Doron Turgeman
		Chief Executive Officer

Date: September 21, 2015

EXHIBIT INDEX

The following exhibits are attached:

99.1

Exhibit 99.1

Condensed Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

Contents		Page

Review Report		2

Condensed Consolidated Interim Financial Statements as at Tuesday, June 30, 2015 (Unaudited)
Condensed Consolidated Interim Statements of Financial Position		3
Condensed Consolidated Interim Statements of Income		5
Condensed Consolidated Interim Statements of Comprehensive Income		6
Condensed Consolidated Interim Statements of Changes in Equity		7
Condensed Consolidated Interim Statements of Cash Flows		10
Notes to the Condensed Consolidated Interim Financial Statements
1	General	12
2	Basis of Preparation	12
3	Reporting Principles and Accounting Policy	13
4	Group Entities	13
5	Debentures, Loans and Borrowings	17
6	Contingent Liabilities	17
7	Capital	19
8	Revenues	19
9	General and Operating Expenses	20
10	Other Operating Expenses (Income), Net	20
11	Financial Instruments	21
12	Segment Reporting	23
13	Condensed Financial Statements of Pelephone, Bezeq International, and DBS	30
14	Subsequent Events	33


Somekh Chaikin
8 Hartum Street, Har Hotzvim	Telephone	972 2 531 2000
PO Box 212, Jerusalem 91001	Fax	972 2 531 2044
Israel	Internet	www.kpmg.co.il

Review Report to the Shareholders of

“Bezeq” -The Israel Telecommunication Corporation Ltd.

Introduction

We have reviewed the accompanying financial information of “Bezeq” -The Israel Telecommunication Corporation Ltd. and its subsidiaries (hereinafter – “the Group”) comprising of the condensed consolidated interim statement of financial position as of June 30, 2015 and the related condensed consolidated interim statements of income, comprehensive income, changes in equity and cash flows for the six and three month periods then ended. The Board of Directors and Management are responsible for the preparation and presentation of interim financial information for these interim periods in accordance with IAS 34 “Interim Financial Reporting”, and are also responsible for the preparation of financial information for these interim periods in accordance with Section D of the Securities Regulations (Periodic and Immediate Reports), 1970. Our responsibility is to express a conclusion on interim financial information for these interim periods based on our review.

We did not review the condensed interim financial information of a certain consolidated subsidiary whose assets constitute 1.1% of the total consolidated assets as of June 30 2015, and whose revenues constitute 1% of the total consolidated revenues for the six and three month periods then ended. The condensed interim financial information of that company was reviewed by other auditors whose review report thereon was furnished to us, and our conclusion, insofar as it relates to amounts emanating from the financial information of that company, is based solely on the said review report of the other auditors.

Scope of Review

We conducted our review in accordance with Standard on Review Engagements 1, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" of the Institute of Certified Public Accountants in Israel. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards in Israel and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review and the review report of other auditors, nothing has come to our attention that causes us to believe that the accompanying financial information was not prepared, in all material respects, in accordance with IAS 34.

In addition to that mentioned in the previous paragraph, based on our review and the review report of other auditors, nothing has come to our attention that causes us to believe that the accompanying interim financial information does not comply, in all material respects, with the disclosure requirements of Section D of the Securities Regulations (Periodic and Immediate Reports), 1970.

Without qualifying our abovementioned conclusion, we draw attention to lawsuits filed against the Group which cannot yet be assessed or the exposure in respect thereof cannot yet be estimated, as set forth in Note 6.

Somekh Chaikin

Certified Public Accountants (Isr.)

August 30, 2015

Condensed Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

Condensed Consolidated Interim Statements of Financial Position

			June 30, 2015		June 30, 2014		December 31, 2014
			(Unaudited)		(Unaudited)		(Audited)
	Note		NIS million		NIS million		NIS million
Assets

Cash and cash equivalents				826		673		660
Investments, including derivatives				999		1,725		2,223
Trade receivables				2,256		2,335		2,227
Other receivables				216		325		238
Inventory				96		89		96
Assets classified as held for sale				6		24		22
Total current assets				4,399		5,171		5,466

Trade and other receivables				655		587		566
Broadcasting rights, net of rights exercised				471		-		-
Property, plant and equipment				6,980		6,060		6,079
Goodwill		4.2		1,647		1,040		1,040
Intangible assets		4.2		2,045		799		753
Deferred and other expenses				254		254		253
Investments in equity-accounted investees		4.2		28		1,014		1,057
Investments				100		80		99
Deferred tax assets		4.2		854		35		-
Total non-current assets				13,034		9,869		9,847
Total assets				17,433		15,040		15,313

Condensed Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

Condensed Consolidated Interim Statements of Financial Position (Contd.)

			June 30, 2015		June 30, 2014		December 31, 2014
			(Unaudited)		(Unaudited)		(Audited)
	Note		NIS million		NIS million		NIS million
Liabilities and equity

Debentures, loans and borrowings				1,924		1,534		1,481
Trade payables				1,021		638		664
Other payables, including derivatives				765		651		710
Current tax liabilities				699		591		600
Provisions				90		134		62
Employee benefits				271		378		259
Liability to Eurocom DBS Ltd, related party		4.2.1		101		-		-
Total current liabilities				4,871		3,926		3,776

Loans and debentures				9,444		7,815		8,606
Employee benefits				238		229		233
Provisions				70		68		69
Deferred tax liabilities				67		10		17
Derivatives				76		35		94
Deferred income and others				87		73		77
Total non-current liabilities				9,982		8,230		9,096

Total liabilities				14,853		12,156		12,872

Total equity				2,580		2,884		2,441

Total liabilities and equity				17,433		15,040		15,313


Shaul Elovitch	Stella Handler	David (Dudu) Mizrahi
Chairman of the Board of Directors	CEO	Deputy CEO and CFO

Date of approval of the financial statements: August 30,2015

The attached notes are an integral part of these condensed consolidated interim financial statements.

Condensed Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

Condensed Consolidated Interim Statements of Income

	Six months ended June 30						Three months ended June 30						Year ended December 31
	2015			2014			2015			2014			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Audited)
	NIS million			NIS million			NIS million			NIS million			NIS million

Revenues (Note 8)		4,777			4,561			2,603			2,250			9,055
Costs of activity
Depreciation and amortization		768			633			451			319			1,281
Salaries		936			891			497			443			1,768
General and operating expenses(Note 9)		1,801			1,691			1,002			822			3,366
Other operating expenses (income), net (Note 10)		(158	)		(576	)		(141	)		(568	)		(586	)
		3,347			2,639			1,809			1,016			5,829

Operating profit		1,430			1,922			794			1,234			3,226
Financing expenses (income)
Financing expenses		265			240			164			127			486
Financing income		(99	)		(166	)		(35	)		(95	)		(356	)
Financing expenses, net		166			74			129			32			130

Profit after financing expenses, net		1,264			1,848			665			1,202			3,096
Share in the (profits) losses of equity accounted investees		16			(98	)		-			(79	)		(170	)
Profit before income tax		1,280			1,750			665			1,123			2,926
Income tax		335			483			183			313			815
Profit for the period		945			1,267			482			810			2,111
Earnings per share (NIS)
Basic earnings per share		0.34			0.46			0.18			0.30			0.77

Diluted earnings per share		0.34			0.46			0.17			0.29			0.77

The attached notes are an integral part of these condensed consolidated interim financial statements.

Condensed Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

Condensed Consolidated Interim Statements of Comprehensive Income

	Six months ended June 30					Three months ended June 30					Year ended December 31
	2015		2014			2015		2014			2014
	(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)			(Audited)
	NIS million		NIS million			NIS million		NIS million			NIS million

Profit for the period		945		1,267			482		810			2,111
Items of other comprehensive income (loss) (net of tax)		33		(9	)		16		(22	)		(36	)
Total comprehensive income for the period		978		1,258			498		788			2,075

The attached notes are an integral part of these condensed consolidated interim financial statements.

Condensed Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

Condensed Consolidated Interim Statements of Changes in Equity

	Share capital		Share premium		Capital reserve for employee options			Capital reserve for transactions between a corporation and a controlling shareholder		Other reserves			Deficit			Total
	NIS million		NIS million		NIS million			NIS million		NIS million			NIS million			NIS million
Six months ended June 30, 2015 (Unaudited):
Balance as at January 1, 2015		3,855		253		131			390		(105	)		(2,083	)		2,441
Profit for the period		-		-		-			-		-			945			945
Other comprehensive income for the period, net of tax		-		-		-			-		33			-			33
Total comprehensive income for the period		-		-		-			-		33			945			978
Transactions with shareholders recognized directly in equity
Dividends to Company shareholders (see Note 7)		-		-		-			-		-			(844	)		(844	)
Exercise of options for shares		5		35		(35	)		-		-			-			5
Balance as at June 30, 2015		3,860		288		96			390		(72	)		(1,982	)		2,580

Six months ended June 30, 2014 (Unaudited):
Balance as at January 1, 2014		3,842		143		242			390		(67	)		(2,127	)		2,423
Profit for the period		-		-		-			-		-			1,267			1,267
Other comprehensive loss for the period, net of tax		-		-		-			-		(9	)		-			(9	)
Total comprehensive income for the period		-		-		-			-		(9	)		1,267			1,258
Transactions with shareholders recognized directly in equity
Dividend to Company shareholders		-		-		-			-		-			(802	)		(802	)
Share-based payments		-		-		(1	)		-		-			-			(1	)
Exercise of options for shares		6		55		(55	)		-		-			-			6
Balance as at June 30, 2014		3,848		198		186			390		(76	)		(1,662	)		2,884

The attached notes are an integral part of these condensed consolidated interim financial statements.

Condensed Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

Condensed Consolidated Interim Statements of Changes in Equity (Contd.)

	Share capital		Share premium		Capital reserve for employee options			Capital reserve for transactions between a corporation and a controlling shareholder		Other reserves			Deficit			Total
	NIS million		NIS million		NIS million			NIS million		NIS million			NIS million			NIS million
Three months ended June 30, 2015 (Unaudited)
Balance as at April 1, 2015		3,858		272		112			390		(88	)		(1,620	)		2,924
Profit for the period		-		-		-			-		-			482			482
Other comprehensive income for the period, net of tax		-		-		-			-		16			-			16
Total comprehensive income for the period		-		-		-			-		16			482			498
Transactions with shareholders recognized directly in equity
Dividends to Company shareholders (see Note 7)		-		-		-			-		-			(844	)		(844	)
Exercise of options for shares		2		16		(16	)		-		-			-			2
Balance as at June 30, 2015		3,860		288		96			390		(72	)		(1,982	)		2,580

Three months ended June 30, 2014 (Unaudited)
Balance as at April 1, 2014		3,844		161		223			390		(54	)		(2,472	)		2,092
Profit for the period		-		-		-			-		-			810			810
Other comprehensive loss for the period, net of tax		-		-		-			-		(22	)		-			(22	)
Total comprehensive income for the period		-		-		-			-		(22	)		810			788
Transactions with shareholders recognized directly in equity
Exercise of options for shares		4		37		(37	)		-		-			-			4
Balance as at June 30, 2014		3,848		198		186			390		(76	)		(1,662	)		2,884

Condensed Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

Condensed Consolidated Interim Statements of Changes in Equity (Contd.)

	Share capital		Share premium		Capital reserve for employee options			Capital reserve for transactions between a corporation and a controlling shareholder		Other reserves			Deficit			Total
	NIS million		NIS million		NIS million			NIS million		NIS million			NIS million			NIS million
Year ended December 31, 2014 (Audited)
Balance as at January 1, 2014		3,842		143		242			390		(67	)		(2,127	)		2,423

Income in 2014		-		-		-			-		-			2,111			2,111
Other comprehensive income (loss) for the year, net of tax		-		-		-			-		(38	)		2			(36	)
Total comprehensive income for 2014		-		-		-			-		(38	)		2,113			2,075
Transactions with shareholders recognized directly in equity
Dividend to Company shareholders		-		-		-			-		-			(2,069	)		(2,069	)
Share-based payments		-		-		(1	)		-		-			-			(1	)
Exercise of options for shares		13		110		(110	)		-		-			-			13
Balance as at December 31, 2014		3,855		253		131			390		(105	)		(2,083	)		2,441

The attached notes are an integral part of these condensed consolidated interim financial statements.

Condensed Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

Condensed Consolidated Interim Statements of Cash Flows

	Six months ended June 30						Three months ended June 30						Year ended December 31
	2015			2014			2015			2014			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Audited)
Cash flows from operating activities
Profit for the period		945			1,267			482			810			2,111
Adjustments:
Depreciation and amortization		768			633			451			319			1,281
Profit from sale of the shares of Coral Tell Ltd.		-			(582	)		-			(582	)		(582	)
Share in the losses (profits) of equity-accounted investees		(16	)		98			-			79			170
Financing expenses, net		203			122			136			59			229
Profit from gaining control in an investee (see Note 4.2)		(12	)		-			-			-			-
Capital gain, net		(159	)		(121	)		(148	)		(104	)		(175	)
Share-based payments		-			(1	)		-			-			(1	)
Income tax expenses		335			483			183			313			815
Miscellaneous		(5	)		(6	)		(4	)		(3	)		(3	)

Change in inventory		-			34			(9	)		13			28
Change in trade and other receivables		145			387			61			224			549
Change in broadcasting rights		(11	)		-			(11	)		-			-
Change in trade and other payables		(195	)		(107	)		(150	)		(45	)		(39	)
Change in provisions		9			8			6			12			(63	)
Change in employee benefits		1			117			(3	)		104			3
Net income tax paid		(207	)		(225	)		(154	)		(135	)		(527	)
Net cash from operating activities		1,801			2,107			840			1,064			3,796

Condensed Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

Condensed Consolidated Interim Statements of Cash Flows (Contd.)

	Six months ended June 30						Three months ended June 30						Year ended December 31
	2015			2014			2015			2014			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Audited)
	NIS million			NIS million			NIS million			NIS million			NIS million
Cash flow used for investing activities
Investment in intangible assets and deferred expenses		(214	)		(90	)		(148	)		(42	)		(194	)
Proceeds from the sale of property, plant and equipment		97			75			84			46			230
Acquisition of financial assets held for trading and others		(929	)		(686	)		(489	)		(476	)		(2,720	)
Proceeds from the sale of financial assets held for trading and others		2,188			94			2,067			94			1,635
Cash in a company consolidated for the first time (see Note 4.2.3)		299			-			-			-			-
Purchase of property, plant and equipment		(665	)		(548	)		(363	)		(281	)		(1,081	)
Non-current investments, net		(1	)		(1	)		3			2			(19	)
Net consideration for the sale of Coral Tell Ltd. shares		-			596			-			596			596
Miscellaneous		3			3			2			1			7
Net cash from (used in) investment activities		778			(557	)		1,156			(60	)		(1,546	)
Cash flows used in financing activities
Payment to Eurocom DBS for acquisition of shares and DBS loans (see Note 4.2)		(680	)		-			(680	)		-			-
Issue of debentures and receipt of loans		228			-			228			-			1,446
Repayment of debentures and loans		(863	)		(462	)		(805	)		(380	)		(1,149	)
Dividends paid		(844	)		(802	)		(844	)		(802	)		(2,069	)
Interest paid		(243	)		(219	)		(223	)		(192	)		(431	)
Miscellaneous		(11	)		(4	)		(14	)		(6	)		3
Net cash used for financing activities		(2,413	)		(1,487	)		(2,338	)		(1,380	)		(2,200	)
Increase (decrease) in cash and cash equivalents, net		166			63			(342	)		(376	)		50
Cash and cash equivalents at beginning of period		660			610			1,168			1,049			610
Cash and cash equivalents at end of period		826			673			826			673			660

The attached notes are an integral part of these condensed consolidated interim financial statements.

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

1.	General

1.1.

Reporting Entity

Bezeq – The Israel Telecommunication Corporation Limited (“the Company”) is a company registered in Israel whose shares are traded on the Tel Aviv Stock Exchange. The consolidated financial statements of the Company include those of the Company and its subsidiaries (together referred to as "the Group”), as well as the Group’s interests in associates. The Group is a principal provider of communication services in Israel (see also Note 12 – Segment Reporting).

1.2.

Material events in the reporting period

On March 23, 2015, the Company gained control in DBS Satellite Services (1998) Ltd. ("DBS") and began consolidation as at that date. On June 24, 2015, acquisition of the remaining holdings of Eurocom in DBS was completed and as from that date, the Company holds the entire rights to DBS shares. The effect of the operating results of DBS on the Group's statement of income for the three months ended March 31, 2015 was included under "Share in losses of equity-accounted investees". For further information see Note 4.2 regarding discontinued operations.

Basis of Preparation

2.1

The condensed interim consolidated financial statements have been prepared in accordance with IAS 34 – Interim Financial Reporting, and Chapter D of the Securities Regulations (Periodic and Immediate Reports), 1970.

2.2

The condensed consolidated interim financial statements do not contain all the information required in full annual financial statements, and should be reviewed in the context of the annual financial statements of the Company and its subsidiaries as at December 31, 2014 and the year then ended, and their accompanying notes (“the Annual Financial Statements”). The notes to the interim financial statements include only the material changes that have occurred from the date of the most recent Annual Financial Statements until the date of these consolidated interim financial statements.

2.3

The condensed consolidated interim financial statements were approved by the Board of Directors on August 30, 2015.

2.4

Use of estimates and judgment

The preparation of the condensed consolidated interim financial statements in conformity with IFRS requires management to make judgments and use estimates, assessments 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.

Other than the contents of Note 3.2, the judgments made by management, when applying the Group’s accounting policies and the key assumptions used in assessments that involve uncertainty, are consistent with those applied in the Annual Financial Statements.

Below is information about significant estimates and judgments for which changes in the assessments and assumptions could potentially have a material effect on the financial statements, in addition to the information in Note 1.7.1 to the annual financial statements:

Subject	Principal assumptions	Possible effects	Reference
Fair value measurement of the Company's investment in DBS prior to gaining control in DBS	Assumption of expected cash flows from the operations of DBS, discount rate and assumptions about the identity of the relevant market participant.	Change in profit/loss from gaining control	Note 4.2
Attribution of excess cost arising from acquisition of control in DBS	Assumption of expected cash flows from identifiable assets in the business combination, timing of recognition, and scope of the deferred tax asset for carry forward losses	Change in the value of identifiable tangible and intangible assets in the business combination and changes in the value of goodwill	Note 4.2
Fair value measurement of contingent consideration in a business combination	Assumption of expected cash flows and assumption of DBS's losses for tax purposes.	Change in the value of a liability for contingent consideration recognized in a business combination	Note 4.2 and Note 11.1.4

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

3.	Reporting Principles and Accounting Policy

3.1

The Group's accounting policy applied in these condensed consolidated interim financial statements is consistent with the policy applied in the Annual Financial Statements, except as described in section 3.2 below.

3.2

Accounting policy for new transactions or events

In view of consolidation of DBS in these financial statements for the first time, as described in Note 4.2, below is a description of the accounting policy for the consolidation of DBS in these condensed consolidated interim financial statements:

3.2.1

The Group implemented the acquisition method for all business combinations. The acquisition date is the date on which the acquirer obtained control over the acquiree.

3.2.2

The Group recognized goodwill at acquisition based on the fair value of the consideration transferred, and the fair value at the acquisition date of any pre-existing equity right of the Group in the acquiree, less the net amount of the identifiable assets acquired and the liabilities assumed.

3.2.3

The consideration transferred includes the fair value of the assets transferred to the previous owners of the acquiree and the liabilities incurred by the acquirer to the previous owners of the acquiree, including the obligation to acquire the acquiree''s equity instruments. In addition, the consideration transferred includes the fair value of any contingent consideration.

