Due Diligence and Valuation Report

Arrowhead Code: 54-01-11 Company: B Communications Ltd. Coverage initiated: 22 October 2013 This document: 03 January 2017 Ticker: NASDAQ / TASE: BCOM Fair share value bracket - DDM US$31.77 and US$34.57 Headquarters: Ramat Gan, Israel Share price (03 Jan. 17): Analysts Parvati Rai parvati.rai@arrowheadbid.com US$20.18 Sumit Wadhwa Sumit.wadhwa@arrowheadbid.com +1 (212) 619-6889 Market Data 52-Week Range: Average Daily Volume: Market Cap. (03 Jan. 17): US$17.99 US$31.86 i 1,041 ii US$603.2MM Financial Forecast (in NIS MM) (FY ending - Dec) NIS MM '16E 17E 18E 19E 20E High NI * 752 1,405 1,450 1,478 1,537 High EPS (4.91) 12.38 12.77 13.03 13.54 Low NI * 709 1,337 1,361 1,369 1,385 Low EPS (5.29) 11.78 11.99 12.06 12.20 Attributable to Shareholder * Company Overview: Based in Israel, B Communications, Ltd (hereinafter referred to as BCOM or the Company ) is a holding company of Bezeq - The Israel Telecommunication Corporation Ltd (hereinafter referred to as Bezeq ), which is the largest telecommunication groups in Israel. BCOM s sole asset is its controlling stake of 26.3% in Bezeq as of December 30, 2016. Bezeq operates in the following segments: (1) Bezeq Fixed-line - provides Domestic Fixed-line Services, Internet infrastructure and access services, Transmission and data communication (2) Pelephone - provides Cellular services (3) Bezeq International Internet access services (ISP), International Communication Services and NEP (Network End Point) Services (4) DBS Multi-channel digital satellite television (YES brand)- YES Pay TV is the only provider of multichannel television broadcasts via satellite (5) Others - This segment covers operations of Internet portals such as Walla!, one of the leading websites in Israel, Walla shops which is Israel's largest e-commerce platform and Bezeq OnLine, which specializes in setting up, managing, and operating call center services. 3Q16: For 3Q 2016, consolidated revenue for BCOM decreased by 3.5% Y-o-Y to NIS 2.5 B. BCOM reported operating income of NIS 488 MM in 3Q 2016 representing a decrease of 7.2% Y-o-Y. Net Loss for the period stood at NIS 27 MM for BCOM. The decrease in net profit during 3Q 2016 was a result of the onetime refinancing and associated expenses of NIS 270 MM. CEO: Mr. Doron Turgeman +1 (212) 619-6889 PFO: Mr. Itzik Tadmor Website: www.bcommunications.co.il Arrowhead is updating coverage on BCOM with a fair value bracket of US$ 31.77 (Low-Bracket estimate) and US$ 34.57 (High-Bracket estimate). Key Highlights: (1) BCOM s experienced management team displayed the ability to withstand and adapt to changes happening in the sector; (2) Bezeq owns most of the operating infrastructure in its area of operation in Israel; (3) Acquisition of YES has strengthened its position in the Israel telco market; (4) Pelephone s subscriber base decreased to 2,348k at the end of 3Q 2016 as compared to 2,651k at the end of FY 2015 as a result of writing-off 499,000 CDMA subscribers; (5) On February 02, 2016, BCom announced the sale of 4.18% of its shares in Bezeq for NIS 982 MM; (6) S&P and Fitch revised the outlook for BCOM from stable to positive; (7) On September 14, 2016, BCOM refinanced its US$ 800 MM, 7⅜% Senior Secured Notes due 2021 with NIS 1.9B, 3.6% Series C Debenture due 2024 and remaining by cash. These debentures will be payable in four equal annual principal installments of 7.5% each starting November 30, 2020 to 2023 and one principal installment payable on November 30, 2024 of 70%. This would lead to a NIS 150 MM decline in annual interest charges which will increase Bcom s net profit; (8) On June 27th, 2016, B Communications (SP4) LP purchased Notes of aggregate value of US$ 18.6 MM at a price of US$ 1.07; (9) On September 05, 2016, Midroog Ltd., approved the local rating of the Series C Debentures of BCOM to Aa3 Israel local rating with a stable outlook (10) Bezez notified regarding "Cancellation of the structural separation obligation". Key