3.2.4

In the step acquisitions, the difference between the fair value at the acquisition date of the Group’s pre-existing equity rights in the acquiree and the carrying amount at that date is recognized in the statement of income under other operating income or expenses.

3.2.5

The Group implements the anticipated acquisition method, whereby it undertook to acquire the equity instruments of a subsidiary in return for cash or another financial asset. The commitment to acquire a subsidiary's equity instruments is recognized as a financial liability at the present value. The commitment is recognized at the agreement date, if the preconditions to the agreement are not under the Group's control.

Based on the anticipated acquisition method, non-controlling interests are derecognized at the recognition date of the commitment to acquire the subsidiary's equity instruments. Accordingly, the Group's share in the subsidiary's equity and operating expenses includes the share of the holders of non-controlling interests.

3.2.6

Costs associated with the acquisition that were incurred by the acquirer in the business combination such as advisory, legal, valuation and other professional or consulting fees were recognized as expenses in the period the services are received.

3.3

New standards not yet adopted

Further to Note 2.17 to the annual financial statements regarding the implementation of IFRS 15, Revenues from Contracts with Customers, in July 2015, the IASB approved the postponement of mandatory initial application of the standard by one year from the original date, meaning that the standard will be effective for annual periods beginning on January 1, 2018. Early application is permitted.

4.	Group Entities

4.1

A detailed description of the Group entities appears in Note 10 to the Annual Financial Statements. Below is a description of the material changes that occurred in connection with the Group entities since publication of the Annual Financial Statements.

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

4.2

DBS Satellite Services (1998) Ltd. ("DBS")

4.2.1

As described in Note 10.1.2 to the annual financial statements, the Company holds 49.78% of the share capital of DBS and it holds options that confer the right to 8.6% in DBS shares, which the Company is unable to exercise. Accordingly, the Company accounted for its investment in DBS in accordance with the equity method.

On March 26, 2014, the Company received the decision of the Antitrust Authority, according to which, under the terms set out in the decision, the merger between the Company and DBS ("the Merger") will be permitted.

Further to the aforesaid, on February 10, 2015, the Board of Directors' subcommittee that was established for this matter, the audit committee and the Board of Directors of the Company approved the Company's engagement in a transaction with Eurocom DBS. In the transaction, the Company will acquire the entire holdings of Eurocom DBS in DBS ("the Acquisition Transaction"), which at this date represent 50.22% of the issued share capital of DBS (41.62% fully diluted) and all the shareholder loans provided by Eurocom to DBS. It was further decided that prior to the Acquisition Transaction, the Company and DBS will accept the merger terms and the Company will exercise the option granted, at no cost, for the allotment of DBS shares at a rate of 8.6% of the issued capital of DBS.

Under the terms of the acquisition transaction, the Company was required to pay Eurocom DBS NIS 680 million in cash on the closing date, against acquisition of the shares and shareholder loans. Eurocom DBS will also be entitled to two additional contingent considerations, as follows: the first additional consideration of up to NIS 200 million will be paid in accordance with the amount of the carry forward losses of DBS used for tax purposes and the second additional consideration of up to NIS 170 million will be paid in accordance with the business results of DBS in the next three years.

On March 23, 2015, the general meeting of the Company's shareholders approved the acceptance of the merger terms and exercise of the option, and the Company's engagement in the Acquisition Transaction, as described above. Subsequently, the Company and DBS announced the acceptance of the merger terms, and on March 25, 2015, the Company exercised the option and it was allotted DBS shares at a rate of 8.6% of the issued capital of DBS, so that as from this date, the Company holds 58.4% of DBS. Accordingly, the Company consolidates the financial statements of DBS as from March 23, 2015 (the date that the general meeting approved exercise of the option to DBS shares by the Company). In view of the Company's holding of 49.78% of DBS shares prior to gaining control, the acquisition transaction was accounted for in the financial statements as a step acquisition.

The Company's engagement in the transaction with Eurocom DBS for acquisition of the entire holdings of Eurocom DBS in DBS is subject to the approval of the Ministry of Communications for transfer of control in DBS such that the Company will control DBS and will hold the entire issued and paid up share capital of DBS. This approval was received unconditionally on June 23, 2015, and on June 24, 2015, the transaction was completed. On the completion date, the Company transferred the cash consideration of NIS 680 million to Eurocom DBS and Eurocom DBS transferred its rights and the rights to DBS shares to the Company and assigned to the Company its entire rights in the shareholders loans of DBS. On completion of the transaction, DBS became a wholly owned subsidiary (100%) of the Company.

As at June 30, 2015, the Company has a liability for the contingent consideration of NIS 101 million towards Eurocom DBS as described in Note 11, Financial Instruments.

4.2.2

At the date of the business acquisition, the Company presented its investment in shares, share options and loans to DBS prior to acquisition of control, according to the equity method based on a valuation by an independent assessor. In accordance with the valuation, the value of the Company's investments prior to acquisition of control is estimated at NIS 1.076 billion. Accordingly, the Company recognized a profit of NIS 12 million from the gain of control under other operating income in the statement of income for the three months ended March 31, 2015.

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

The valuation was based on the income approach, whereby the discounted cash flow method (DCF) was applied on the basis of the forecasted cash flow for 2015 through to 2019. The cash flow forecast was based on the results of DBS for 2011-2014 and the three months ended March 31, 2015. In the valuation, it was assumed that the market share of DBS is expected to remain stable and will be 42%-43% throughout the years of the forecast. It was also assumed that gradual erosion in the ARPU of DBS is expected between 2015 and 2018, while in 2019 and thereafter, it is expected that a fixed nominal ARPU will be maintained. The revenue forecast was based on the forecast of the number of subscribers, average income and competition in the market.

Assumed cost of capital: 8.5% (net of tax). In addition, it was assumed that the permanent growth will be 1%.

The valuation was based on assumptions regarding the identity of the relevant market participant that might acquire the Company's holdings in DBS and does not take into account the specific operational and tax synergies between the companies.

4.2.3

Identifiable acquired assets and liabilities:

	March 23, 2015
	(Unaudited)
	NIS million
Cash and cash equivalents		299
Trade and other receivables		182
Broadcasting rights		449
Property, plant and equipment		801
Intangible assets (including excess cost attributed to customer relations and brand as described below)		1,284
Deferred tax asset, net of deferred tax liabilities (for attributed excess cost)		831
Debentures, loans, and borrowings (including excess cost attributed to debentures as described below)		(1,947	)
Trade payables and other liabilities		(632	)
Contingent liabilities (including excess cost attributed to contingent liabilities as described below)		(19	)
Identifiable assets, net		1,248

4.2.4

The Company attributed the acquisition cost in relation to the fair value of the assets and liabilities that were acquired in the business combination. The attribution was based on the valuation performed by an independent assessor whose opinion is attached to these financial statements.

Excess cost was attributed as follows:

	March 23, 2015
	(Unaudited)
	NIS million
Customer relations (see section A below)		790
Brand (see section B below)		347
Goodwill (see section C below)		609
Deferred tax asset, net of deferred tax liabilities (see D below)		831
Debentures (see section E below)		(160	)
Contingent liabilities (see section F below)		(10	)
Total excess cost		2,407

Customer relations: The valuation was based on the income approach, using the multi-period excess earning method. Under this approach, the value of the asset is derived from the present value of the cash flows that are expected to arise from it over the remaining economic life of the asset. Amortization will be based on the customer churn rate.

Brand: The valuation was prepared in accordance with the relief from royalty method. In accordance with this method, the value of the asset is estimated as the present value of the appropriate royalty that the entity would have to pay a third party for the use of the asset, if the company did not own it. The useful life of the brand assumed in the model is 12 years.

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

Goodwill: Following the acquisition of control, goodwill was recognized as follows:

	March 23, 2015
	(Unaudited)
	NIS million
Consideration value		781
Fair value of the investment in DBS prior to the acquisition		1,076
Less the fair value of net identifiable assets		(1,248	)
Goodwill		609

Deferred tax asset: Following completion of the acquisition transaction on June 24, 2015, as described in Note 4.2.1 above, the Company believes that will be able to take advantage of the tax asset for the accrued losses from future profits of DBS and due to the possible merger between the companies.

The Company accounted for completion of the acquisition transaction after gaining control as new information obtained in the measurement period for the facts and circumstances that existed at the acquisition date and, therefore, the Company attributed the excess cost arising from gain of control as a deferred tax asset in the financial statements as at June 30, 2015 (retroactively, effective as from gain of control).

Composition of the tax asset:

	March 23, 2015
	(Unaudited)
	NIS million
Tax asset for cumulative losses of DBS		1,087
Tax reserve for attributed excess cost		(256	)
Deferred tax asset, net		831

Debentures: The excess cost reflects the fair value of the debentures at the acquisition date based on a capitalization rate of 1.9%-2.3%.

Contingent liabilities: The excess cost represents a present obligation arising from a class action filed by DBS customers.

4.2.5

The management estimates that had the business combination taken place on January 1, 2015, the revenue in the consolidated statement of income would have increased by NIS 434 million and there would have been no significant change in consolidated profit. When determining the amounts, the management assumed that the fair value adjustments at the date of the business combination are the same as the adjustments that would have been received had the business combination taken place on January 1, 2015.

4.2.6

Since the beginning of its operations, DBS has accumulated considerable losses. The loss of DBS in 2014 amounted to NIS 322 million and the loss in the six months ended June 30, 2014, amounted to NIS 169 million. As a result of these losses, as of June 30, 2014, DBS had an equity deficit and a working capital deficit of NIS 4,833 million and NIS 349 million, respectively.

4.2.7

As at June 30, 2015, DBS is in compliance with the financial covenants established under the financing and debenture agreements. As at June 30, 2015, DBS is in compliance with the debt/EBITDA ratio covenant established in Deed of Trust B (as at June 30, 2015, the debt/EBITDA ratio was 2.5). Furthermore, DBS is in compliance with the debt/EBITDA ratio covenant set out in Debenture 2012 (as at June 30, 2015, the debt/EBIDTA ratio was 2.5) and the debt/E-C ratio covenant set out in Debenture 2012 (as at June 30, 2015, the debt-E-C ratio was 6).

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

4.2.8

The management of DBS believes that the financing resources at its disposal, which include, among other things, loans from the Company, will be sufficient for the operations of DBS for the coming year, based on the forecasted cash flows approved by DBS’s board of directors.

5.	Debentures, Loans and Borrowings

5.1.

In the second quarter of 2015, the Company entered into agreements with banks and a financial institution, which undertook to provide the Company with credit in a total amount of NIS 1.4 billion, to refinance its future debt in 2016, as follows:

Agreements with banks for credit of NIS 900 million in June 2016, with a duration of 4.6 years (payable in five equal annual payments commencing on June 1, 2019 through to June 1, 2023), at a fixed NIS unlinked interest rate of 3.7%. The agreements with the banks include an option to cancel the credit line, subject to an early repayment fee.

Agreements with a financial institute for credit of NIS 500 million in December 2016, with a duration of 4.9 years (payable in five equal annual payments commencing on December 15, 2019 through to December 15, 2023), at a fixed NIS unlinked interest rate of 4.3%.

The terms of the undertaking and the loans to be provided thereunder include terms that are similar to the terms provided for other loans taken by the Company, as described in Note 11.2.1 to the annual financial statements, including the following: an undertaking to refrain from creating additional liens on the Company's assets (with certain restrictions); an undertaking that if the Company assumes an undertaking towards a party in respect of compliance with financial covenants, the Company will also assume the same undertaking for this credit (subject to certain exceptions); and standard terms for immediate repayment (such as default events, insolvency, liquidation or receivership), and cross default (with certain restrictions), which will also apply, with the required changes, to the period of the undertaking to provide credit.

In the three months ended June 30, 2015, the Company recognized financing income amounting to NIS 30 million for the fair value of future long-term credit from banks, net of transaction costs.

5.2.

In August 2015, the Company entered into additional agreements with a bank and a financial institution, which undertook to provide the Company with additional credit amounting to NIS 400 million to refinance the Company's future debt in 2017.

5.3.

In the second quarter of 2015, DBS issued additional debentures (Series B) amounting to NIS 228 million by expanding the series. For information about the terms of the debentures, see Note 10.1.5 to the Annual Financial Statements.

6.	Contingent Liabilities

During the normal course of business, legal claims were filed against Group companies or there are pending claims against the Group (“in this section: “Legal Claims”).

In the opinion of the managements of the Group companies, based, inter alia, on legal opinions as to the likelihood of success of the legal claims, the financial statements include appropriate provisions of NIS 89 million, where provisions are required to cover the exposure arising from such legal claims.

In the opinion of the managements of the Group companies, the additional exposure (beyond these provisions) as at June 30, 2015 for claims filed against Group companies on various matters and which are unlikely to be realized, amounted to NIS 3.3 billion. There is also additional exposure of NIS 2.8 billion for claims, the chances of which cannot yet be assessed.

In addition, motions for certification of class actions have been filed against the Group companies, for which the Group has additional exposure beyond the aforesaid, since the exact amount of the claim is not stated in the claim.

This amount and all the amounts of the additional exposure in this note are linked to the CPI and are stated net of interest.

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

For updates subsequent to the reporting date, see section 6.2 below.

6.1.

Below is a description of the contingent liabilities of the Group (including DBS) as at June 30, 2015, classified into groups with similar characteristics:

Claims group	Nature of the claims	Provision		Additional exposure		Exposure for claims that cannot yet be assessed
		NIS million
Claims of employees and former employees of Group companies	Mainly collective and individual claims filed by employees and former employees of the Company in respect of recognition of various salary components as components for calculation of payments to Company employees, some of which have wide ramifications in the Company.		11		128		-
Customer claims	Mainly motions for certification of class actions concerning contentions of unlawful collection of payment and impairment of the service provided by the Group companies.		42		2,899		829
Supplier and communication provider claims	Legal claims for compensation for alleged damage as a result of the supply of the service and/or the product.		3		168		-
Claims for punitive damages, real estate and infrastructure	Claims for alleged physical damage or damage to property caused by Group companies and in relation to real estate and infrastructure. The additional amount of exposure for punitive damages does not include claims for which the insurance coverage is not disputed.		2		63		-
Claims by enterprises and companies	Claims alleging liability of the Group companies in respect of their activities and/or the investments made in various projects.		11		47		2,000	*
Claims by the State and authorities	Various claims by the State of Israel, government institutions and authorities (“the Authorities”). These are mainly procedures related to regulations relevant to the Group companies and financial disputes concerning monies paid by the Group companies to the authorities (including property taxes) or by the authorities to the Group companies.		20		37		11
Total legal claims against the Company and subsidiaries			89		3,342		2,840

A claim filed by shareholders against the Company and officers in the Company amounting to NIS 1.1 billion or NIS 2 billion (according to the method of calculating the damage to be determined).

6.2.

Subsequent to the reporting date, claims amounting to NIS 592 million were filed against Group companies, and two other claims without a monetary estimate. At the approval date of the financial statements, the chances of these claims cannot yet be assessed. In addition, claims with exposure of NIS 403 million came to an end.

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

7.	Capital

7.1.

Below are details of the Company's equity:

Registered

Issued and paid up

June 30,
2015

June 30,
2014

December 31,
2014

June 30,

2015

June 30,
2014

December 31,
2014

(Unaudited)

(Audited)

(Unaudited)

(Audited)

Number of
shares

2,825,000,000

2,748,349,912

2,735,918,334

2,743,283,920

7.2.

On May 6, 2015, the general meeting of the Company's shareholders approved the recommendation of the Company's Board of Directors of March 25, 2015 to distribute a cash dividend to the shareholders of the Company in the amount of NIS 844 million (representing NIS 0.371722 per share on the record date. The dividend was paid on May 27, 2015.

7.3.

On August 30, 2015, the Board of Directors of the Company resolved to recommend to the general meeting of the Company's shareholders the distribution of a cash dividend to the shareholders in the amount of NIS 933 million. The dividend is distributed for profits of the first half of 2015 amounting to NIS 945 million less revaluation gains of NIS 12 million for the gain of control in DBS, which were excluded from the Company's dividend policy in accordance with the Board of Director's decision of February 10, 2015 as set out in Note 18.2.1 to the annual financial statements. As at the approval date of the financial statements, the dividend has not yet been approved by the general meeting.

8.	Revenues

	Six months ended June 30				Three months ended June 30				Year ended December 31
	2015		2014		2015		2014		2014
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Audited)
	NIS million		NIS million		NIS million		NIS million		NIS million
Domestic fixed-line communication
Fixed-line telephony		783		824		388		407		1,636
Internet - infrastructure		770		677		387		345		1,394
Transmission and data communication		415		408		208		201		802
Other services		113		112		55		55		220
		2,081		2,021		1,038		1,008		4,052
Cellular telephony
Cellular services and terminal equipment		975		1,232		489		609		2,399
Sale of terminal equipment		443		500		219		220		966
		1,418		1,732		708		829		3,365

International communications, internet and NEP services		739		689		368		357		1,425

Multi-channel television		439		-		439		-		-

Other		100		119		50		56		213

		4,777		4,561		2,603		2,250		9,055

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

9.	General and Operating Expenses

	Six months ended June 30				Three months ended June 30				Year ended December 31
	2015		2014		2015		2014		2014
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Audited)
	NIS million		NIS million		NIS million		NIS million		NIS million
Terminal equipment and materials		431		474		205		212		928
Interconnectivity and payments to domestic and international operators		453		414		241		208		847
Maintenance of buildings and sites		306		312		156		156		639
Marketing and general		289		306		160		153		603
Content services		157		30		144		15		58
Services and maintenance by sub-contractors		89		78		55		38		137
Vehicle maintenance		76		77		41		40		154
		1,801		1,691		1,002		822		3,366

10.

Other Operating Expenses (Income), Net

	Six months ended June 30						Three months ended June 30						For the year ended December 31
	2015			2014			2015			2014			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Audited)
	NIS million			NIS million			NIS million			NIS million			NIS million
Profit from gaining control in DBS Satellite Services (1998) Ltd.		12			-			-			-			-
Capital gain from the sale of property, plant and equipment (mainly real estate)		159			121			148			104			175
Elimination of provision for contingent liabilities, net		-			-			-			-			23
Profit from sale of the shares of Coral Tell Ltd.		-			582			-			582			582
Other operating income		171			703			148			686			780
Provision for contingent liabilities, net		12			-			6			-			-
Provision for severance pay in voluntary redundancy		1			125			1			117			176
Others		-			2			-			1			18
Total other operating expenses		13			127			7			118			194

		(158	)		(576	)		(141	)		(568	)		(586	)

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

11.

Financial Instruments

11.1.

Fair value

11.1.1

Financial instruments at fair value for disclosure purposes only

The table below shows the differences between the carrying amount and the fair value of financial liabilities. The methods used to estimate the fair values of financial instruments are described in Note 28.7 to the Annual Financial Statements.

	June 30, 2015				June 30, 2014				December 31, 2014
	Carrying amount (including accrued interest)		Fair value		Carrying amount (including accrued interest)		Fair value		Carrying amount (including accrued interest)		Fair value
	(Unaudited)				(Unaudited)				(Audited)
	NIS million				NIS million				NIS million
Bank loans (unlinked)		2,197		2,358		2,101		2,246		2,112		2,292
Debentures issued to the public (CPI-linked)		3,459		3,634		2,796		3,026		3,820		4,033
Debentures issued to the public (unlinked)		890		949		1,335		1,438		1,335		1,426
Debentures issued to financial institutions (unlinked)		403		463		403		455		403		467
Debentures issued to financial institutions (CPI-linked)		1,952		2,089		-		-		-		-
		8,901		9,493		6,635		7,165		7,670		8,218

11.1.2

Fair value hierarchy

The table below presents an analysis of the financial instruments measured at fair value, with details of the evaluation method. The methods used to measure the fair value of investments in ETFs, monetary funds, and forward contracts are described in Note 28.7 to the annual financial statements.

The methods used to measure the fair value of the future credit from the banks are described in Note 11.1.3 below. The methods used to measure the fair value of contingent consideration for a business combination are described in Note 11.1.4 below.

	June 30, 2015			June 30, 2014			December 31, 2014
	(Unaudited)			(Unaudited)			(Audited)
	NIS million			NIS million			NIS million
Level 1: investment in exchange-traded funds and financial funds		200			1,629			1,513
Level 2 - future credit from banks		36			-			-
Level 2: forward contracts		(93	)		(47	)		(110	)
Level 3: contingent consideration for a business combination (Note 4.2)		(101	)		-			-
Level 3: investment in non-marketable shares		9			9			9

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

11.1.3

Information about fair value measurement of the credit line to refinance future debt

The fair value of the future credit in accordance with the agreement with the banks, as set out in Note 5.1 above, was estimated by discounting the difference between the interest rate in the agreement and present interest for the remaining period, using appropriate market interest rates for similar instruments, including the required adjustments for credit risk.

11.1.4

Information about fair value measurement of contingent consideration in a business combination (Level 3)

Below is the fair value of the contingent consideration liability for a business combination, as described in Note 4.2:

	June 30, 2015
	Maximum additional consideration under the agreement		Fair value
	(Unaudited)		(Unaudited)
	NIS million		NIS million
Additional consideration for tax synergy (first additional consideration)(A)		200		84
Additional consideration for the business results of DBS (second additional consideration) (B)		170		17
		370		101

First additional consideration

The fair value of the first additional contingent consideration was calculated by an independent assessor, based on a legal opinion on tax issues related to the possible merger between the Company and DBS. The legal opinion includes the probability of the chances and risks facing the Company regarding utilization of losses.

The estimated fair value of the contingent consideration will increase as the probability attributed to major risks in utilization of losses, as assessed in the legal opinion, decreases.

A 10% change in the probability attributed to major risks will result in a change of NIS 36 million in the first contingent consideration.

Second additional consideration

The fair value of the first additional consideration was estimated by the assessor, using the Monte Carlo simulation with risk neutral measure of the underlying asset which is the expected cash flow. The unobservable parameter that was used in the model and would have significantly changed the fair value is the expected cash flows in 2015-2017. To calculate the value of the second contingent consideration, a free cash flow was assumed as presented in the fair value assessment of Bezeq's holdings in DBS prior to gain of control as described in Note 4.2.2.

An increase of 10% in the expected cash flow will result in an increase of NIS 7 million in the estimated contingent consideration.

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

12.

Segment Reporting

12.1.

Further to Note 26 to the annual financial statements, the Company's investment in DBS was presented on the basis of the equity method up to March 25, 2015. As from this date, the financial statements of DBS are consolidated with the financial statements of the Group as described in Note 4 above. The Group reports on multichannel television as an operating segment without adjustment to ownership rates and excess cost in all reporting periods.

In addition, after DBS became a wholly-owned subsidiary of the Company on June 24, 2015, the Company updated the internal management reporting structure for financing income for the shareholders loans that were provided to DBS. In addition, the Company restated financing income under separate interim financial information. As from the second quarter of 2015, the Company no longer recognizes financing income for the shareholders loans under the financing income of the fixed-line domestic communications segment. Financing expenses in the multi-channel television segment include financing expenses for the loans without any change. The comparative figures were restated to reflect the change in the reporting structure: financing income in the amount of NIS 100 million and NIS 63 million was eliminated in the fixed-line domestic communications segment for the six and three months ended June 30, 2014, respectively, and NIS 213 million in the year ended December 31, 2014.

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

12.2.

Operating segments

	Six months ended June 30, 2015 (Unaudited):
	Domestic fixed-line communication			Cellular communications			International communications and internet services			Multi-channel television			Other			Adjustments			Consolidated
	NIS million			NIS million			NIS million			NIS million			NIS million			NIS million			NIS million
Revenues from external sources		2,079			1,418			736			878			100			(440	)		4,771
Inter-segment revenues		139			30			48			1			7			(219	)		6
Total revenues		2,218			1,448			784			879			107			(659	)		4,777

Depreciation and amortization		356			210			65			156			6			(25	)		768

Segment results – operating profit		1,209			85			122			129			(4	)		(111	)		1,430
Financing expenses		220			3			7			320			1			(286	)		265
Financing income		(45	)		(31	)		(4	)		(23	)		(9	)		13			(99	)
Total financing expenses (income), net		175			(28	)		3			297			(8	)		(273	)		166

Segment profit (loss) after financing expenses, net		1,034			113			119			(168	)		4			162			1,264
Share in earnings of associates		-			-			-			-			-			16			16
Segment profit (loss) before income tax		1,034			113			119			(168	)		4			178			1,280
Income tax		306			28			30			1			-			(30	)		335
Segment results – net profit (loss)		728			85			89			(169	)		4			208			945

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

12.2

Operating segments (contd.)

	Six months ended June 30, 2014 (Unaudited):
	Domestic fixed-line communication			Cellular communications			International communications and internet services			Multi-channel television			Other			Adjustments			Consolidated
	NIS million			NIS million			NIS million			NIS million			NIS million			NIS million			NIS million
Revenues from external sources		2,017			1,730			685			851			119			(851	)		4,551
Inter-segment revenues		133			30			36			-			7			(196	)		10
Total revenues		2,150			1,760			721			851			126			(1,047	)		4,561

Depreciation and amortization		340			211			65			144			13			(140	)		633

Segment results – operating profit		975			253			116			140			638			(200	)		1,922
Financing expenses		230			9			9			299			1			(308	)		240
Financing income		(27	)*		(44	)		(4	)		(11	)		-			(80	)*		(166	)
Total financing expenses (income), net		203	*		(35	)		5			288			1			(388	)*		74

Segment profit (loss) after financing expenses, net		772	*		288			111			(148	)		637			188	*		1,848
Share in profits (losses) of associates		-			-			1			-			(3	)		(96	)		(98	)
Segment profit (loss) before income tax		772	*		288			112			(148	)		634			92	*		1,750
Income tax		226			74			29			1			154			(1	)		483
Segment results – net profit (loss)		546	*		214			83			(149	)		480			93	*		1,267

* Reclassified, see section 12.1 above

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

12.2

Operating segments (contd.)

	Three months ended June 30, 2015 (Unaudited):
	Domestic fixed-line communication			Cellular communications			International communications and internet services			Multi-channel television			Other			Adjustments			Consolidated
	NIS million			NIS million			NIS million			NIS million			NIS million			NIS million			NIS million
Revenues from external sources		1,037			709			368			438			51			-			2,603
Inter-segment revenues		68			12			23			1			3			(107	)		-
Total revenues		1,105			721			391			439			54			(107	)		2,603

Depreciation and amortization		180			106			33			80			3			49			451

Segment results – operating profit		662			53			62			70			(2	)		(51	)		794
Financing expenses		122			-			3			240			1			(202	)		164
Financing income		(22	)		(14	)		(1	)		(4	)		(5	)		11			(35	)
Total financing expenses (income), net		100			(14	)		2			236			(4	)		(191	)		129

Segment profit (loss) after financing expenses, net		562			67			60			(166	)		2			140			665
Income tax		180			18			15			-			-			(30	)		183
Segment results – net profit (loss)		382			49			45			(166	)		2			170			482

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

12.2

Operating segments (contd.)

	Three months ended June 30, 2014 (Unaudited):
	Domestic fixed-line communication			Cellular communications			International communications and internet services			Multi-channel television			Other			Adjustments			Consolidated
	NIS million			NIS million			NIS million			NIS million			NIS million			NIS million			NIS million
Revenues from external sources		1,006			828			354			427			57			(427	)		2,245
Inter-segment revenues		67			15			12			-			2			(91	)		5
Total revenues		1,073			843			366			427			59			(518	)		2,250

Depreciation and amortization		172			105			33			74			6			(71	)		319

Segment results – operating profit		471			127			58			67			637			(126	)		1,234
Financing expenses		124			3			4			187			(1	)		(190	)		127
Financing income		(14	)*		(20	)		(1	)		(6	)		-			(54	)*		(95	)
Total financing expenses (income), net		110	*		(17	)		3			181			(1	)		(244	)*		32

Segment profit (loss) after financing expenses, net		361	*		144			55			(114	)		638			118	*		1,202
Share in losses of associates		-			-			-			-			(3	)		(76	)		(79	)
Segment profit (loss) before income tax		361	*		144			55			(114	)		635			42	*		1,123
Income tax		110			38			14			1			151			(1	)		313
Segment results – net profit (loss)		251	*		106			41			(115	)		484			43	*		810

* Reclassified, see section 12.1 above

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

12.2

Operating segments (contd.)

	Year ended December 31, 2014 (Audited)
	Domestic fixed-line communication			Cellular communications			International communications and internet services			Multi-channel television			Other			Adjustments			Consolidated
	NIS million			NIS million			NIS million			NIS million			NIS million			NIS million			NIS million
Revenues from external sources		4,045			3,361			1,419			1,724			209			(1,724	)		9,034
Inter-segment revenues		272			58			85			-			17			(411	)		21
Total revenues		4,317			3,419			1,504			1,724			226			(2,135	)		9,055

Depreciation and amortization		688			430			130			297			23			(287	)		1,281

Segment results – operating profit		1,980			449			232			273			629			(337	)		3,226
Financing expenses		472			21			18			620			2			(647	)		486
Financing income		(72	)*		(77	)		(9	)		(26	)		(11	)		(161	)*		(356	)
Total financing expenses (income), net		400	*		(56	)		9			594			(9	)		(808	)*		130

Segment profit (loss) after financing expenses, net		1,580	*		505			223			(321	)		638			471	*		3,096
Share in profits (losses) of associates		-			-			1			-			(3	)		(168	)		(170	)
Segment profit (loss) before income tax		1,580	*		505			224			(321	)		635			303	*		2,926
Income tax		478			132			60			1			147			(3	)		815
Segment results – net profit (loss)		1,102	*		373			164			(322	)		488			306	*		2,111

* Reclassified, see section 12.1 above

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

12.3.

Adjustment of profit or loss for reporting segments

	Six months ended June 30						Three months ended June 30						Year ended December 31
	2015			2014			2015			2014			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Audited)
	NIS million			NIS million			NIS million			NIS million			NIS million
Operating profit for reporting segments		1,545			1,484			847			723			2,934
Cancellation of results for a segment classified as an associate (up to gain of control)		(59	)		(140	)		-			(67	)		(273	)
Financing expenses, net		(166	)		(74	)		(129	)		(32	)		(130	)
Share in profits (losses) of associates		16			(98	)		-			(79	)		(170	)
Profit (loss) for operations classified in other categories and other adjustments		(56	)		578			(53	)		578			565
Income before income tax		1,280			1,750			665			1,123			2,926

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

13.

Condensed Financial Statements of Pelephone, Bezeq International and DBS

13.1.

Pelephone Communications Ltd.

Selected data from the statement of financial position

	June 30, 2015		June 30, 2014		December 31, 2014
	(Unaudited)		(Unaudited)		(Audited)
	NIS million		NIS million		NIS million
Current assets		1,468		1,775		1,658
Non-current assets		1,952		1,962		1,883
Total assets		3,420		3,737		3,541
Current liabilities		553		735		610
Long-term liabilities		96		105		86
Total liabilities		649		840		696
Capital		2,771		2,897		2,845
Total liabilities and equity		3,420		3,737		3,541

Selected data from the statement of income

	Six months ended June 30						Three months ended June 30						Year ended December 31,
	2015			2014			2015			2014			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Audited)
	NIS million			NIS million			NIS million			NIS million			NIS million

Revenues from services	1,001			1,259			502			622			2,453
Revenues from sales of terminal equipment		447			501			219			221			966
Total revenues from services and sales		1,448			1,760			721			843			3,419
Cost of services and sales		1,195			1,293			588			612			2,537
Gross profit		253			467			133			231			882
Selling and marketing expenses		120			159			57			76			309
General and administrative expenses		48			55			23			28			106
Other operating expenses		-			-			-			-			18
		168			214			80			104			433

Operating profit		85			253			53			127			449
Financing expenses		3			9			-			3			21
Financing income		(31	)		(44	)		(14	)		(20	)		(77	)
Financing income, net		(28	)		(35	)		(14	)		(17	)		(56	)

Profit before income tax		113			288			67			144			505
Income tax		28			74			18			38			132
Profit for the period		85			214			49			106			373

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

13.2.

Bezeq International Ltd.

Selected data from the statement of financial position

	June 30, 2015		June 30, 2014		December 31, 2014
	(Unaudited)		(Unaudited)		(Audited)
	NIS million		NIS million		NIS million
Current assets		507		497		487
Non-current assets		736		746		730
Total assets		1,243		1,243		1,217
Current liabilities		340		299		313
Long-term liabilities		72		121		79
Total liabilities		412		420		392
Capital		831		823		825
Total liabilities and equity		1,243		1,243		1,217

Selected data from the statement of income

	Six months ended June 30						Three months ended June 30						For the year ended
	2015			2014			2015			2014			December 31, 2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Audited)
	NIS million			NIS million			NIS million			NIS million			NIS million

Revenues from services		784			721			391			366			1,504
Operating expenses		501			447			250			229			951
Gross profit		283			274			141			137			553
Selling and marketing expenses		107			100			54			50			209
General and administrative expenses		54			58			25			29			112
		161			158			79			79			321

Operating profit		122			116			62			58			232
Financing expenses		7			9			3			4			18
Financing income		(4	)		(4	)		(1	)		(1	)		(9	)
Financing expenses, net		3			5			2			3			9
Share in profits of equity-accounted associates		-			1			-			-			1
Profit before income tax		119			112			60			55			224
Income tax		30			29			15			14			60
Profit for the period		89			83			45			41			164

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

13.3.

DBS Satellite Services (1998) Ltd.

Selected data from the statement of financial position

	June 30, 2015			June 30, 2014			December 31, 2014
	(Unaudited)			(Unaudited)			(Audited)
	NIS million			NIS million			NIS million
Current assets		651			558			434
Non-current assets		1,392			1,351			1,386
Total assets		2,043			1,909			1,820
Current liabilities		1,000			989			980
Long-term liabilities		1,577			3,798			1,450
Loans from shareholders		4,299			1,614			4,054
Total liabilities		6,876			6,401			6,484
Capital deficit		(4,833	)		(4,492	)		(4,664	)
Total liabilities and capital deficit		2,043			1,909			1,820

Selected data from the statement of income

	Six months ended June 30						Three months ended June 30						For the year ended December 31,
	2015			2014			2015			2014			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Audited)
	NIS million			NIS million			NIS million			NIS million			NIS million

Revenues from services		879			851			439			427			1,724
Operating expenses		634			588			314			297			1,203	*
Gross profit		245			263			125			130			521
Selling and marketing expenses		70			80			34			40			154
General and administrative expenses		46			43			21			23			94	*
		116			123			55			63			248

Operating profit		129			140			70			67			273
Financing expenses		76			73			59			50			137
Financing expenses for shareholder loans, net		244			226			181			137			483
Financing income		(23	)		(11	)		(4	)		(6	)		(26	)
Financing expenses, net		297			288			236			181			594

Loss before income tax		(168	)		(148	)		(166	)		(114	)		(321	)
Income tax		1			1			-			1			1
Loss for the period		(169	)		(149	)		(166	)		(115	)		(322	)

* Reclassified

Notes to the Condensed Consolidated Interim Financial Statements as at Monday, June 30, 2015 (Unaudited)

14.

Subsequent Events

14.1.

On August 30, 2015, the Company's Board of Directors approved Amendment (No. 5) to the special collective agreement of December 5, 2006 between the Company, the employees union and the Histadrut New General Federation of Labor. The main points of the amendment are as follows:

Extension of the collective agreement and retirement arrangements up to December 31, 2021 and their amendments.

As part of the retirement arrangements, the Company may terminate the employment of 203 tenured employees (including newly-hired tenured employees) each year, at its discretion.

The Company's management believes that the estimated costs over the term of the agreement, including wage improvements, not including the retirement of employees subject to the Company's discretion, will amount to NIS 280 million (of which an amount of NIS 30 million is dependent on the Company's performance).

14.2.

On August 30, 2015, the Board of Directors authorized the Company’s management to review the option of issuing one or more new series of debentures to the public under the Company's shelf prospectus of May 2014. It is clarified that there is no final decision regarding the issuance and its scope, and the terms of the debentures have not yet been determined. The issuance is subject, in part, to the final decision of the Company's Board of Directors, publication of a shelf offering memorandum, and approval from the Tel Aviv Stock Exchange Ltd. to list the debentures for trading. The above is not an undertaking by the Company to perform the issuance and/or a public offering of securities, and there is no certainty that the issuance will indeed take place and/or what its terms will be.

14.3.

On August 30, 2015, the Company's Board of Directors approved the Company's guarantee for the undertaking of DBS to pay all of its obligations to the holders of Debentures Series B and C of DBS (amounting to NIS 1.05 billion and NIS 307 million respectively), against reduction of the rate of annual interest that the debentures will bear (0.5% and 1% respectively), and cancellation of securities and certain provisions in the deeds of trust of the debentures and in the debentures. Subsequently, the Company is taking steps towards signing an appropriate guarantee. For information about the terms of these debentures, see also section 5.15 of Chapter A to the Periodic Report for 2014.

14.4.

For information about the undertaking to provide additional credit, which the Company received in August 2015, see Note 5.2 above.

The information contained in this financial information report constitutes a translation of the financial information published by the Company. The Hebrew version was submitted by the Company to the relevant authorities pursuant to Israeli law, and represents the binding version and the only one having legal effect. This translation was prepared for convenience purposes only.

Condensed Separate Interim Financial Information as at June 30, 2015 (unaudited)

Contents	Page
Auditors’ Report	2
Condensed Separate Interim Financial Information as at June 30, 2014 (unaudited)
Condensed interim information of Financial Position	3
Condensed interim information of Profit or Loss	5
Condensed interim information of Comprehensive Income	5
Condensed interim information of Cash Flows	6
Notes to the condensed separate interim financial information	7


Somekh Chaikin
8 Hartum Street, Har Hotzvim	Telephone	972 2 531 2000
PO Box 212, Jerusalem 91001	Fax	972 2 531 2044
Israel	Internet	www.kpmg.co.il

To:

The Shareholders of “Bezeq”- The Israel Telecommunication Corporation Ltd.

Subject: Special auditors’ report on separate interim financial information according to Regulation 38D of the Securities Regulations (Periodic and Immediate Reports) – 1970

Introduction

We have reviewed the separate interim financial information presented in accordance with Regulation 38D of the Securities Regulations (Periodic and Immediate Reports) – 1970 of “Bezeq”- The Israel Telecommunication Corporation Ltd. (hereinafter – “the Company”) as of June 30, 2015 and for the six and three month periods then ended. The separate interim financial information is the responsibility of the Company’s Board of Directors and of its Management. Our responsibility is to express a conclusion on the separate interim financial information based on our review.