Risks (1) BCOM is a Holding company with only one asset; (2) Any decline in controlling interest below 25% will lead to non-compliance with the Control Permit norms and result in loss of authority in Bezeq; (3) Increase in competition is obliging infrastructure owners to offer wholesale services to independent service providers. iii Valuation and Assumptions: Based on due diligence and valuation estimates, Arrowhead believes that BCOM s fair share value lies in the US$ 31.77 to US$ 34.57 bracket. iv We have valued BCOM using a Dividend Discount Model (DDM) method to arrive at the per share value of the Company. As per NAV method, the fair value of the Company comes to US$ 26.57 per share. B Communications Ltd. Arrowhead BID 1 NASDAQ / TASE: BCOM

Table of Contents 1. SUMMARY AND OUTLOOK... 3 2. BUSINESS OVERVIEW... 4 2.1 Ownership Structure... 6 2.2 Company Milestone... 7 2.3 Business Model... 8 2.4 Products and Services... 8 2.4.1 Bezeq Fixed-line... 8 2.4.2 Pelephone... 10 2.4.3 Bezeq International... 11 2.4.4 Digital Broadcast Satellite (DBS)... 11 2.5 Company Premiums...14 2.6 Company Risks...15 2.7 Corporate Strategy...16 2.8 Company Financial Performance Overview...16 2.9 BCOM s Shareholding Pattern...17 2.10 Listing and Contact Details...17 3. KEY VARIABLE ANALYSIS... 18 3.1 Variable 1 Fixed-line Telephony: Total Access Lines Growth rate...18 3.2 Variable 2 Broadband Internet Lines Growth Rate...18 3.3 Variable 3 Cellular Communication: Subscriber s Growth Rate...18 3.4 Variable 4 Cellular Communication: ARPU...18 4. NEWS... 19 BCOM...19 Bezeq Group...20 5. MANAGEMENT AND GOVERNANCE... 23 6. TECHNOLOGIES AND MARKETS... 24 6.1 Telecommunication...24 6.2 Medium of Telecommunication:...24 6.2.1 Wire Line Telecommunication... 24 6.2.2 Wireless Telecommunication... 25 6.2.3 Broadband Internet Services... 25 6.2.4 Satellite Television... 26 6.3 Telecommunication Industry - Israel...26 6.3.1 Industry Overview... 26 6.3.2 Growth Drivers... 26 6.3.3 Fixed Telecommunication Services... 27 6.3.4 Cellular Telephony... 28 6.3.5 Internet and Broadband... 28 6.3.6 International Telecommunications Services... 28 6.3.7 Multichannel TV... 29 6.3.8 Competitive Landscape... 30 7. VALUATION... 31 7.1 Dividend Discount Model...31 7.2 Net Asset Valuation (NAV) Method...34 8. APPENDIX... 36 8.1 BCOM s Financial Summary...36 9. ANALYST CERTIFICATIONS... 37 10. NOTES AND REFERENCES... 38 B Communications Ltd. Arrowhead BID 2 NASDAQ / TASE: BCOM

1. Summary and Outlook We are updating coverage on B Communications Ltd, headquartered in Israel, which is the holding company of Bezeq - The Telecommunication Company Ltd, one of the largest telecommunication groups in Israel. Key Highlights: (1) Bezeq s strong presence across the telecommunication spectrum (Fixed-line, broadband services, cellular services, and International services) gives Bezeq a competitive advantage. (2) Bezeq is one of two groups in the Israeli Telecommunication field where it operates which owns its own infrastructure. (3) BCOM reported a net loss (attributable to shareholders) of NIS 257 MM for 3Q 2016 compared to a net income of NIS 38 MM in 3Q 2015. (4) On September 15, 2016, Bezeq signed an assessment agreement with the Israeli Tax Authority (the Assessment Agreement ) thereby ending the disputes involving the tax assessor s arguments concerning financing income from the shareholder loans and concerning the rights and shareholdings which Bezeq purchased in D.B.S and regarding D.B.S. s assertions that its entire losses, as recorded in its statements, should be tax deductible. The main points of the agreement were: Bezeq will pay tax amounting to approximately NIS 462 million. The losses of DBS will amount to NIS 5.26 billion as a final assessment up to December 31, 2013. An additional loss will be added to this amount, for the Tax Issue up to June 2015, in the amount of NIS 315 million. DBSs losses at the date of the merger may be set off against the profits of Bezeq