We did not review the separate interim financial information of an investee company the investment in which amounted to NIS 597 million as of June 30, 2015, and the profit from this investee company amounted to NIS 5 million and NIS 2 million for the six and three month periods then ended, respectively. The financial statements of that company were reviewed by other auditors whose review report thereon was furnished to us, and our conclusion, insofar as it relates to amounts emanating from the financial statements of that company, is based solely on the said review report of the other auditors.

Scope of Review

A review is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards in Israel and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review and the review report of other auditors, nothing has come to our attention that causes us to believe that the accompanying separate interim financial information was not prepared, in all material respects, in accordance with Regulation 38D of the Securities Regulations (Periodic and Immediate Reports) – 1970.

Without qualifying our abovementioned conclusion, we draw attention to lawsuits filed against the Company which cannot yet be assessed or the exposure in respect thereof cannot yet be estimated, as set forth in Note 5.

Somekh Chaikin

Certified Public Accountants (Isr.)

August 30, 2015

Condensed Separate Interim Financial Information as at June 30, 2015 (unaudited)

Condensed interim information of Financial Position

	June 30, 2015		June 30, 2014		December 31, 2014
	(Unaudited)		(Unaudited)		(Audited)
	NIS million		NIS million		NIS million
Assets
Cash and cash equivalents		65		207		248
Investments, including derivatives		757		1,659		2,175
Trade receivables		796		727		720
Other receivables		111		216		107
Inventories		5		6		4
Loans provided to investees		309		262		261
Assets classified as held for sale		6		24		22
Total current assets		2,049		3,101		3,537

Investments		87		69		86
Trade and other receivables		156		36		51
Property, plant and equipment		4,715		4,563		4,620
Intangible assets		276		314		295
Investment in investees		7,097		6,328		6,325
Loans provided to investees		85		311		272
Deferred tax assets		-		40		-
Total non-current assets		12,416		11,661		11,649
Total assets		14,465		14,762		15,186

Condensed Separate Interim Financial Information as at June 30, 2015 (unaudited)

Condensed interim information of Financial Position (contd.)

	June 30, 2015			June 30, 2014			December 31, 2014
	(Unaudited)			(Unaudited)			(Audited)
	NIS million			NIS million			NIS million
Liabilities
Debentures, loans and borrowings		1,615			1,555			1,570
Loan from an investee		434			434			-
Trade payables		150			127			167
Other payables, including derivatives		462			465			553
Current tax liabilities		677			574			590
Provisions (Note 5)		57			107			48
Employee benefits		220			340			223
Liability to Eurocom DBS Ltd., a related party		101			-			-
Total current liabilities		3,716			3,602			3,151

Debentures and loans		7,772			7,975			8,787
Loan from an investee		-			-			434
Employee benefits		195			195			203
Deferred tax liabilities		54			-			1
Derivatives		76			36			94
Other liabilities		72			70			75
Total non-current liabilities		8,169			8,276			9,594

Total liabilities		11,885			11,878			12,745

Equity
Share capital		3,860			3,848			3,855
Share premium		288			198			253
Reserves		414			500			416
Deficit		(1,982	)		(1,662	)		(2,083	)
Total equity attributable to equity holders of the Company		2,580			2,884			2,441
Total liabilities and equity		14,465			14,762			15,186

Shaul Elovitch		Stella Handler		David (Dudu) Mizrahi
Chairman of the Board of Directors		CEO		Deputy CEO and CFO

Date of approval of the financial statements: August 30, 2015

The attached notes are an integral part of this condensed separate interim financial information.

Condensed Separate Interim Financial Information as at June 30, 2015 (unaudited)

Condensed interim information of Profit or Loss

	Six months ended June 30						Three months ended June 30						Year ended December 31
	2015			2014			2015			2014			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Audited)
	NIS million			NIS million			NIS million			NIS million			NIS million
Revenues (Note 2)		2,218			2,150			1,105			1,073			4,317

Cost of Activities
Depreciation and amortization		356			340			180			172			688
Salaries		453			451			226			228			895
Operating and general expenses  (Note 3)		356			378			176			188			777
Other operating expenses (income), net (Note 4)		(156	)		6			(139	)		14			(23	)
Cost of Activities		1,009			1,175			443			602			2,337

Operating profit		1,209			975			662			471			1,980
Financing expenses (income)
Financing expenses		220			230			122			124			472
Financing income		(45	)		(27	)*		(22	)		(14	)*		(72	)*
Financing expenses, net		175			203			100			110			400

Profit after financing expenses, net		1,034			772			562			361			1,580
Share in earnings of investees, net		217			721	*		100			559	*		1,009	*
Profit before income tax		1,251			1,493			662			920			2,589
Income tax		306			226			180			110			478
Profit for the period attributable to the owners of the Company		945			1,267			482			810			2,111

* Restated due to changes in accounting policy, see Note 1.3

Condensed Interim Statement of Comprehensive Income

	Six months Ended June 30					Three months Ended June 30					Year ended December 31
	2015		2014			2015		2014			2014
	(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)			(Audited)
	NIS million		NIS million			NIS million		NIS million			NIS million
Profit for the period		945		1,267			482		810			2,111
Items of other comprehensive income (loss) for the period including actuarial gains and hedging transactions, net of tax		33		(9	)		16		(22	)		(36	)

Total comprehensive income for the period attributable to equity holders of the Company		978		1,258			498		788			2,075

The attached notes are an integral part of this condensed separate interim financial information.

Condensed Separate Interim Financial Information as at June 30, 2015 (unaudited)

Condensed interim information of Cash Flows

	Six months						Three months						Year ended
	Ended June 30						Ended June 30						December 31
	2015			2014			2015			2014			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Audited)
	NIS million			NIS million			NIS million			NIS million			NIS million
Cash flows from operating activities
Profit for the period		945			1,267			482			810			2,111
Adjustments:
Depreciation and amortization		356			340			180			172			688
Share in earnings of investees, net		(217	)		(721	)*		(100	)		(559	)*		(1,009	)*
Financing expenses, net		178			205	*		96			107	*		432	*
Profit from gaining control in an investee		(12	)		-			-			-			-
Capital gain, net		(157	)		(120	)		(146	)		(103	)		(175	)
Income tax expenses		306			226			180			110			478
Sundries		(3	)		(1	)		(2	)		-			3

Change in trade and other receivables		(76	)		48			(2	)		53			59
Change in trade and other payables		(111	)		(15	)		(131	)		(72	)		85
Change in provisions		10			(3	)		7			1			(62	)
Change in employee benefits		(11	)		113			(3	)		107			3

Net cash (used in) from operating activities due to transactions with subsidiaries		(23	)		(6	)		(5	)		(2	)		5

Net income tax paid		(181	)		(172	)		(100	)		(79	)		(359	)
Net cash flows from operating activities		1,004			1,161			456			545			2,259
Cash flows from investing activities
Investment in intangible assets		(37	)		(39	)		(17	)		(20	)		(82	)
Proceeds from the sale of property, plant and equipment		92			70			80			42			221
Acquisition of financial assets held for trading and others		(729	)		(620	)		(289	)		(410	)		(2,654	)
Proceeds from the sale of financial assets held for trading and others		2,180			94			2,060			94			1,617
Purchase of property, plant and equipment		(385	)		(378	)		(174	)		(187	)		(740	)
Sundries		2			2			5			3			(14	)
Net cash from investment activities due to transactions with subsidiaries		197			589			241			345			931
Net cash provided by (used in) investment activities		1,320			(282	)		1,906			(133	)		(721	)
Cash flow from financing activities
Issue of debentures and receipt of loans		-			-			-			-			1,446
Repayment of debentures and loans		(752	)		(323	)		(752	)		(323	)		(920	)
Dividend paid		(844	)		(802	)		(844	)		(802	)		(2,069	)
Payment to Eurocom DBS for purchase of shares and DBS loans		(680	)		-			(680	)		-			-
Interest paid		(200	)		(213	)		(182	)		(191	)		(421	)
Sundries		(11	)		(5	)		(14	)		(7	)		3
Net cash (used in) from operating activities due to transactions with subsidiaries		(20	)		434			(20	)		434			434
Net cash used for financing activities		(2,507	)		(909	)		(2,492	)		(889	)		(1,527	)
Increase (decrease) in cash and cash equivalents		(183	)		(30	)		(130	)		(477	)		11
Cash and cash equivalents at beginning of period		248			237			195			684			237
Cash and cash equivalents at the end of the period		65			207			65			207			248

* Restated due to changes in accounting policy, see Note 1.3

The attached notes are an integral part of this condensed separate interim financial information.

Notes to the Condensed Separate Interim Financial Information as at June 30, 2015 (unaudited)

Notes to the condensed separate interim financial information

Manner of preparing financial information

	1.1.	Definitions

		The Company: Bezeq The Israel Telecommunication Corporation Limited

		"Investee", the "Group", "Subsidiary": as these terms are defined in the Company's consolidated financial statements for 2014.

	1.2.	Principles used for preparing financial information

		The condensed separate interim financial information is presented in accordance with Regulation 38(D) of the Securities Regulations (Periodic and Immediate Reports),1970 ("the Regulation") and the Tenth Addendum of the Securities Regulations (Periodic and Immediate Reports),1970 ("the Tenth Addendum") with respect to the separate interim financial information of the corporation. They should be read in conjunction with the separate financial statements for the year ended December 31, 2014 and in conjunction with the condensed interim consolidated financial statements as at June 30, 2015 ("the Consolidated Financial Statements").

		Other than as set out in section 1.3 below, the accounting policies used in these condensed separate interim financial information are in accordance with the accounting policies set out in the separate financial information as of and for the year ended December 31, 2014.

	1.3.	Changes in accounting policies

		Following closing of the transaction for the acquisition of Eurocom DBS's entire holdings of DBS shares and shareholders loans on June 24, 2015 as set out in Note 4 to the Consolidated Financial Statements, the Company changed its accounting policies with regard to the presentation of financing income for the shareholders loans provided to DBS.

		Prior to acquisition of the entire holdings of DBS shares and shareholders loans the Company presented the financing revenue from shareholders loans under a financing revenue item in the statement of income, while the Company's share regarding DBS financing expenses were presented under the item "Company's share in profit (loss) of investees". As a result of the acquisition of 100% of the rights in DBS and in view of the Company's position that it does not expect to collect this financing income, the Company concluded that the financing revenue regarding shareholders loans to DBS should be presented net of DBS gains (losses) in the statement of income included in the separate financial information.

		The change of policy was adopted and applied retrospectively. Effect of retrospective application on the relevant statement of income items:

	Six months ended June 30, 2014 (unaudited)
	As previously presented			Effect of retrospective application		As reported in these financial statements
	NIS million			NIS million		NIS million
Financing expenses		230			-		230
Finance revenues		(127	)		100		(27	)
Financing expenses, net		103			100		203

Share in earnings of investees, net		621			100		721

Notes to the Condensed Separate Interim Financial Information as at June 30, 2015 (unaudited)

	Three months ended June 30, 2014 (unaudited)
	As previously presented			Effect of retrospective application		As reported in these financial statements
	NIS million			NIS million		NIS million
Financing expenses	124			-		124
Finance revenues		(77	)		63		(14	)
Financing expenses, net		47			63		110

Share in earnings of investees, net		496			63		559

	For the year ended December 31, 2014 (audited)
	As previously presented			Effect of retrospective application		As reported in these financial statements
	NIS million			NIS million		NIS million
Financing expenses	472			-		472
Finance revenues		(285	)		213		(72	)
Financing expenses, net		187			213		400

Share in earnings of investees, net		796			213		1,009

Revenues

	Six months ended June 30				Three months ended June 30				Year ended December 31
	2015		2014		2015		2014		2014
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Audited)
	NIS million		NIS million		NIS million		NIS million		NIS million

Fixed-line telephony		799		841		396		415		1,668
Internet - infrastructure		770		677		387		345		1,394
Transmission and data communication		530		514		264		255		1,022
Other services		119		118		58		58		233
		2,218		2,150		1,105		1,073		4,317

Operating and general expenses

	Six months ended June 30				Three months ended June 30				Year ended December 31
	2015		2014		2015		2014		2014
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Audited)
	NIS million		NIS million		NIS million		NIS million		NIS million

Maintenance of buildings and sites		98		108		47		53		217
Sales and marketing		95		100		48		52		213
Interconnectivity and payments to communications operators		75		81		37		39		161
Services and maintenance by sub-contractors		30		31		14		15		61
Vehicle maintenance		36		36		19		19		76
Terminal equipment and materials		22		22		11		10		49
		356		378		176		188		777

Notes to the Condensed Separate Interim Financial Information as at June 30, 2015 (unaudited)

Other operating expenses (income), net

	Six months ended June 30						Three months ended June 30						Year ended December 31
	2015			2014			2015			2014			2014
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Audited)
	NIS million			NIS million			NIS million			NIS million			NIS million

Gain from disposal of property, plant and equipment (mainly real estate)		(157	)		(120	)		(146	)		(103	)		(175	)
Provision for contingent liabilities, net		12			-			6			-			(24	)
Provision for severance pay in early retirement		1			125			1			117			176
Gain from increase in the Company's control of DBS Satellite Services Ltd.		(12	)		-			-			-			-
Other		-			1			-			-			-
Other operating income, net		(156	)		6			(139	)		14			(23	)

	5.	Contingent Liabilities

		During the normal course of business, legal claims were filed against the Company or there are various pending claims (“in this section: “Legal Claims”).

		In the opinion of the Company's management, based, inter alia, on legal opinions as to the likelihood of success of these litigations, the financial statements include appropriate provisions in the amount of NIS 57 million, where provisions are required to cover the exposure arising from such litigation.

		In the Company's opinion, the additional exposure (exceeding the foregoing provisions), as of June 30, 2015 due to legal claims filed against the Company on various matters, which are unlikely to be realized, amounts to a total of NIS 1,030 million. Of this amount, NIS 372 million is for a claim filed against the Company and other communications companies, without specifying the portion of the amount claimed from each of the plaintiffs. In addition, there is further exposure in the amount of NIS 2.1 billion* for claims, the chances of which cannot be assessed at this stage. The foregoing amounts are linked to the consumer price index and are before the addition of interest.

		Furthermore, other claims have been filed against the Company as class actions with respect to which the Company has additional exposure beyond the aforesaid amounts, which cannot be quantified as the exact amounts of the claims are not stated in the claims.

		Subsequent to the reporting date, lawsuits were filed against the Company in a total amount of NIS 405 million, the chances of which cannot yet be assessed at this stage. Furthermore, another lawsuit in regard of which the exposure was NIS 144 million has concluded.
		For further information concerning contingent liabilities see Note 6 to the Consolidated Financial Statements.

		* The total includes a shareholder's claim against the Company and officers in the Company amounting to a total of NIS 1.1 billion or NIS 2 billion (based on the method for calculating the claimed damages).

Dividends from investees

6.1

In May 2015, Pelephone Communications Ltd. paid a cash dividend to the Company, which was announced in March 2015, in the amount of NIS 159 million.

6.2

In May 2015, Bezeq International Ltd. paid a cash dividend to the Company, which was announced in March 2015, in the amount of NIS 82 million.

6.3

In August 2015 the board of directors of Pelephone decided to distribute a dividend to the Company in the amount of NIS 84 million in October 2015.

6.4

In August 2015 the board of directors of Bezeq International decided to distribute a dividend to the Company in the amount of NIS 88 million in October 2015.

Notes to the Condensed Separate Interim Financial Information as at June 30, 2015 (unaudited)

Events in and subsequent to the reporting period

7.1

For information regarding the increase in control in DBS see Note 4.2 to the Consolidated Financial Statements.

7.2

On March 8, 2015, the Company provided Bezeq International a loan in the amount of NIS 50 million to be repaid in one lump sum on March 8, 2016. The loan bears annual interest of 3.05%.

7.3

On August 30, 2015, the Company's board of directors approved a revision (number 5) to the special collective agreement dated December 5, 2006 between the Company and the workers committee and New General Federation of Workers, the highlights of which are:

Extension of the collective agreement and retirement arrangements, and their revisions, through to December 31, 2021.

	2.	Under the retirement arrangements, the Company will be entitled, at its discretion, to terminate the employment of up to 203 permanent employees (including new permanent employees) each year.

	The Company's management estimates the expected costs for the entire period of the agreement, including wage hikes and excluding retrenchment of employees at the Company's discretion, to amount to NIS 280 million (of which NIS 30 million conditional upon the Company's results).

7.4

On August 30, 2015 the board of directors authorized the Company's management to examine options for issuing one or more new series of debentures to the public under the Company's shelf prospectus of May 2014. It is hereby clarified that a final decision with regard to such issue has not yet been made and the scope and terms thereof have not yet been set. Such an issue is subject, among other things, to a final decision by the Company's board of directors, issuing of a shelf offering and obtaining approval of the Tel Aviv Stock Exchange Ltd. for listing for trading. The foregoing does not constitute the Company's commitment to execute an issue and/or public offering of securities and it is not certain that such issue will indeed be executed and/or what its terms may be.

7.5

On August 30, 2015 the Company's board of directors provided the Company's guarantee for DBS's liability for full repayment of its debts to holders of DBS Series B and C debentures (in a total amount of NIS 1.05 billion and NIS 307million, respectively), against a reduction in the annual interest rates borne by the debentures (at 0.5% and 1%, respectively), and cancellation of certain collateral and provisions in the deeds of trust and debentures, and all in accordance with the provisions of the deeds of trust of the debentures and the debentures. Furthermore, the Company is taking measures for the signing of the appropriate letters of guarantee. For the terms of the foregoing debentures see section 5.15 of Chapter A to the Periodic Reports of 2014.

7.6

In August 2015 the Company entered into additional agreements with a bank and another financial institution, under which the Company received an undertaking from these organizations to provide additional credit of NIS 400 million for rescheduling a future debt of the Company in 2017.

The information contained in these financial statements constitutes a translation of the financial information published by the Company. The Hebrew version was submitted by the Company to the relevant authorities pursuant to Israeli law, and represents the binding version and the only one having legal effect. This translation was prepared for convenience purposes only.

Pro Forma Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

Contents	Page

Review Report	2

Pro Forma Condensed Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)
Pro Forma Condensed Consolidated Interim Statements of Income and Comprehensive Income	4
Notes to the Pro Forma Condensed Consolidated Interim Financial Statements	7


Somekh Chaikin
8 Hartum Street, Har Hotzvim	Telephone	972 2 531 2000
PO Box 212, Jerusalem 91001	Fax	972 2 531 2044
Israel	Internet	www.kpmg.co.il

Review Report to the Shareholders of

“Bezeq” -The Israel Telecommunication Corporation Ltd.

Introduction

We have reviewed the accompanying pro forma financial information of “Bezeq” -The Israel Telecommunication Corporation Ltd. and its subsidiaries (hereinafter – “the Group”) comprising of the pro forma condensed consolidated interim statements of income and comprehensive income for the six and three month periods ended on June 30, 2015. The Board of Directors and Management are responsible for the preparation and presentation of interim financial information for these interim periods in accordance with IAS 34 “Interim Financial Reporting”, and are also responsible for the preparation of financial information for these interim periods in accordance with Regulation 38b of the Securities Regulations (Periodic and Immediate Reports), 1970. Our responsibility is to express a conclusion on pro forma interim financial information for these interim periods based on our review.

We did not review the condensed interim financial information of a certain consolidated subsidiary whose revenues constitute 1% of the total consolidated revenues for the six and three month periods then ended. The condensed interim financial information of that company was reviewed by other auditors whose review report thereon was furnished to us, and our conclusion, insofar as it relates to amounts emanating from the financial information of that company, is based solely on the said review report of the other auditors.

Scope of Review

Conclusion

Based on our review and the review report of other auditors, nothing has come to our attention that causes us to believe that the accompanying pro forma financial information was not prepared, in all material respects, in accordance with IAS 34 based on the assumptions set forth in Note 2.

In addition to that mentioned in the previous paragraph, based on our review and the review report of other auditors, nothing has come to our attention that causes us to believe that the accompanying pro forma interim financial information does not comply, in all material respects, with the disclosure requirements of Regulation 38b of the Securities Regulations (Periodic and Immediate Reports), 1970 based on the assumptions set forth in Note 2.

Somekh Chaikin

Certified Public Accountants (Isr.)

August 30, 2015

Pro Forma Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

Pro Forma Condensed Consolidated Interim Statements of Income

	Six months ended June 30, 2015									Six months ended June 30, 2014
	Prior to the pro forma event			Adjustments for pro forma information			Pro forma information			Prior to the pro forma event			Adjustments for pro forma information			Pro forma information
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	NIS million			NIS million			NIS million			NIS million			NIS million			NIS million

Revenues	4,777			434			5,211			4,561			842			5,403
Costs of activity
Depreciation and amortization		768			104			872			633			237			870
Salaries		936			69			1,005			891			131			1,022
General and operating expenses		1,801			230			2,031			1,691			428			2,119
Other operating income, net		(158	)		12			(146	)		(576	)		-			(576	)
		3,347			415			3,762			2,639			796			3,435

Operating profit		1,430			19			1,449			1,922			46			1,968
Financing expenses (income)
Financing expenses		265			34			299			240			55			295
Financing income		(99	)		(21	)		(120	)		(166	)		89			(77	)
Financing expenses, net		166			13			179			74			144			218

Profit after financing expenses, net		1,264			6			1,270			1,848			(98	)		1,750
Share in earnings (losses) of equity accounted investees		16			(17	)		(1	)		(98	)		94			(4	)
Profit before income tax		1,280			(11	)		1,269			1,750			(4	)		1,746
Income tax		335			12			347			483			(24	)		459
Profit for the period		945			(23	)		922			1,267			20			1,287
Earnings per share (NIS)
Basic earnings per share		0.34			-			0.34			0.46			0.01			0.47

Diluted earnings per share		0.34			(0.01	)		0.33			0.46						0.47

Shaul Elovitch		Stella Handler		David (Dudu) Mizrahi
Chairman of the Board of Directors		CEO		Deputy CEO and CFO

Date of approval of the pro forma financial statements: August 30, 2015

The attached notes are an integral part of these pro forma consolidated interim financial statements.

Pro Forma Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

Condensed Consolidated Interim Statements of Comprehensive Income

	Six months ended June 30, 2015							Six months ended June 30, 2014
	Prior to the pro forma event		Adjustments for pro forma information			Pro forma information		Prior to the pro forma event			Adjustments for pro forma information		Pro forma information
	(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)
	NIS million		NIS million			NIS million		NIS million			NIS million		NIS million
Profit for the period		945		(23	)		922		1,267			20		1,287
Items of other comprehensive income (loss) (net of tax)		33		-			33		(9	)		-		(9	)
Total comprehensive income for the period		978		(23	)		955		1,258			20		1,278

The attached notes are an integral part of these pro forma consolidated interim financial statements.

Pro Forma Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

Pro Forma Condensed Consolidated Interim Statements of Income (Contd.)

	Three months ended June 30, 2015									Three months ended June 30, 2014
	Prior to the pro forma event			Adjustments for pro forma information			Pro forma information			Prior to the pro forma event			Adjustments for pro forma information			Pro forma information
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	NIS million			NIS million			NIS million			NIS million			NIS million			NIS million

Revenues		2,603			-			2,603			2,250			422			2,672
Costs of activity
Depreciation and amortization		451			(9	)		442			319			120			439
Salaries		497			-			497			443			69			512
General and operating expenses		1,002			-			1,002			822			213			1,035
Other operating income, net		(141	)		-			(141	)		(568	)		-			(568	)
		1,809			(9	)		1,800			1,016			402			1,418

Operating profit		794			9			803			1,234			20			1,254
Financing expenses (income)
Financing expenses		164			2			166			127			31			158
Financing income		(35	)		-			(35	)		(95	)		68			(27	)
Financing expenses, net		129			2			131			32			99			131

Profit after financing expenses, net		665			7			672			1,202			(79	)		1,123
Share in earnings (losses) of equity accounted investees		-			-			-			(79	)		76			(3	)
Profit before income tax		665			7			672			1,123			(3	)		1,120
Income tax		183			2			185			313			(22	)		291
Profit for the period		482			5			487			810			19			829
Earnings per share (NIS)
Basic earnings per share		0.18			-			0.18			0.30			-			0.30

Diluted earnings per share		0.17			0.01			0.18			0.29			0.01			0.30

Condensed Consolidated Interim Statements of Comprehensive Income

	Three months ended June 30, 2015						Three months ended June 30, 2014
	Prior to the pro forma event		Adjustments for pro forma information		Pro forma information		Prior to the pro forma event			Adjustments for pro forma information		Pro forma information
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)
	NIS million		NIS million		NIS million		NIS million			NIS million		NIS million
Profit for the period		482		5		487		810			19		829
Items of other comprehensive income (loss) (net of tax)		16		-		16		(22	)		-		(22	)
Total comprehensive income for the period		498		5		503		788			19		807

The attached notes are an integral part of these pro forma consolidated interim financial statements

Pro Forma Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

Pro Forma Condensed Consolidated Interim Statements of Income (Contd.)

	Year ended December 31, 2014
	Prior to the pro forma event			Adjustments for pro forma information			Pro forma information
	(Audited)			(Audited)			(Audited)
	NIS million			NIS million			NIS million

Revenues		9,055			1,710			10,765
Costs of activity
Depreciation and amortization		1,281			484			1,765
Salaries		1,768			267			2,035
General and operating expenses		3,366			872			4,238
Other operating income, net		(586	)		1			(585	)
		5,829			1,624			7,453

Operating profit		3,226			86			3,312
Financing expenses (income)
Financing expenses		486			98			584
Financing income		(356	)		188			(168	)
Financing expenses, net		130			286			416

Profit after financing expenses, net		3,096			(200	)		2,896
Share in losses of equity-accounted investees		(170	)		165			(5	)
Profit before income tax		2,926			(35	)		2,891
Income tax		815			(47	)		768
Profit for the year		2,111			12			2,123
Earnings per share (NIS)
Basic earnings per share		0.77			0.01			0.78

Diluted earnings per share		0.77			-			0.77

Condensed Consolidated Interim Statements of Comprehensive Income

	Year ended December 31, 2014
	Prior to the pro forma event			Adjustments for pro forma information		Pro forma information
	(Audited)			(Audited)		(Audited)
	NIS million			NIS million		NIS million
Profit for the year		2,111			12		2,123
Items of other comprehensive loss (net of tax)		(36	)		-		(36	)
Total comprehensive income for the year		2,075			12		2,087

The attached notes are an integral part of these pro forma consolidated interim financial statements.

Notes to the Pro Forma Consolidated Interim Financial Statements as at June 30, 2015 (Unaudited)

	1.	General

1.1

These pro forma consolidated interim financial statements are prepared in accordance with Regulation 38B of the Israel Securities Regulations (Periodic and Immediate Reports), 1970 and refer to the gain of control in DBS. Up to March 23, 2015, the Company held 49.78% of DBS shares and accounted for this investment using the equity method. On this date, the general meeting of the Company's shareholders approved the acceptance of the merger terms and exercise of the option, and the Company's engagement in the Acquisition Transaction, as described in Note 4.2 to the Group's interim financial statements. As from March 23, 2015, the Company consolidates the financial statements of DBS in the Group's financial statements.

1.2

The pro forma consolidated interim financial statements are based on the condensed consolidated interim financial statements of the Company and the condensed interim financial statements of DBS as at June 30, 2015, which were prepared in accordance with IAS 34, Interim Financial Reporting.

Assumptions and adjustments used to prepare the pro forma interim financial statements

2.1

The pro forma consolidated financial statements have been prepared to reflect the results of the Company's operations for the six and three months ended June 30, 2015 and June 30, 2014, and for the year ended December 31, 2014. The reports were prepared under the assumption that the business combination with DBS, which is described in Note 4.2 to the Group's condensed consolidated interim financial statements, was completed on January 1, 2013.

2.2

Prior to gaining control in DBS, as described above, the Company held 49.78% of its shares and accounted for this investment using the equity method. Accordingly, the consolidated statements of income included equity gains for this investment. In addition, for the purpose of the pro forma statement of income, the equity gains that were recognized up to March 23, 2015 were eliminated. In addition, a profit of NIS 12 million from acquisition of control was eliminated in the pro forma statement of income for the six months ended June 30, 2015.

2.3

Income and expenses arising from transactions between the Company and DBS were eliminated in the pro forma consolidated statements.

2.4

The adjustments for pro forma information include amortization of excess cost amounting to NIS 20 million and NIS 75 million for the six months ended June 30, 2015 and June 30, 2014, respectively, NIS 37 million for the three months ended June 30, 2014, and NIS 149 million for the year ended December 31, 2014. In addition, amortization of excess cost in the amount of NIS 7 million was recorded for the three month period ending June 30, 2015. The amortization was based on the estimated forecasted useful life of the excess cost as at the date of the business combination.

2.5

The Company assumes that there is no change in measurement of the fair value of DBS, allocation of excess cost, and the contingent consideration in the periods.

Board of Directors' Report on the state of the corporation's affairs for the periods ended June 30, 2015

We hereby present the Board of Directors’ report on the state of affairs of “Bezeq” - The Israel Telecommunication Corporation Ltd. ( "the Company") and the consolidated Group companies (the Company and the consolidated companies, jointly - "the Group") for the six month period ended June 30, 2015 (“the Six Month Period”) and the three months then ended (“the Quarter”).

The Board of Directors’ report includes a condensed review of its subject-matter, and was prepared assuming the Board of Directors' report of December 31, 2014 is also available to the reader.

On March 23, 2015, the Company assumed control of D.B.S. Satellite Services (1998) Ltd. ("DBS"). As of that date, DBS is consolidated in the Company's statements. On June 24, 2015, the Company completed its acquisition of Eurocom's remaining holdings in DBS, and as of that date the Company holds all rights to DBS's shares ( "DBS's First Time Consolidation"). The effects of DBS's operations on the Group's income statement for the three months ended March 31, 2015 were included under the 'Share in the earnings of investees accounted for under the equity method" item.

For more information, see Note 4.2 to the financial statements.

In its financial statements, the Group reports on four main operating segments:

1.	Domestic Fixed-Line Communications

2.	Cellular Communications

3.	International Communications, Internet and NEP Services

4.	Multi-Channel Television

The Company’s financial statements also include an "Others" segment, which comprises mainly online content and commerce services (through "Walla") and contracted call center services (through “Bezeq Online”). The “Others” segment is immaterial at the Group level.

The Group's results were as follows:

	1-6.2015		1-6.2014		Increase (decrease)						4-6.2015		4-6.2014		Increase (decrease)
	NIS millions		NIS millions		NIS millions			%			NIS millions		NIS millions		NIS millions			%
Profit		945		1,267		(322	)		(25.4	)		482		810		(328	)		(40.5	)
EBITDA (operating profit before depreciation and amortization)		2,198		2,555		(357	)		(14.0	)		1,245		1,553		(308	)		(19.8	)

Results for the corresponding period and quarter include gains on the sale of all holdings in the shares of Coral-Tell Ltd. and a provision for termination of employment by way of early retirement (see Note 10 to the financial statements). For the first time, operating results for the present Quarter include the results of the Multi-Channel Television segment, as detailed below.

Board of Directors' Report on the state of the corporation's affairs for the periods ended June 30, 2015

The Board of Directors’ explanations on the state of the Company’s affairs, the results of its operations, equity, cash flows, and additional matters

1.1

Financial position

	June 30, 2015		June 30, 2014		Increase (decrease)
	NIS millions		NIS millions		NIS millions			%			Explanation

Cash and current investments		1,825		2,398		(573	)		(23.9	)	The decrease was mainly due to ongoing investments in the Domestic Fixed-Line Communications segment, and was partially offset by DBS's First Time Consolidation to the amount of NIS 470 million.
Current and non-current trade and other receivables		3,127		3,247		(120	)		(3.7	)	The decrease was due to a reduction in trade receivables balances in the Cellular Communications segment, caused by a reduction in revenues from services, including revenues from hosting services and a reduction in installment-based terminal equipment sales. The decrease was partially offset by DBS's First Time Consolidation to the amount of NIS 181 million.
Other current assets		102		113		(11	)		(9.7	)	The decrease was mainly attributable to a reduction in held-for-sale assets in the Domestic Fixed-Line Communications segment.
Broadcasting rights		471		-		471			-		Balance from DBS's First Time Consolidation.
Property, plant and equipment		6,980		6,060		920			15.2		The increase was mainly due to DBS's First Time Consolidation to the amount of NIS 789 million.
Goodwill and intangible assets		3,692		1,839		1,853			100.8		The increase was due to the DBS's First Time Consolidation, mainly comprising goodwill, customer relations and brand value (see Note 4.2.4 to the financial statements).
Investments in investees as per the equity method		28		1,014		(986	)		(97.2	)	The decrease was due to the reversal of DBS's investment, presented as per the equity method, and its first time consolidation.
Deferred tax assets		854		35		819			-		After completing the acquisition of DBS, the Company attributed surplus acquisition costs to a deferred tax asset, net (See Note 4.2.4 d to the financial statements).
Other non-current assets		354		334		20			6.0
Total assets		17,433		15,040		2,393			15.9

Board of Directors' Report on the state of the corporation's affairs for the periods ended June 30, 2015

	June 30, 2015		June 30, 2014		Increase (decrease)
	NIS millions		NIS millions		NIS millions			%			Explanation

Debt to financial institutions and debenture holders		11,368		9,349		2,019			21.6		The increase was mainly due to DBS's First Time Consolidation (including attributed surplus acquisition costs) to the amount of NIS 2.1 billion.
Liabilities towards Eurocom D.B.S. Ltd.		101		-		101			-		Obligation to pay a contingent consideration in a business combination (see Note 4.2.1 to the financial statements).
Trade and other payables		1,786		1,289		497			38.6		The increase was due to DBS's First Time Consolidation to the amount of NIS 546 million.
Other liabilities		1,598		1,518		80			5.3		The increase was mainly attributable to the Domestic Fixed-Line Communications Segment, due to current and deferred tax liabilities.
Total liabilities		14,853		12,156		2,697			22.2
Total equity		2,580		2,884		(304	)		(10.5	)	The decrease in total equity was mainly attributable to timing differences between accrual of earnings in the Company, and the distribution of such earnings as dividends. Equity comprises 14.8% of the balance sheet total, as compared to 19.2% of the balance sheet total on June 30, 2014.

Board of Directors' Report on the state of the corporation's affairs for the periods ended June 30, 2015

1.2

Results of operations

1.2.1

Highlights

	1-6.2015		1-6.2014			Increase (decrease)						4-6.2015		4-6.2014			Increase (decrease)
	NIS millions		NIS millions			NIS millions			%			NIS millions		NIS millions			NIS millions			%			Explanation

Revenues		4,777		4,561			216			4.7			2,603		2,250			353			15.7		The increase was due to DBS's First Time Consolidation in the present Quarter, to the amount of NIS 439 million, and increased revenues in the Domestic Fixed-Line Communications segment and the International Communications, Internet and NEP Services segment. The increase was partially offset by lower revenues in the Cellular Communications segment.
Depreciation and amortization		768		633			135			21.3			451		319			132			41.4		The increase was mainly due to DBS's First Time Consolidation in the present Quarter to the amount of NIS 80 million, and a write-down of surplus acquisition costs incurred when assuming control.
Labor costs		936		891			45			5.1			497		443			54			12.2		The increase was due to DBS's First Time Consolidation to the amount of NIS 62 million. The increase was partially offset by lower expenses in the Cellular Communications segment.
General and operating expenses		1,801		1,691			110			6.5			1,002		822			180			21.9		The increase was due to DBS's First Time Consolidation to the amount of NIS 227 million. The increase was partially offset by lower expenses in the Cellular Communications segment and in the Domestic Fixed-Line Communications segment.
Other operating income, net		158		576			(418	)		(72.6	)		141		568			(427	)		(75.2	)	Net income was down due to NIS 582 million in gains recorded in the same quarter last year on the sale of Coral-Tell Ltd. shares. The decrease was partially offset, mainly by a provision recorded in the same quarter last year for termination of employment by way of early retirement in the Domestic Fixed-Line Communications segment.
Operating profit		1,430		1,922			(492	)		(25.6	)		794		1,234			(440	)		(35.7	)
Finance expenses, net		166		74			92			-			129		32			97			-		Expenses were up mainly due to DBS's First Time Consolidation in the present Quarter, to the amount of NIS 55 million, and NIS 63 million in finance income from shareholder loans to DBS recognized in the same quarter last year.
Share in the gains (losses) of investees		16		(98	)		114			-			-		(79	)		79			(100	)	Following DBS's First Time Consolidation in the present quarter, this item only includes the effects of this segment's results in the first quarter of 2015.
Income tax		335		483			(148	)		(30.6	)		183		313			(130	)		(41.5	)	The decrease was mainly due to taxes on gains from the sale of Coral-Tell Ltd.'s shares, included in the last-year quarter.
Profit for the period		945		1,267			(322	)		(25.4	)		482		810			(328	)		(40.5	)

Board of Directors' Report on the state of the corporation's affairs for the periods ended June 30, 2015

1.2.2

Operating segments

Revenue and operating profit data, presented by the Group’s operating segments:

	1-6.2015						1-6.2014						4-6.2015						4-6.2014
	NIS millions			% of total revenues			NIS millions			% of total revenues			NIS millions			% of total revenues			NIS millions			% of total revenues
Revenues by operating segment
Domestic Fixed-Line Communications		2,218			46.4			2,150			47.1			1,105			42.4			1,073			47.7
Cellular Communications		1,448			30.3			1,760			38.6			721			27.7			843			37.4
International Communications, Internet and NEP Services		784			16.4			721			15.8			391			15.0			366			16.3
Multi-Channel Television		879			18.4			851			18.7			439			16.9			427			19.0
Other and offsets*		(552	)		(11.5	)		(921	)		(20.2	)		(53	)		(2.0	)		(459	)		(20.4	)
Total		4,777			100			4,561			100			2,603			100			2,250			100

	1-6.2015					1-6.2014					4-6.2015					4-6.2014
	NIS millions			% of total revenues		NIS millions			% of total revenues		NIS millions			% of total revenues		NIS millions			% of total revenues
Operating profit by segment
Domestic Fixed-Line Communications		1,209			54.5		975			45.3		662			59.9		471			43.9
Cellular Communications		85			5.9		253			14.4		53			7.4		127			15.1
International Communications, Internet and NEP Services		122			15.6		116			16.1		62			15.9		58			15.8
Multi-Channel Television		129			14.7		140			16.5		70			15.9		67			15.7
Other and offsets*		(115	)		-		438	**		-		(53	)		-		511	**		-
Consolidated operating profit/ % of Group revenues		1,430			29.9		1,922			42.1		794			30.5		1,234			54.8

(*)	Offsets are mainly for periods when results from Multi-Channel Television operations were included as an associate company.
(**)	Including NIS 582 million in gains on the sale of Coral-Tell Ltd.'s shares.