provided that in each tax year, the amount offset does not exceed 12.5% of the aggregate losses (spread out over 8 years) of DBS and Bezeq or of 50% of Bezeq s taxable income in that tax year, prior to setting-off the loss from previous years, whichever is lower. (5) On September 14, 2016, BCOM refinanced its US$ 800 MM, 7⅜% Senior Secured Notes due 2021 with NIS 1.9B, 3.6% Debenture due 2024 and the remaining by cash. The Series C Debentures will be payable in four equal annual principal installments payable on November 30 of each of the years 2020 through 2023 of 7.5% each and one principal installment payable on November 30, 2024 of 70%. Because of the refinance, the Company will achieve an approximately NIS 150 MM annual decrease in its financial expenses beginning in 2017. The decrease in the financial expenses is expected to increase Bcom s net profit, provide a quality yield for its investors and improved financial flexibility for the company. (6) Bezeq reports that on December 22, 2016 notice was received from the Director General of the Ministry of Communications dated December 21, 2016 regarding "Cancellation of the structural separation obligation in the Bezeq Group. The first stage is advancing the cancellation of the corporate separation in the Bezeq Group, such that the activities of Bezeq's subsidiary companies will be structured under a single corporate entity with divisional separation between each of the activities, while the regulatory guidelines regarding structural separation between the different activities, currently set in Bezeq's license, will be maintained in their competitive aspects. The Notice states that the aforesaid is subject to Bezeq's commitment to invest in infrastructure, according to which Bezeq will accelerate the deployment of a broadband network (fiber optics) in order to launch the service at the beginning of 2017 and set an accelerated deployment plan for 76% of households within three years, as well as meet the full universal deployment obligation at a date to be determined. (7) On December 25, 2016 Bezeq's Board of Directors passed a resolution to merge Bezeq with D.B.S as detailed below. Subject to fulfillment of the contingent terms stipulated in the merger agreement, which was signed between Bezeq and DBS on December 25, 2016, at the date of completion of the merger, and effective retroactively from the effective date for the merger (December 31, 2016), all activities of DBS will be merged with and into Bezeq. (8) Standard & Poor s Ratings Services ( S&P ) reaffirmed the Company s international corporate credit rating of BB- and revised its outlook from Stable to Positive in July 2016. (9) On September 05, 2016, Midroog Ltd., an Israeli rating company affiliated with Moody s ( Midroog ), approved the local rating of the Series C Debentures of BCOM to Aa3 Israel local rating with a stable outlook (10) On Feb 01, 2016, BCOM announced the sale of 4.18% of its shares in Bezeq. The total proceeds from the sale of Bezeq shares were NIS 982 MM. (11) On May 25, 2016, Bcom's Board of Directors declared a cash dividend of NIS 355 million, or NIS 11.88 per share. The dividend was paid to Bcom s shareholders on June 29, 2016. (12) On June 27, the tender offer for 7⅜% Senior Secured Notes due 2021 expired and the clearing price for the tender offer was US$ 1.07 per US$ 1.00 par value of the Notes. The aggregate par value of the Notes tendered and purchased by B Communications (SP4) LP was approximately US$ 18.6 MM. (13) BCOM announced that Bezeq received an approval from the Local Committee for Planning and Construction for an outline plan for the use of a 70 dunams (approximately 18 acres) parcel of land owned by Bezeq which is designated for use as offices and storage building purposes in Sakiya, which is adjacent to the Mesubim Junction. B Communications Ltd. Arrowhead BID 3 NASDAQ / TASE: BCOM

(14) Bezeq strengthened its position in the Israeli Telco market, after acquiring all the shares of YES, the Israeli DBS company. On June 23, 2015, and further to Bezeq s shareholder s approval, approval was granted by the Ministry of Communications for the transfer of the means of control in Yes such that Bezeq would control Yes and hold all of Yes's issued and paid-up capital, unconditionally. Due to this transaction, Bezeq will be able to provide Quarto-Packages and will get tax benefits as well as potential merger synergies. (15) Bezeq through its NGN network has launched various ultra-speed Internet surfing packages ranging from 10 Mbps to 100 Mbps for its customers to experience high bandwidth rates at a lower price compared to its peers. This is clearly reflected in its Broadband revenue that grew at a CAGR of 9.9% between 2008 and 2014. (16) In January 2015, Pelephone won a 4G tender and received 15 megahertz in the 1800 frequency band. (17) BCOM has decreased its net finance debt from NIS 5.0B since its acquired Bezeq in April 2010 to only NIS 2.15 B as of September 30, 2016 with LTV ratio of only 42% as of September 30, 2016. Key Risks: (1) BCOM is a leveraged holding company with only one asset and due to this it is fully exposed to the Israeli communications market; (2) A fall in the controlling interest below 25% would lead to non-compliance with the Control Permit norms and result in a loss of authority in Bezeq; (3) Ministry of Communications has released a list of services which infrastructure owners will be obliged to offer as wholesale services to service providers. This is likely to increase competition in the coming years. v Industry Overview vi : Telecommunications services industry in Israel is highly developed and consists of several segments, all of which are highly competitive. The Israeli telecommunications market benefits from favorable dynamics, including high penetration rates across all telecommunications services (62% in pay television and 124% in cellular telephony as of December 31, 2015, high penetration of postpaid contracts in the cellular telephony market, rapid adoption rates of new technologies and significant expenditures on telecommunications services by consumers and businesses. The market is dominated by four major groups, namely the Bezeq group, the IDB group, the Partner group, and the HOT group with each of these having interests in some or all the primary communications sub sectors. Major factors contributing to the growth of the industry include the various technological advancements made by the country in the sector, the massive inflow of foreign investments in the sector, and the favorable regulatory environment of the country, which has consistently promoted competition in the industry. Intense competition within all sub sectors has mainly been responsible for the sector witnessing downward pricing trends and higher churn rates. This has, in effect, given rise to newer trends in the industry with existing companies investing in better technologies to constantly innovate; they focus more on effective marketing strategies to introduce new products and services, differentiating them from their competitors to win valuable market share in a highly competitive business environment. With a view to provide high quality services at affordable price to consumers, Ministry of Communication (MoC) is in the process of developing Wholesale market for Fixed Communication. This Wholesale Regulation will enforce infrastructure owners to share their existing infrastructure with other license holders which are expected to increase competition. 