Board of Directors' Report on the state of the corporation's affairs for the periods ended June 30, 2015

1.2.2

Operating segments

Domestic Fixed-Line Communications Segment

	1-6.2015			1-6.2014			Increase (decrease)						4-6.2015			4-6.2014			Increase (decrease)
	NIS millions			NIS millions			NIS millions			%			NIS millions			NIS millions			NIS millions			%			Explanation

Fixed-line telephony		799			841			(42	)		(5.0	)		396			415			(19	)		(4.6	)	The decrease was mainly due to a reduction in ARPU.
Internet - infrastructure		770			677			93			13.7			387			345			42			12.2		The increase was mostly attributable to growth in the number of internet subscribers and higher average revenues per user.
Transmission, data communications and others		649			632			17			2.7			322			313			9			2.9
Total revenues		2,218			2,150			68			3.2			1,105			1,073			32			3.0
Depreciation and amortization		356			340			16			4.7			180			172			8			4.7
Labor costs		453			451			2			0.4			226			228			(2	)		(0.9	)
General and operating expenses		356			378			(22	)		(5.8	)		176			188			(12	)		(6.4	)	The decrease was mainly due to a reduction in building maintenance costs and call completion fees to telecom operators.
Other operating expenses (income), net		(156	)		6			(162	)		-			(139	)		14			(153	)		-		The difference was mainly due to an expense recognized in the last-year quarter for termination of employment by way of early retirement and an increase in capital gains on property sales.
Operating profit		1,209			975			234			24.0			662			471			191			40.6
Finance expenses, net		175			203	*		(28	)		(13.8	)		100			110	*		(10	)		(9.1	)	Expenses were down mainly due to finance income from the fair value of future long-term credit from banks (see Note 5.1 to the financial statements).
Taxes on income		306			226			80			35.4			180			110			70			63.6		The increase was mainly attributable to an increase in pre-tax profit.
Segment profit		728			546			182			33.3			382			251			131			52.2

* Re-stated, see Note 12.1 to the financial statements.

Board of Directors' Report on the state of the corporation's affairs for the periods ended June 30, 2015

1.2.2

Operating segments

Cellular Communications segment

	1-6.2015		1-6.2014		Increase (decrease)						4-6.2015		4-6.2014		Increase (decrease)
	NIS millions		NIS millions		NIS millions			%			NIS millions		NIS millions		NIS millions			%			Explanation

Services		1,001		1,259		(258	)		(20.5	)		502		622		(120	)		(19.3	)	The decrease was due to a NIS 104 million reduction in hosting services revenues in the present period (NIS 52 million in the present Quarter), following termination of the contract with HOT Mobile in December 2014. The decrease was further due to a reduction in the number of subscribers, lower rates due to increased market competition, and migration of existing customers to cheaper bundles at current market prices, both of which lowered ARPU.
Equipment sales		447		501		(54	)		(10.8	)		219		221		(2	)		(0.9	)	The decrease was mainly due to a reduction in the number of items sold, partially offset by a change in the sales mix.
Total revenues		1,448		1,760		(312	)		(17.7	)		721		843		(122	)		(14.5	)
Depreciation and amortization		210		211		(1	)		(0.5	)		106		105		1			1
Labor costs		192		212		(20	)		(9.4	)		96		103		(7	)		(6.8	)	The decrease was mainly attributable to a reduction in the workforce.
General and operating expenses		961		1,084		(123	)		(11.3	)		466		508		(42	)		(8.3	)	The decrease was due to a reduction in most cost categories and mainly in terminal equipment costs, advertising, doubtful and bad debt, repair and expanded warranty services, rental costs, and content-related expenses.
Operating profit		85		253		(168	)		(66.4	)		53		127		(74	)		(58.3	)
Finance income, net		28		35		(7	)		(20	)		14		17		(3	)		(17.6	)
Income tax		28		74		(46	)		(62.2	)		18		38		(20	)		(52.6	)	The decrease was attributable to the reduction in income before taxes.
Segment profit		85		214		(129	)		(60.3	)		49		106		(57	)		(53.8	)

Board of Directors' Report on the state of the corporation's affairs for the periods ended June 30, 2015

1.2.2

Operating segments

International Communications, Internet and NEP Services

	1-6.2015		1-6.2014		Increase (decrease)						4-6.2015		4-6.2014		Increase (decrease)
	NIS millions		NIS millions		NIS millions			%			NIS millions		NIS millions		NIS millions			%			Explanation

Revenues		784		721		63			8.7			391		366		25			6.8		The increase was attributable to greater revenues from enterprise communication solutions (ICT), higher internet revenues due to growth in the number of subscribers, higher revenues from call transfers between global communication carriers, and an increase in revenues from data communication services. The increase was partially offset by a reduction in revenues from outgoing calls, mainly due to ongoing competition with cellular operators.
Depreciation and amortization		65		65		-			-			33		33		-			-
Labor costs		152		148		4			2.7			75		73		2			2.7		This increase was mainly attributable to an increase in the number of employees providing outsourced services in ICT operations
General and operating expenses		445		392		53			13.5			222		202		20			9.9		The increase was due to an increase in ICT equipment costs, internet services, call transfers between global communication carriers, and data communication services, corresponding with the above revenues.
Operating profit		122		116		6			5.2			62		58		4			6.9
Finance expenses, net		3		5		(2	)		(40.0	)		2		3		(1	)		(33.3	)
Share in the earnings of associates		-		1		(1	)		(100	)		-		-		-			-
Tax expenses		30		29		1			3.4			15		14		1			7.1
Segment profit		89		83		6			7.2			45		41		4			9.8

Board of Directors' Report on the state of the corporation's affairs for the periods ended June 30, 2015

1.2.2

Operating segments

Multi-Channel Television

	1-6.2015			1-6.2014			Increase (decrease)						4-6.2015			4-6.2014			Increase (decrease)
	NIS millions			NIS millions			NIS millions			%			NIS millions			NIS millions			NIS millions			%			Explanation

Revenues		879			851			28			3.3			439			427			12			2.8		This increase was mainly attributable to an increase in the average number of subscribers.
Depreciation and amortization		156			144			12			8.3			80			74			6			8.1
Labor costs		131			130			1			0.8			62			68			(6	)		(8.8	)
General and operating expenses		463			437			26			5.9			227			218			9			4.1		This increase was mainly due to an increase in utilized broadcasting rights, and content costs.
Operating profit		129			140			(11	)		(7.9	)		70			67			3			4.5
Finance expenses, net		53			62			(9	)		(14.5	)		55			44			11			25.0		The decrease in the present period was mainly due to linkage differences on debentures due to a greater drop in the CPI in the present period, as compared to the same period last year. The increase in the present Quarter was due to a greater rise in the CPI in the present Quarter as compared to the same quarter last year.
Finance expenses for shareholder loans, net		244			226			18			8.0			181			137			44			32.1		Expenses were up in the Quarter due to higher expenses for linkage differences, interest and factoring. Expenses in the period were partially offset by lower linkage differences.
Tax expenses		1			1			-			-			-			1			(1	)		(100	)
Segment loss		(169	)		(149	)		(20	)		13.4			(166	)		(115	)		(51	)		44.3

Board of Directors' Report on the state of the corporation's affairs for the periods ended June 30, 2015

1.3

Cash flow

	1-6.2015			1-6.2014			Change						4-6.2015			4-6.2014			Change
	NIS millions			NIS millions			NIS millions			%			NIS millions			NIS millions			NIS millions			%			Explanation

Net cash from operating activities		1,801			2,107			(306	)		(14.5	)		840			1,064			(224	)		(21.1	)	The decrease in net cash from operating activities was mainly attributable to the Cellular Communications segment, due to lower net profits and a more moderate decrease in trade receivables balances. The decrease in net cash from operating activities was also attributable to the Domestic Fixed-Line Communications segment. The decrease was partially offset by DBS's First Time Consolidation in the present Quarter, to the amount of NIS 106 million.
Net cash from (used in) investing activities		778			(557	)		1,335			-			1,156			(60	)		1,216			-		The increase in net cash from investing activities was due to an increase in the net proceeds on the sale of held-for-trade financial assets in the Domestic Fixed-Line Communications segment, and in the present period was also due to NIS 299 million in cash in the first quarter of 2015 from assuming control of DBS. The increase was partially offset by DBS's First Time Consolidation in the present Quarter, to the amount of NIS 262 million, which were mainly used to purchase held-for-trade financial assets, frequency purchases and increased investment in the 4G network in Cellular Communications and the net proceeds received in the same quarter last year from the sale of holdings in Coral-Tell Ltd.'s shares.
Net cash used in financing activities		(2,413	)		(1,487	)		(926	)		62.3			(2,338	)		(1,380	)		(958	)		69.4		The increase in net cash used in financing activities was mainly due to payments to Eurocom DBS for the acquisition of DBS's shares and loans to the amount of NIS 680 million and an increase in debenture repayments in the Domestic Fixed-Line Communications segment following repayment of debentures (Series 8) in the present Quarter. The increase was partially offset by DBS's First Time Consolidation in the present Quarter, to the amount of NIS 147 million. This amount mainly included debenture issues (see Note 5.3 to the financial statements).
Net increase (decrease) in cash		166			63			103			163.5			(342	)		(376	)		34			(9.0	)

Average volume in the reporting Period:

Long-term liabilities (including current maturities) to financial institutions and debenture holders: NIS 10,833 million.

Supplier credit: NIS 848 million.

Short-term credit to customers: NIS 2,222 million. Long-term credit to customers: NIS 520 million.

Board of Directors' Report on the state of the corporation's affairs for the periods ended June 30, 2015

1.3.

Cash flow (contd.)

As of June 30, 2015, the Group had a working capital deficit of NIS 472 million, as compared to a surplus of NIS 1,245 million on June 30, 2014.

According to its separate financial statements, the Company had a working capital deficit of NIS 1,667 million as of June 30, 2015, as compared to a working capital deficit of NIS 501 million on June 30, 2014.

The change in the Group's working capital was mainly attributable to the Domestic Fixed-Line Communications segment, mainly due to lower ongoing investments and DBS's First Time Consolidation which brought in a working capital deficit of NIS 349 million.

The Company's Board of Directors has reviewed, among other things, the Company's cash requirements and resources, both at present and in the foreseeable future, has reviewed the Company's and the Group's investment needs, the Company's and the Group's available credit sources, and has conducted sensitivity analysis to unexpected deterioration in the Company and the Group's business. In this context, the Company's Board of Directors has determined that the aforesaid working capital deficit does not indicate any liquidity problem in the Company and the Group and that there is no reasonable concern that the Company and the Group will fail to meet their existing and foreseeable obligations on time (even in the event of unexpected deterioration in the Company's and the Group's business). The Company and the Group can meet their existing and foreseeable cash requirements, both through available cash balances, through cash from operating activities, through dividends from subsidiaries, through guaranteed credit facilities for 2016 and 2017 under pre-determined commercial terms, and by raising debt from bank and non-bank sources.

The above information includes forward-looking information, based on the Company’s assessments concerning its liquidity. Actual data may differ materially from these assessments if there is a change in any of the factors taken into account in making them.

Market Risk - Exposure and Management

2.1

Fair value sensitivity analysis data as of June 30, 2015 do not differ materially from sensitivity analysis data as of December 31, 2014, except for the effect of DBS's consolidation, which increased the Group's exposure to CPI changes by NIS 2 billion; exposure to changes in the real NIS-based interest rate - by NIS 2 billion; exposure to changes in the USD exchange rate - by NIS 1 billion; and exposure to changes in the USD-based interest rate - by NIS 0.8 billion.

2.2

The linkage bases report as of June 30, 2015 does not differ materially from the report as of December 31, 2014, except for a NIS 2 billion increase in CPI-linked liabilities, mainly due to DBS's consolidation.

Aspects of Corporate Governance

Disclosure concerning the financial statements’ approval process

3.1

Committee

The Company’s Financial Statements Review Committee is a separate committee which does not serve as the Audit Committee. The Committee comprises 4 members, as follows: Yitzhak Idelman, chairman (external director); Mordechai Keret (external director); Tali Simone (external director); and Dr. Yehoshua Rosenzweig (independent director). All Committee members have accounting and financial expertise. All Committee members have submitted a statement prior to their appointment. For more information concerning the directors serving on the Committee, see Chapter D of the Company's Periodic Report for 2014.

Board of Directors' Report on the state of the corporation's affairs for the periods ended June 30, 2015

3.2

Financial statements approval process

The Financial Statements Review Committee discussed and finalized its recommendations to the Company's Board of Directors in its meetings of August 4, 2015, August 10, 2015, and August 27, 2015.

The Committee’s meeting on August 4, 2015, was attended by all Committee members and by the Chairman of the Board, Mr. Shaul Elovitch; Deputy CEO and CFO, Mr. Dudu Mizrahi; Company Comptroller, Mr. Danny Oz; Corporate Secretary, Mrs. Linor Yochelman; the Internal Auditor, Mr. Lior Segal; the Legal Counsel, Mr. Amir Nachlieli; Mr. Rami Nomkin - director; the external auditors; and other Company officers.

The Committee's meeting of August 10, 2015, was attended by all the above, except for Dr. Rosenzweig. However, the August 10, 2015 meeting was also attended by Company CEO, Mrs. Stella Handler.

The Committee’s meeting on August 27, 2015, was attended by all Committee members and by the Chairman of the Board, Mr. Shaul Elovitch; Corporate Secretary, Mrs. Linor Yochelman; the Internal Auditor, Mr. Lior Segal; the Legal Counsel, Mr. Amir Nachlieli; the external auditors; and other Company officers.

The Committee reviewed, inter alia, the assessments and estimates made in connection with the financial statements; internal controls over financial reporting; full and proper disclosure in the financial statements; and the accounting policies adopted on material matters.

	C.	The Committee submitted its recommendations to the Company’s Board of Directors in writing on August 27, 2015.

The Board of Directors discussed the Financial Statements Review Committee's recommendations and the financial statements on August 30, 2015.

The Company’s Board of Directors believes that the Financial Statements Review Committee’s recommendations were submitted a reasonable time (three days) prior to the Board meeting, taking into account the scope and complexity of these recommendations.

The Company’s Board of Directors adopted the Financial Statements Review Committee’s recommendations and resolved to approve the Company’s financial statements for the second quarter of 2015.

Board of Directors' Report on the state of the corporation's affairs for the periods ended June 30, 2015

Disclosure Concerning the Company’s Financial Reporting

4.1

Disclosure of material valuations

The following table discloses a material valuation pursuant to Regulation 8B to the Securities Regulations (Periodic and Immediate Reports), 1970.

4.1.1

Valuation of Bezeq's investment in DBS:

(Attached to the financial statements as of March 31, 2015)

Subject of valuation	Value of Bezeq's investment in D.B.S. Satellite Services (1998) Ltd., in shares, share options, and various shareholder loans. The valuation was made as part of a Company transaction leading to Bezeq assuming control of DBS's shares.
Date of valuation	March 23, 2015; the valuation was signed on May 19, 2015.
Value prior to the valuation	The carrying amount of the Company's investment in DBS - NIS 1,064 million.
Value set in the valuation	NIS 1,076 million - value of Bezeq's investment in DBS.
Assessor’s identity and profile	Fahn Kanne Consulting Ltd. The valuation was made by a team headed by Mr. Shlomi Bartov, CPA, partner and CEO of Fahn Kanne Consulting. Mr. Bartov has extensive experience in consulting and supporting some of the largest companies in Israel. Fahn Kanne Consulting is a subsidiary of Fahn Kanne & Co., a part of the Grant Thornton International Ltd. (GTIL) network, the special advisory services branch of the global Grant Thornton network specializing in spearheading international transactions, valuation and transaction consulting, global IPOs, executive consultancy and project financing. The assessor has no dependence on the Company.
Valuation model	The valuation was conducted using the income approach, using the discounted cash flows (DCF) method. Value was assigned to share capital and shareholder debt based on the repayment order of the new shareholder loans and the extent of the shareholder's investments.
Assumptions used in the valuation	Discount rate - 8.5% (post-tax). Permanent growth rate - 1%. Scrap value of total value set in valuation - 80%.

Board of Directors' Report on the state of the corporation's affairs for the periods ended June 30, 2015

4.1.2

Purchase Price Allocation (PPA) Valuation:

The valuation is appended to the financial statements.

Subject of valuation	PPA upon assuming control of D.B.S. Satellite Services (1998) Ltd., by exercising the option to purchase 8.6% of the company's shares.
Date of valuation	March 23, 2015; the valuation was signed on August 26, 2015.
Value prior to the valuation	N/A
Value set in the valuation	Brand value (before assigning deferred taxes) - NIS 347 million. Customer relations value (before assigning deferred taxes) - NIS 790 million. Deferred tax asset net of deferred tax liabilities - NIS 831 million. Goodwill (100%) (residual value) - NIS 609 million.
Assessor’s identity and profile	See above table - Section 4.1.1.
Valuation model	Fair value of customer relations was appraised using the income approach, using the multi-period excess earnings method. Fair value for the brand was appraised using the relief from royalties approach.
Assumptions used in the valuation	Customer relations - Discount rate - 8.5% (post-tax). Brand - Discount rate - 9.5% (post-tax). Deferred tax asset, net - based on legal counsel concerning the utilization of DBS's losses carried forward.

4.2

Due to the material nature of legal actions brought against the Group, which cannot yet be assessed or for which the Group cannot yet estimate its exposure, the auditors drew attention to these actions in their opinion concerning the financial statements.

4.3

Material events subsequent to the financial statements’ date

For information on material events subsequent to the financial statements’ date, see Note 14 to the financial statements.

Board of Directors' Report on the state of the corporation's affairs for the periods ended June 30, 2015

Details of debt certificate series

5.1

Debentures (Series 5 and 8)

	Debentures (Series 5)	Debentures (Series 8)
Repaid on June 1, 2015	NIS 397,827,674 par value	NIS 443,076,688 par value
Revaluated par value as of June 30, 2015	NIS 490,176,126	NIS 886,286,312
Fair and market value as of June 30, 2015	NIS 514,034,372	NIS 948,592,240

5.2

Debentures (Series 5-8) are rated Aa2 Stable by Midroog Ltd. (“Midroog”) and ilAA/Stable by Standard & Poor’s Maalot Ltd. (“Maalot”). For current and historical ratings data for the debentures, see the Company's immediate report (amended) of April 21, 2015 (ref. no. 2015-01-004083) and its immediate report of August 13, 2014 (ref. no. 2014-01-133185) (Maalot), and its immediate reports of December 28, 2014 (ref. no. 2014-01-232224) and March 5, 2015 (ref. no. 2015-01-045085) (Midroog). The rating reports are included in this Board of Directors’ Report by way of reference.

Miscellaneous

For information concerning the liabilities balances of the reporting corporation and those companies consolidated in its financial statements as of June 30, 2015, see the Company's reporting form on the MAGNA system, dated August 31, 2015.

We thank the managers of the Group’s companies, its employees, and shareholders.

Shaul Elovitch

Chairman of the Board

Stella Handler

CEO

Date of signature: August 30, 2015

Update to Chapter A (Description of Company Operations) of the Periodic Report for 2014

Update to Chapter A (Description of Company Operations) ¹

to the Periodic Report for 2014 ("Periodic Report") of

"Bezeq" - The Israel Telecommunication Corporation Ltd. ("the Company")

Description of the general development of Bezeq Group's business

Section 1.1.2 - Merger of the Company and DBS

In the matter of the Company’s engagement in a transaction with Eurocom DBS to acquire Eurocom DBS’s entire holdings in DBS - on June 23, 2015, approval was received from the Minister of Communications to transfer the means of control in DBS in which the Company will control DBS and will hold the entire issued and paid-up capital of DBS. Subsequently, on June 24, 2015, the aforesaid transaction was completed. On this occasion, the Company transferred to Eurocom DBS the cash consideration for the transaction in the amount of NIS 680 million, Eurocom DBS transferred to the Company all its shares and rights to shares in DBS and assigned to the Company its entire rights in the shareholders’ loans that it had provided to DBS, and the director in DBS representing Eurocom DBS resigned his position. Upon completion of the transaction, DBS became a wholly owned subsidiary (100%) of the Company.

Section 1.3.3 - Dividend distribution

For information about a dividend distribution in the amount of NIS 844 million in respect of profits from the second half of 2014 that was approved by a general meeting of the Company’s shareholders on May 6, 2015, and a recommendation by the Board of Directors on August 30, 2015 in connection with a dividend distribution in the amount of NIS 933 million for profits in the first half of 2015, see Note 7 to the Company’s Financial Statements for the period ended June 30, 2015.

Outstanding, distributable profits at the reporting date - NIS 945 million² (surpluses accumulated over the last two years, after subtracting previous distributions and excluding the Special Distribution).

The update is further to Regulation 39A of the Securities Regulations (Periodic and Immediate Reports), 1970, and includes material changes or innovations that have occurred in the corporation in any matter which must be described in the periodic report. The update relates to the Company's periodic report for the year 2013 and refers to the section numbers in Chapter A (Description of Company Operations) in the said periodic report.

²	Including revaluation gains in the amount of NIS 12 million for an increase in the control of DBS. Pursuant to a Board of Directors’ resolution dated February 10, 2015, these revaluation gains will be excluded from the dividend distribution policy and will not be distributed as a dividend.

Update to Chapter A (Description of Company Operations) of the Periodic Report for 2014

Section 1.4.4 - Main results and operational data

Bezeq Fixed Line (the Company's operations as a domestic carrier)

	Q2 2015			Q1 2015			Q4 2014			Q3 2014			Q2 2014			Q1 2014
Revenues (NIS million)		1,105			1,113			1,086			1,081			1,073			1,077
Operating profit (NIS million)		662			547			507			498			471			504
Depreciation and amortization (NIS million)		180			176			170			178			172			168
EBITDA (NIS million) (1)		842			723			677			676			643			672
Net profit (NIS million) (8)		382			346			293			263			251			295
Cash flow from operating activities (NIS million)		456			548			499			599			545			616
Payments for investments in property, plant & equipment and intangible assets (NIS million)		191			231			195			210			207			210
Proceeds from the sale of property, plant & equipment and intangible assets (NIS million)		80			12			82			69			42			28
Free cash flow (NIS million) (2)		345			329			386			458			380			434
Number of active subscriber lines at the end of the period (in thousands) (3)		2,204			2,208			2,205			2,205			2,205			2,214
Average monthly revenue per line (NIS) (ARPL) (4)		60			61			62			63			63			64
Number of outgoing minutes (in millions)		1,396			1,459			1,482			1,588			1,522			1,608
Number of incoming minutes (in millions)		1,385			1,428			1,440			1,498			1,424			1,467
Number of active subscriber lines at the end of the period (in thousands) (7)		1,418			1,390			1,364			1,335			1,308			1,289
Number of active subscriber lines at the end of the period (in thousands) – wholesale (7)		78			11			-			-			-			-
Average monthly revenue per Internet subscriber (NIS) - retail		88			87			85			85			84			82
Average broadband speed per Internet subscriber (Mbps)(5)		34.9			33.2			32.5			24.0			21.9			20.0
Churn rate (6)		2.4	%		2.4	%		2.5	%		2.8	%		2.8	%		3.0	%

	(1)	EBITDA (Earnings before interest, taxes, depreciation and amortization) is a financial index that is not based on generally accepted accounting principles. The Company presents this index as an additional index for assessing its business results since this index is generally accepted in the Company's area of operations which counteracts aspects arising from the modified capital structure, various taxation aspects and methods, and the depreciation period for fixed and intangible assets. This index is not a substitute for indices which are based on GAAP and it is not used as a sole index for estimating the results of the Company's activities or cash flows. Additionally, the index presented in this report is unlikely to be calculated in the same way as corresponding indices in other companies.
	(2)	Free cash flow is a financial index which is not based on GAAP. Free cash flow is defined as cash from operating activities less cash for the purchase/sale of property, plant and equipment, and intangible assets, net. The Company presents free cash flow as an additional index for assessing its business results and cash flows because the Company believes that free cash flow is an important liquidity index that reflects cash resulting from ongoing operations after cash investments in infrastructure and other fixed and intangible assets.
	(3)	Inactive subscribers are subscribers whose Bezeq lines have been physically disconnected (except for a subscriber during (roughly) the first three months of the collection process).
	(4)	Excluding revenues from transmission services and data communication, internet services, services to communications operators and contractor and other works. Calculated according to average lines for the period.
	(5)	For bundles with a range of speeds, the maximum speed per bundle is taken into account.
	(6)	The number of telephony subscribers who left Bezeq Fixed Line during the period divided by the average number of registered telephony subscribers in the period.
	(7)	Number of active Internet lines including retail and wholesale lines. Retail - internet lines provided directly by the Company. Wholesale - Internet lines provided through a wholesale service to other communications providers.
	(8)	Commencing in Q2 2015, the Company revised the internal management reporting structure in connection with financing income for shareholders loans that were provided to DBS and it no longer presents the financing income for shareholder loans as part of financing income for the fixed line domestic carrier segment. Comparison figures were restated so as to reflect the change in reporting structure. In this matter, see Note 12.1 to the Company’s Financials.

Update to Chapter A (Description of Company Operations) of the Periodic Report for 2014

Pelephone

	Q2 2015			Q1 2015			Q4 2014			Q3 2014			Q2 2014			Q1 2014
Revenue from services (NIS million)		502			499			584			610			622			637
Revenues from sale of equipment (NIS million)		219			228			251			214			221			280
Total revenue (NIS million)		721			727			835			824			843			917
Operating profit (NIS million)		53			32			74			122			127			126
Depreciation and amortization (NIS million)		106			104			111			108			105			106
EBITDA (1)		159			136			184			231			232			232
Net profit (NIS million)		49			36			59			100			106			108
Cash flow from operating activities (NIS million)		202			351			158			286			420			349
Payments for investments in property, plant and equipment and intangible assets (NIS million)		199			72			80			83			85			73
Free cash flow (NIS million) (1)		3			279			78			203			335			276
Number of subscribers at end of the period (thousands) (2)		2,566			2,565			2,586			2,600			2,610			2,631
Average monthly revenue per subscriber (NIS) (ARPU) (3)		65			65			75			78			79			80
Churn rate (4)		6.1	%		6.5	%		5.6	%		7.3	%		6.5	%		7.5	%

(1)

Regarding the definition of EBITDA and free cash flows, see comments (1) and (2) in the Bezeq Fixed Line table.

(2)

Subscriber data include Pelephone subscribers (without subscribers from other operators hosted on the Pelephone network) and does not include subscribers connected to Pelephone services for six months or more but who are inactive. An inactive subscriber is one who in the past six months has not received at least one call, has not made one call / sent one SMS, performed no surfing activity on his phone or has not paid for Pelephone services. It is noted that a customer may have more than one subscriber number (“line”).

(3)

Average monthly revenue per subscriber. The index is calculated by dividing the average total monthly revenues from cellular services, from Pelephone subscribers and other telecom operators, including revenues from cellular operators who use Pelephone's network, repair services and extended warranty in the period, by the average number of active subscribers in the same period.

(4)

The churn rate is calculated at the ratio of subscribers who disconnected from the company's services and subscribers who became inactive during the period, to the average number of active subscribers during the period.

Update to Chapter A (Description of Company Operations) of the Periodic Report for 2014

Bezeq International

	Q2 2015			Q1 2015			Q4 2014			Q3 2014			Q2 2014			Q1 2014
Revenues (NIS million)		391			393			398			385			366			355
Operating profit (NIS million)		62			61			57			59			58			58
Depreciation and amortization (NIS million)		32			32			33			32			33			32
EBITDA (NIS million) (1)		94			93			90			92			90			90
Net profit (NIS million)		45			44			39			42			41			42
Cash flow from operating activities (NIS million)		74			62			71			71			95			74
Payments for investments in property, plant and equipment and intangible assets (NIS million) (2)		26			53			28			27			23			31
Free cash flow (NIS million) (1)		48			9			43			44			72			43
Churn rate (3)		4.9	%		4.1	%		4.7	%		4.5	%		3.7	%		4.0	%

(1)

Regarding the definition of EBITDA and cash flows, see comments (1) and (2) in the Bezeq Fixed Line table.

(2)

The item also includes long term investments in assets.

(3)

The number of Internet subscribers who left Bezeq International during the period, divided by the average number of registered Internet subscribers in the period.

DBS

	Q2 2015			Q1 2015			Q4 2014			Q3 2014			Q2 2014			Q1 2014
Revenues (NIS million)		439			440			440			432			428			424
Operating profit (NIS million)		70			59			57			76			67			73
Depreciation and amortization (NIS million)		80			76			78			75			74			70
EBITDA (NIS million) (1)		150			135			135			151			141			143
Net profit (loss) (NIS million)		(166	)		(3	)		(87	)		(86	)		(115	)		(34	)
Cash flow from operating activities (NIS million)		106			149			122			101			106			113
Payments for investments in property, plant and equipment and intangible assets (NIS million)		82			65			94			64			68			78
Free cash flow (NIS million) (1)		24			84			27			38			38			35
Number of subscribers (at the end of the period, in thousands) (2)		638			634			632			623			613			607
Average monthly revenues per subscriber (ARPU) (NIS)(3)		230			232			234			233			234			234
Churn rate (4)		3.1	%		3.4	%		2.9	%		3.2	%		3.1	%		3.6	%

(1)

Regarding the definition of EBITDA and cash flows, see comments (1) and (2) in the Bezeq Fixed Line table.

(2)

Subscriber – one household or one small business customer. In the event of a business customer with many reception points or a large number of decoders (such as a hotel, kibbutz or gym), the number of subscribers is calculated by dividing the total payment received from the business customer by the average revenue from a small business customer.

(3)

Monthly ARPU is calculated by dividing total DBS revenues (from content and equipment, premium channels, advanced products, and other services) by average number of customers.

(4)

Number of DBS subscribers who left DBS during the period, divided by the average number of DBS registered subscribers in the period.

Update to Chapter A (Description of Company Operations) of the Periodic Report for 2014

Section 1.5 - Forecast regarding the Group

On the forecast for the Group for 2015 as published in the 2014 financials - the forecast remains unchanged after the execution of the transaction for the purchase of all the holdings in DBS (see update to Section 1.1.2) and after approval of the amendment to the collective labor agreement (see update to Section 2.9).

Section 1.6 - General environment and the influence of external factors on the Group's activity

Section 1.6.3 - Regulatory oversight and changes in the regulatory environment - wholesale market

Following the High Court of Justice ("HCJ") ruling of March 25, 2015 that a round-table discussion must be held with the participation of the Company and the State, as a form of post hearing, to examine the Company’s arguments (professional and technical arguments, including technical issues which the Company claims are impossible to implement), in an effort to clarify such issues wherever possible and make the necessary amendments, and after which the Company and the State must submit statements to the Court within 60 days, the Company and the Ministry of Communications held discussions on the subject of the possible implementation of the wholesale telephony service and issues pertaining to the economic pricing model.

On April 20, 2015, the Company received a letter from the Director General of the Ministry of Communications on the subject of providing wholesale telephony service. According to the letter, further to the meetings between the Ministry and the Company pursuant to the above-mentioned HCJ ruling, it emerges, according to the Ministry, that provision of the wholesale services on the Bezeq network is technically feasible, with slight adjustments, within a short period and at negligible cost. The letter also states that the Ministry believes there are several possible technological solutions to providing the service in accordance with the service portfolio on time, and the letter includes a summary of three of these solutions. The Ministry therefore expects Bezeq to prepare for providing the service on the scheduled date (May 17, 2015). To this end, by April 27, 2015 the Company was required to submit documents to the Ministry describing the computerized interface for this service, and the letter also stipulates that insofar as Bezeq fails to submit these documents on time, the Ministry will take the view that Bezeq has no intention of providing the wholesale telephony service in accordance with its license, and it will take every available course of action (a copy of the letter sent by the Director General of the Ministry of Communications is attached to the Company’s immediate report dated April 20, 2015, included in this report by way of reference). On April 26, 2015, the Company submitted its comments on this letter, completely rejecting the allegation that it had used the argument of the unfeasibility of the implementation to avoid providing the telephony services, and that the “technological solutions” presented in the Ministry’s letter do not resolve the problem of unfeasibility and make it impossible to provide wholesale telephony services on the Company’s existing network; nor are they consistent with the format for providing the services as defined in the service portfolio (in this context, the Company even suggested appointing an independent expert to examine the feasibility of the options put forward by the Ministry of Communications). Furthermore, the Company noted that the documents relating to the computerized interface for the service cannot be prepared as long as the service itself is impossible to implement (or even, taking the Ministry’s position, until the format for the service has been defined and, according to the Ministry, several options may be possible).

On May 7, 2015, the Minister of Communications, Minister of Finance and Ministry of Communications submitted an updated notice on the Company’s aforementioned petition, whereby, after the Ministry of Communications held meetings with the Company subsequent to the HCJ decision, the Ministry concluded that the provision of wholesale telephony services by the Company was technically feasible and that had the Company made preparations in advance, there would have been no technical impediment to opening the wholesale market in this field on the scheduled date, May 17, 2015. As for the economic issues, the notice stated that the Ministry of Communications had concluded that the Company’s arguments that the tariffs were unreasonable should not be accepted. Nevertheless, after re-examining the Company's arguments, it had reached the conclusion that there was room to make certain changes in matters concerning the demand for data usage and requirements concerning the quality of the service as defined in the service portfolio (which the Ministry believes do not affect the tariffs), including the Ministry's intention to publish a preliminary hearing for the entire market and not to enforce requirements concerning the quality of the service at this stage. The notice included expert opinions by the Ministry's engineering and economic professionals. On May 25, 2015, the Company submitted its revised notice in this proceeding. In the revised notice, the Company rejects the statements in the State's update, and noted that contrary to the State's conclusions (1) the various solutions put forward by the Ministry for providing telephony services in a wholesale market are not technically feasible. (2) The tariffs determined by the Ministry of Communications for the provision of the wholesale market services are unreasonable. The Company further asserts that the Ministry of Communications has not completed the discussions to evaluate the Company's arguments, as requested by HCJ, and has held steadfastly to its decisions such that the unreasonableness of such decisions has remained unchanged. The Company’s revised notice included an engineering opinion prepared by an external expert and an internal economic opinion (together with an external comparative study indicating that the wholesale price in European countries on which the Ministry relied, is more than double the price determined by the Israeli ministry). On June 15, 2015, HCJ handed down its decision that the case would be returned to the tribunal. The hearing of the petition was set for September 16, 2015. The Company and the Ministry of Communications are currently negotiating in an attempt to find solutions to the disputes.

Update to Chapter A (Description of Company Operations) of the Periodic Report for 2014

Until May 16, 2015, retail subscribers were transferred to a wholesale subscription (wholesale BSA service) via a non-automated process (a manual process that requires the intervention of Company employees). Notably, the Ministry of Communications and some of the communications operators had complaints regarding the Company’s work capacity at that stage. As of May 17, 2015, the transfer is made by means of an automated process that does not require human intervention.

On May 11, 2015, the Company received notice from the Ministry of Communications of its intention to impose a monetary sanction in connection with the implementation of the broadband reform (the "Notice"), whereby, as detailed in the supervisory report attached to the Notice, the Ministry found that the Company was not in compliance with the directives prescribed in the service portfolio and that such course of conduct amounted to a violation under Item (5) of Section D of the Addendum to the Communications Law (Telecommunications and Broadcasting), 1982. The Ministry therefore intends to impose on the Company a monetary sanction of NIS 11,343,800, which is the maximum amount prescribed by the law. According to the Notice, the Ministry believes that the Company's conduct since the launching of the reform amounts, at the very least, to a violation of the provisions of the service portfolio in the following matters:

The Company conducted customer retention calls prior to completing the transition (to wholesale);

The Company did not enable implementation of a verbal transition process during the interim period until the establishment of an automated interface;

The Company did not comply with the timeframe prescribed for transferring an infrastructure subscriber from the Company to a service provider, and for transferring a subscriber between suppliers on the Company's infrastructure

The Company operated the service provider call center in a limited scope compared with the other centers, thereby discriminating between the different types of subscribers.

The explanations provided in the Notice stated, among other reasons, that the violation made it difficult to create competition in the market, assisted the Company in maintaining its monopolistic market share and the resulting high revenues, and that the Company's conduct could harm and even prevent an important and significant reform in the Israeli communications market, which was designed to ensure the public's interest, consumers' welfare and competition in various markets, including in the Internet and telephony sectors, and in the future in the commercial broadcasting and other sectors

The Company dismissed the Notice and submitted its counter-arguments, including that it rejects the unsubstantiated statements and determinations in the Notice in the context of preventing the reform and monopolistic practices. At the same time, the Company presented the Ministry’s unreasonable course of conduct and the updating of the service portfolio in excess of its authority, while disregarding the complexity of the non-automated processes and the time frame prescribed for them.

On June 1, 2015, the Ministry of Communications published a hearing concerning the use of terminal equipment in a wholesale market, whereby it is considering the establishment of an “associate arrangement” for the BSA service file, according to which retail subscribers that become wholesale subscribers will be able to continue to use the Company’s terminal equipment for a further 6 months, after which the equipment will be returned to the Company. On June 30, 2015, the Company filed its position opposing the arrangement under consideration, which infringes upon the Company’s proprietary rights and expropriates its property, is contrary to the approach and justification underlying the wholesale service in that it detracts from the service provider’s responsibility at the Company’s expense, where there is no market failure, lack of infrastructure or bottleneck, and it fails to comply with the clause limiting infringement of a basic right. On the same date, Bezeq International filed its position which also opposes the arrangement under consideration and asks for the conditions of the arrangement to be amended.

Update to Chapter A (Description of Company Operations) of the Periodic Report for 2014

On June 15, 2015, the Antitrust Authority asked the Company for information as part of a review being conducted by the Antitrust Commissioner in relation to the provision of wholesale services on the Company’s network, including information about requests to connect customers as part of the wholesale market, the dates of visits by technicians and Company documents relating to the reform of the wholesale market. The Company submits the information as requested by the Authority.

Section 1.6.4 - Regulatory oversight and changes in the regulatory environment - additional topics

Sub-section F - Enforcement and monetary penalties - the Ministry of Communications has recently made extensive use of the oversight powers and has issued notice of its intention to impose monetary sanctions on the Company regarding on-going regulatory matters as well as matters pertaining to implementation of the wholesale market. The Company submitted its comments on these oversight reports and notice of the imposition of such penalties to the Ministry.

Bezeq (“the Company”) - Domestic fixed-line communications

Section 2.7.4 – Real estate

Sub-section A - concerning the Company’s right to receive a site in Sakia, further to the Company’s talks with the planning authorities vis-a-vis exercising the Company’s rights under the planning authorization contract between the Company and ILA - in April 2015, a detailed outline plan was submitted to the Regional Planning Committee and published for objections, which determined the purposes, uses, building rights and construction provisions for the zoning in the plan.