2. Business Overview B Communications Ltd. is a publicly traded holding company of Bezeq The Israel Telecommunication Corp Ltd., a leading telecommunication company headquartered in Israel. Its shares are traded on the Nasdaq Global Market and the Tel- Aviv Stock Exchange under the symbol BCOM. The ultimate parent company, Eurocom Group, holds c. 61.9% in Internet Gold Golden Lines (IGLD), a telecommunications group which, in turn, holds c. 64.8% in BCOM. Since BCOM s sole asset is its 26.3% controlling stake in Bezeq The Israel Telecommunication Corp, Ltd., Israel s largest telecommunications group, its key cash inflows are through dividends received from Bezeq. Bezeq follows a regular dividend policy of distributing 100% of its net income on a semi-annual basis. Additionally, from 2011 to September 2013, Bezeq has also distributed six semi-annual payments of NIS500MM (total of NIS3B) as special dividends to its shareholders. No special dividend was distributed in 2014 and 2015. In October 2007, BCOM raised US$80.1MM through its IPO by offering 6.675 MM shares (27.56% of its outstanding shares) at US$12 per share and it was listed on the Nasdaq Global Market. The Company, shortly thereafter, registered its shares for dual listing on the Tel Aviv Stock Exchange. In April 2010, BCOM acquired 30.98% of Bezeq from Apax-Saban-Arkin for NIS 6.5 B (NIS 8 per Share). The acquisition was partly funded with the proceeds that BCOM received from the sale of its legacy Communications Business (012Smile Communication) for NIS 1.2 B and through a private debt totaling NIS 5.1 B which has been taken from an Israeli bank consortium and Israel's largest insurance company. Since the acquisition of its controlling interest in Bezeq in April 2010, BCOM has decreased its net finance debt from NIS 5.0 B since its acquired Bezeq in April 2010 to only NIS 2.15 B as of September 30, 2016. vii As of September 30, 2016, the net financial debt of the Bezeq group stood at NIS 9.4 B compared to NIS 8.92 B YoY. B Communications Ltd. Arrowhead BID 4 NASDAQ / TASE: BCOM

Bezeq is Israel s largest telecommunication group with a clear leadership position. It provides services across the telecommunication spectrum of domestic Fixed-line, mobile voice, Internet services, International Long Distance (ILD) services, multichannel pay TV (YES brand in Israel), and Walla!, one of Israel s leading Internet portals. Bezeq s shares are traded only on the Tel-Aviv Stock Exchange. The fact that the shares of BCOM, Bezeq s controlling shareholder, and IGLD, BCOM s controlling shareholder, are listed on the Nasdaq Global Market, positions BCOM and IGLD as vehicles for U.S. investors interested in making an investment in Bezeq. B Communications Ltd. Arrowhead BID 5 NASDAQ / TASE: BCOM

2.1 Ownership Structure viii Exhibit 1: Ownership Structure Eurocom Group, the ultimate parent is a privately held company with 80% of its stake held by the Chairman of the Board of Directors Mr. Shaul Elovitch and 20% held by Mr. Yossef Elovitch, Director. Eurocom Group holds a 61.9% stake in IGLD, which, in turn, holds a 64.8% stake in BCOM. Further, BCOM s sole asset is its 26.3% stake in Bezeq and IGLD's sole asset is its holding in BCOM. Bezeq has stakes in the following companies across the telecommunication spectrum in Israel: 1. 100% stake in Bezeq Fixed-line 2. 100% stake in Pelephone Cellular 3. 100% stake in Bezeq International B Communications Ltd. Arrowhead BID 6 NASDAQ / TASE: BCOM

4. 100% stake in DBS (On June 23, 2015 with Bezeq s shareholders approval, approval was granted by the Ministry of Communications for the transfer of the means of control in Yes such that Bezeq would control Yes and hold all of Yes's issued and paid-up capital, unconditionally) 5. 100% stake in Bezeq on line 6. 100% stake in Walla! Internet Portal 2.2 Company Milestone Exhibit 2: BCOM s Milestones Year Event 1991 - Israeli government started privatization process for the telecommunication industry 1992 1995 - Eurocom forms Internet Gold under the name of Euronet Golden-Lines Ltd to capitalize on the privatization process - The Internet emerged as new channel for service delivery, and to seize the opportunity, Internet Gold launched its Internet Service Provider (ISP) services 1999 - Internet Gold s IPO Gets listed on NASDAQ Global markets and Tel-Aviv Stock Exchange 2004 2006 2007 2009 2010 2015 2016 - With Voice over Internet Protocol(VoIP) technologies