Section 2.9 – Human resources

On August 30, 2015, the Company’s Board of Directors approved an amendment (no. 5) to the special collective labor agreement from December 5, 2006 between the Company, the union and the Histadrut. The main points of the amendment are:

An extension of the collective labor agreement and the retirement arrangements through December 31, 2021 and amendments thereof.

As part of the retirement arrangements, the Company will be entitled, at its discretion, to terminate the employment of up to 203 tenured employees (including new tenured employees) each year.

The estimated cost of the agreement, including wage improvements and not including the retirement of employees which is subject to the Company’s discretion, is NIS 280 million throughout the period of the agreement (of which about NIS 30 million are contingent on the Company’s performance).

Section 2.11 – Working capital

See Section 1.3 of the Board of Directors' Report for information about the Company’s working capital.

At June 30, 2015, the Company has a working capital deficit in the amount of NIS 1,667 million (this figure refers to the Company's separate financial statements. In the Company's consolidated financial statements as at June 30, 2015, there is a working capital deficit in the amount of NIS 472 million).

Update to Chapter A (Description of Company Operations) of the Periodic Report for 2014

Section 2.13 - Financing

On April 2, 2015 and on May 6, 2015, the Company entered into agreements with banking institutions in which context the banks undertook to provide the Company with credit in 2016 to recycle future debt, in the aggregate amount of NIS 900 million. The undertaking is to provide credit to the Company in June 2016 with an average duration of 4.6 years (repayment in five, equal annual installments as of June 1, 2019 until June 1, 2023), at an aggregate interest rate of 3.7% (fixed, shekel non-linked interest). Furthermore, on June 11, 2015, the Company entered into an additional agreement with a financial institution in which context the financial institution undertook to provide the Company with further credit of NIS 500 million to recycle a future debt of the Company in 2016. The undertaking is to provide credit to the Company in December 2016 with an average duration of 4.9 years (repayment in five, equal annual installments from December 15, 2019 through December 15, 2023), at an aggregate interest rate of 4.3% (fixed, shekel non-linked interest). The terms of all the above undertakings and the loans to be provided thereunder, include terms that are similar to those given in relation to other loans provided to the Company, as detailed in Part C, Note 11.2.1 of the 2014 Periodic Report. These conditions include: an undertaking to refrain from creating additional liens over the Company's assets (under certain restrictions); an undertaking whereby, in the event that the Company assumes an undertaking towards a particular party in connection with meeting financial covenants, the Company shall also assume an identical undertaking with respect to this credit (subject to certain exceptions), and also accepted terms for immediate repayment (such as breach events, insolvency, liquidation or receivership and so forth), and cross default (with certain restrictions), that will also apply, mutatis mutandis, with respect to the periods of the undertaking to provide credit.

Additionally, the Company is working to obtain an undertaking to provide credit in 2017, and at the date of the report it received such undertaking in the amount of NIS 400 million.

On August 30, 2018, the Board of Directors authorized the Company’s management to review the possible issuance of one or more new series of debentures to the public by virtue of the Company’s shelf offering from May 2014. It should be clarified that no final decision on the issuance and scope of the issuance has been made, and the conditions of the debentures have yet to be determined. The issuance is subject, in part, to a final decision by the Company’s Board of Directors, publication of a shelf offering and obtaining the approval of the Tel Aviv Stock Exchange Ltd. for listing the debentures for trade. The foregoing should not be construed as an undertaking by the Company to carry out the issuance and/or a public offering of securities, and there is no certainty that the issuance will actually take place and/or what its conditions will be.

On April 21, 2015, Maalot affirmed a rating of ilAA/Stable for the Company. In this matter, see also Section 5 of the Directors’ Report.

See Section 5 of the Directors’ Report on the repayments of a bond fund (Series 5) and a bond fund (Series 8).

On August 30, 2015, the Board of Directors of the Company approved the providing of a guarantee by the Company to uphold an undertaking by DBS to pay all the outstanding debts towards the holders of Debentures in Series B and C of DBS (in the amount of NIS 1.05 billion and NIS 307 million respectively), and this against a reduction of the annual rate of interest that the debentures will bear (by 0.5% and 1% respectively), as well as a cancellation of certain provisions sureties in the deeds of trust and debentures, and all in accordance with the conditions of the debentures’ deeds of trust and the debentures. Pursuant to the foregoing, the Company is working to sign appropriate letters of guarantee. For the conditions of these debentures, see also Section 5.15 in Chapter of the 2014 Periodic Report.

Section 2.15.3 – Permits

Concerning high-voltage facilities - at the date of this report, radiation permits for 27 HV facilities have been received. Two additional facilities are still in the process of obtaining such permits.

Section 2.16.5 - Authority with respect to real estate

On May 7, 2015, the Ministry of Communications published a hearing on the subject of wiring in residential buildings. As part of the hearing it announced that taking note of the 2010 amendment to the Planning and Construction Regulations, which prescribes that the owner of a building permit must install three conduits from the boundary of the property to the building’s internal communications cabinet, and that due to complaints by IBC concerning the lack of available conduits, it is considering, inter alia, determining that Bezeq and Hot groups will each use one conduit from the boundary of the property to the building’s internal communications cabinet and to the communications cabinets on each floor, and that they must vacate conduits in existing buildings and make the necessary modifications following IBC’s requests in certain circumstances. The Company submitted its objection to the aforesaid determinations, in part due to a lack of justification, proportionality and necessity.

Update to Chapter A (Description of Company Operations) of the Periodic Report for 2014

Section 2.16.8 – Antitrust Laws

Concerning sub-section G - negotiations with the Antitrust Commissioner whereby the Company abused its position as a monopoly and determined unfair purchase and sale prices of a service in a monopoly in a sales promotion campaign - on March 31, 2015, the Company appealed the decision to the Antitrust Court, and submitted the opinion and affidavit of an economic expert, in which the Company asked that the court instruct that the determination is nullified, and alternatively for its repeal. In this appeal, the Company also argued that there had been no negative margin, that the decision had ignored various tests of negative margin and margin squeeze, that under the circumstances there was no concern of harm to competition, that in practice competition had not been adversely affected and that there had been no breach of relevant sections of the Antitrust Law. The Company also pointed out that the Authority had been in breach of administrative obligations while formulating the decision and by its very publication, which should also lead to cancelling the decision.

Section 2.18 – Legal proceedings

Subsection G on a claim and an application for its certification as a class action that was filed against the Company in the Haifa District Court in which it is alleged that the Company does not permit existing customers to connect to the its infrastructure at the prices offered to new customers for the same service - on August 11, 2015, the court authorized the motion to abandon the application to certify the action as a class action without an order for legal costs.

Concerning sub-section J on an application to certify a claim as a derivative claim in the matter of a Company transaction for acquisition of all the holdings and shareholders’ loans of Eurocom DBS in DBS (“the First Application”) - on April 2, 2015 an additional application was filed in the Tel Aviv District Court (Economics Department) (“the Second Application”) to certify a derivative claim in the same matter by a private shareholder who owns 30 shares of the Company and a company under his full ownership that holds 1000 Company shares (“the Applicants”), against the Company and against Eurocom DBS and Shaul Elovitch (Chairman of the Company’s Board of Directors and an indirect controlling shareholder of the Company and Eurocom), against members of the Company’s Board of Directors who approved the transaction, against three other Company directors, as claimed, for their influence over the resolutions passed by the sub-committee of the Company’s Board of Directors, and against Bank of America Merrill Lynch for its professional liability and alleged negligence in estimation of the purchase price (“the Respondents”). The Applicants request, inter alia, that the court approve the filing of a derivative claim in the Company’s name, in which Eurocom DBS and Shaul Elovitch will be required to return a total of NIS 518 million, which in the opinion of the Applicants and their economic expert, constitutes the “unfair surplus consideration” paid for acquiring the outstanding shares of Eurocom DBS, to determine the liability of the respondent directors and the liability of the Bank of America Merrill Lynch for contracting in the transaction, and to obligate them to pay the entire amount up to a total of NIS 518 million which shall not be returned to the Company’s coffers, as noted above, or alternatively to obligate all the Respondents for payment of NIS 477 million which is the price obtained, according to the Applicants, on the assumption of credit of only 70% of the value of the synergies in favor of DBS (instead of 100%). On June 25, 2015, the Court resolved to strike out the Second Application, further to the application that was submitted on this matter. Accordingly, the hearing on the First Application will proceed.

In August 2015, the Company received an application to certify as a class action an action that had been filed in the Tel Aviv District Court. The application, which was filed by a Company subscriber, alleges that the Company abused its monopoly position to price its services in a manner that restricts the ability of the Company’s competitors to offer fixed-line telephony services at competitive prices. This includes by offering its customers special offers in which it charges a lower price for its fixed-line telephony services than the price charged only for internet infrastructure services, namely for an input which is critical to the activity of its competitors in the market that operate using VoB technology (on this, it should be noted that in November 2014, the Antitrust Authority issued a ruling whereby the Company abused its position as a monopoly and the Company appealed the ruling in the Antitrust Court - see Section 2.16.8 (g) in Chapter A of the 2014 reports and an update to that section in this report). The applicant argues that the loss caused to the public as a result of the foregoing is estimated by examining the difference between the existing price in the fixed-line telephony market and comparing it with the hypothetical price that would have prevailed in a market with sophisticated competition that in turn would have resulted in lower prices in the long term. Based on an economic opinion (which the applicant mentions but was not included in the documents received by the Company), the applicant estimates the amount of the class action at NIS 244 million. The applicant claims that the members of the class action group are all the customers of the fixed-line telephony services, irrespective of whether the services are provided by the Company or its competitors, including by VoB technology, from January 15, 2011 and up to the date of submittal of the application.

Update to Chapter A (Description of Company Operations) of the Periodic Report for 2014

Mobile radio-telephone (cellular telephony) - Pelephone Communications Ltd. ("Pelephone")

Section 3.1.5 A - Establishment of cellular networks using advanced technologies

On May 20, 2015, Pelephone paid NIS 96 million in license fees for the LTE frequencies tender and deposited a guarantee of NIS 80 million with the Ministry of Communications as required in the tender. On August 9, 2015, the Ministry of Communications informed Pelephone that as a direct outcome of its winning the tender for the allocation of 4G frequencies, Pelephone’s license had been amended thus allowing it to provide LTE (4G) services, and that it was also allocated the dedicated frequencies it had been awarded as part of that tender. The amendment to the license includes: permission to operate 4G services, rules for network sharing among operators (based on the models specified in the amendment), and definitions for systemic performance and requirements (quality and cover) that the 4G network must comply with (based on a periodic classification).

Section 3.6.2 C - Infrastructure sharing

On March 29, 2015, the Minister of Communications announced that the infrastructure sharing agreements between Cellcom and Golan Telecom must be changed significantly before the Ministry of Communications will review the agreements in detail. As far as Pelephone is aware, the companies are studying the repercussions of the required changes and are taking action to apply these changes in order to obtain the Minister’s approval of the agreements.

On April 20, 2015, Partner and Hot Mobile announced that the Minister of Communications had approved the network sharing agreement between them. To the best of Pelephone’s knowledge, the cellular network shared by the companies will operate through a joint venture of these two companies (“the Joint Venture”). The Joint Venture’s entire operation is subject to obtaining a communications license for the venture and to the allocation of frequency bands in the 1800 Mhz spectrum that Partner and Hot Mobile won as part of the 4G frequency tender.

On July 8, 2015, the Antitrust Commissioner’s decision was received granting a conditional exemption from a restrictive arrangement to the Joint Venture between Pelephone and Cellcom for the maintenance of passive components on cellular sites owned by Pelephone and Cellcom, including the reduction of costs by sharing the passive network components on these sites (including antennae), and the construction and maintenance of the shared sites by means of a supplier (“the External Contractor”) to be chosen jointly by Pelephone and Cellcom (“the Agreement”). The exemption was granted, inter alia, on condition that each of the companies may independently enter into an agreement with a third party for the provision of hosting services on sites owned by the company and sites owned by the other company. In addition, the exemption limits the companies with respect to the employment of a party who is an employee, consultant or officer with the External Contractor, and the transfer of information which is not required as part of the Agreement among the companies themselves and between the External Contractor and either of the companies. The exemption is in force for a period of 10 years.

On August 9, 2015, the Ministry of Communications informed Hot Mobile that its license had been amended to facilitate the rendering of advanced services based on the use of LTE technologies and the allocation of the relevant frequencies that it had won the right to use according to the results of the tender. Furthermore, the Ministry of Communications announced that both Hot Mobile and Partner may use the frequency bands allocated to each of them through the MOCN, and that the MCON is also entitled to operate the cell-based radio centers by means of these frequency bands. The Ministry of Communications also granted the joint venture a special license to provide cellular radio infrastructure services to the cellular telephony operators. The license is valid for 10 years.

Section 3.6.2 D - MVNO - Mobile Virtual Network Operator

On July 7, 2015, Pelephone signed an agreement to acquire the activity of Alon Cellular. The agreement is subject to regulatory approvals that have not yet been received.

According to information published in the media, in July 2015, Cellcom acquired the activity of Home Cellular, a virtual cellular communications network operator.

Section 3.9 – Human resources

On August 3, 2015, Pelephone received notice from the New General Federation of Labor (“Histradrut”) - Cellular, Internet and Hi-tech Workers’ Union, of a labor dispute in accordance with the Settlement of Labor Disputes Law, 1957 and a strike beginning on August 17, 2015 onwards (“the Announcement”). According to the Notice, the matters in dispute are unilateral decisions taken by Pelephone, specifically Pelephone allegedly undertaking organizational or structural changes that have implications on the working conditions, as well as Pelephone expanding the areas and scope of outsourced work. The workers are demanding to negotiate these issues. Pelephone rejected these arguments in previous correspondence. There has been no change during the 14 day notice period required by law.

Update to Chapter A (Description of Company Operations) of the Periodic Report for 2014

Section 3.12.3 - Credit rating

On April 21, 2015, Maalot affirmed a rating of ilAA/Stable for the Company and a rating of ilAA for Debentures (Series C) of Pelephone.

Section 3.15.3 – Site construction licensing

As part of a notice and application for a further extension by the State on July 15, 2015, the State announced, among other things, that on May 14, 2015, a new government had been formed in Israel and that it had resolved to transfer to the Minister of Finance most of the Minister of the Interior’s powers under the Planning and Construction Law, including the authority to promulgate regulations under Section 266C of the Planning and Construction Law. The State also advised that on July 13, 2015, the Knesset plenum had approved the transfer of authority from the Minister of the Interior to the Minister of Finance. The State further argued that the Minister of Finance must be given reasonable time to study the issue of the promulgation of regulations under Section 266C of the Planning and Construction Law, and to formulate his opinion on the subject. Under these circumstances and to enable the Minister of Finance as well as the Ministers of Communications and Environmental Protection to study the subject which is the subject of the petitions and formulate their opinions, the State requested a further time extension to submit its revised notice until December 15, 2015. On July 19, 2015, HCJ granted the requested extension.

Section 3.17 – Legal proceedings

In May 2015, an action was filed against Pelephone in the Tel Aviv District Court together with an application for its certification as a class action, on grounds that Pelephone had discriminated against customers who contracted with it by not providing them with the lowest price that is offered for such services; and that it discriminated against its new customers over existing customers who were awarded monetary benefits for joining Pelephone. This was allegedly contrary to Pelephone's obligation, as provided in its license and by law, to refrain from discriminatory practices with respect to the prices of the services it offers. Notably, in 2013, a claim was filed against Pelephone on similar grounds, and such claim is still pending in court (see Section 3.17.1(E) in Chapter A of the 2014 Periodic Report). The applicant seeks for Pelephone to reimburse the members of the class group for the difference between the price they paid for the services and the lowest price customers such as themselves could have paid for the same services. Additionally, the applicant asked the court to require Pelephone to offer all customers identical terms and to display them in its various advertisements. The applicant estimates the action at millions of shekels and even more.

In May 2015, Pelephone received a financial claim together with an application for its certification as a class action, which was filed in the Tel Aviv District Court. The claim is based on the allegation that Pelephone violated a compromise settlement approved by the court as part of a ruling that was handed down on another class action that the same applicant had filed against Pelephone (see Section 3.17.2B in Chapter A of the 2014 Periodic Report). The subject of the alleged violation relates to the sale of earphones by Pelephone. The applicant estimates the amount of the application at NIS 410 million.

In August 2015, Pelephone received a claim together with an application for its certification as a class action that had been filed in the Central District Court against Pelephone and against two communications companies and a company operating in the insurance and finance industry. The main subject of the action is the allegation that one of the communications companies had made improper use of its database and that in contravention of the Protection of Privacy Law, 1981, it had transferred or sold information about its customers to the other respondents, Pelephone included. The claim against Pelephone can be summarized as the purchase or receipt of such information and its utilization for marketing purposes, in a manner that violates the provisions of the Communications Law with respect to the sending of unsolicited advertising material (spamming). The applicant does not specify the amount of the action against Pelephone.

Update to Chapter A (Description of Company Operations) of the Periodic Report for 2014

Bezeq International – international communications, Internet and NEP services - (“Bezeq International”)

Section 4.13.2 D - NEP license

On July 23, 2015, the Ministry of Communications extended the NEP license that had been granted to Bezeq International, until July 31, 2020.

Section 4.13.4 - Key regulatory developments

On June 15, 2015, Bezeq International filed an application with the Ministry of Communications to obtain a uniform general license, pursuant to the provisions of the Communications (Telecommunications and Broadcasts) (Procedures and Conditions for Obtaining a Uniform General License), 2010.

Multi-channel television - DBS Satellite Services (1998) Ltd. (“DBS”)

As of June 24, 2015, DBS is a wholly owned subsidiary of the Company, further to the completion of the transaction between the Company and Eurocom DBS for the acquisition of Eurocom DBS’s holdings in DBS. On this, see the above update to Section 1.1.2.

Section 5.15.3 - Institutional financing

In April-May 2015, DBS issued additional debentures (Series B), by way of an expansion of the series, in the total amount of NIS 228 million.

Section 5.19.1 - Pending legal proceedings

Sub-section A - An action in the matter of disconnecting customers from Channel 5+ and a motion for its certification as a class action - in May 2015, the parties filed a motion in the court to approve the compromise settlement whereby DBS will grant the members of the class action group a bonus and it will also pay compensation to the class plaintiff as well as lawyer’s fees to his attorney. At the date of this report, the Attorney General’s opinion on the compromise settlement had not been received and the court has not given its decision regarding approval of the compromise settlement.

Sub-section E - action in the matter of subtitles that accompany DBS television broadcasts and a motion for its certification as a class action - on June 30, 2015, the parties filed an agreed application for the applicant to abandon the action and the motion for certification. On July 7, 2015, a ruling was issued in which the court approved the application for abandonment.

In July 2015, a claim was filed against DBS in the Central District Court together with an application for its certification as a class action, concerning alleged discrimination against DBS customers who were not offered or were not given the best possible conditions or the lowest price for the services received from Yes; that it discriminated against its new customers over existing customers who were awarded special offers or a bonus for joining Yes; and an allegation of discrimination against new customers who are introduced by company employees, over other new customers. This was allegedly contrary to the obligation applicable to Yes, as provided in its license and by law, to refrain from discriminatory practices with respect to the prices of the services it offers. The applicant has asked that Yes should compensate members of the class action group with the financial difference between the price that each of them actually paid Yes for the services, and the lowest price they could have paid for the same services. Furthermore, the applicant asked the court to instruct Yes to offer and provide its services freely to any applicant under identical conditions and to display these conditions in its various advertisements. The applicant did not present the amount of the group claim due to a lack of data, although she estimates the scope of the loss as tens of millions of NIS.