maturing, Internet Gold introduced low cost ILD services and started converting low Average Revenue per User (ARPU) Internet access customers to high ARPU broadband service customers - Internet Gold acquired its key competitor in ILD & ISP services 012 Golden Lines to expand its operation significantly - To efficiently handle this expanded operation, Internet Gold through restructuring created BCOM (previously known as 012 Smile Communication) & transferred its ISP & ILD services and merged 012 Golden Lines into BCOM. - BCOM s IPO on NASDAQ Global market Raised US$80.1MM through the sale of 6.675MM shares (27.56% of its outstanding shares) at US$12 per Share. - Shortly thereafter dual listed on Tel Aviv Stock Exchange - BCOM signed a share purchase agreement for acquisition of the controlling interest (30.98%) in Bezeq from Apax-Saban-Arkin for NIS6.5 B (NIS8 per share) - As part of a regulatory requirement in relation to the acquisition of a controlling stake in Bezeq, 012Smile Communication divested its legacy telecommunication assets and was renamed as BCOM - Bezeq acquired 100% control of YES, formerly known as DBS Satellite Services with the approval of MoC. - On February 2, 2016, BCOM announced the sale of 4.18% of Bezeq s shares for NIS 982 MM - On September 14, 2016, BCOM refinanced its US$ 800 MM, 7⅜% Senior Secured Notes due 2021 with NIS 1.9 B, 3.6% Debenture due 2024 and the remaining by cash. The Series C Debentures will be payable in four equal annual principal installments payable on November 30 of each of the years 2020 through 2023 of 7.5% each and one principal installment payable on November 30, 2024 of 70%. Because of the refinance, the Company will achieve an approximately NIS 150 MM annual decrease in its financial expenses beginning in 2017, the decrease will increase the Company s net profit and will provide a quality yield to the Company s investors. B Communications Ltd. Arrowhead BID 7 NASDAQ / TASE: BCOM

2.3 Business Model BCOM s sole asset is its controlling stake of 26.3% in Bezeq, by far the leading telecommunication company in Israel, which provides services across the telecommunication spectrum. With Bezeq being the only asset of BCOM, the key revenue stream is the dividend flow from Bezeq that follows a dividend policy of distributing 100% of Profit after Tax as cash dividends on a semi-annual basis to its shareholders. For Bezeq, the major business segments are as follows: 1. Bezeq Fixed-line - Domestic Fixed-line Services, Internet infrastructure and access services, Transmission and data communication services 2. Pelephone Communications - Cellular Services 3. Bezeq International - Internet access services, International Communication Services & NEP (Network end point) Services 4. DBS (Digital Broadcast Satellite) - On March 26, 2015, Bezeq announced that the Antitrust Commissioner approved the acquisition of DBS Satellite Services (1998) Ltd. Accordingly, Bezeq notified that they are ready to exercise the option warrants in its possession, for no consideration, for the issuance of 6,221 shares of Yes to Bezeq. These shares have been issued, and Bezeq's shareholdings of Yes's issued capital increased to approximately 58.4%. Further to Bezeq s shareholders approval, the Ministry of Communications granted permission for the transfer of the means of control in Yes such that Bezeq would control it and hold all its issued and paid-up capital, unconditionally. The transaction was closed on June 24, 2015. At the closing: (a) a total cash amount of NIS 680 MM (six hundred and eighty million), was paid to Eurocom DBS; (b) Bezeq acquired the entire holdings of Eurocom DBS in Yes (including a right to exercise 43 Yes shares that it holds) and acquired all the shareholder loans provided by Eurocom DBS to Yes (c) Eurocom DBS director in YES, resigned. As a result of the closing, Bezeq holds 100% of "YES". 5. Others - This segment includes Internet portals (Walla!) and customer call center services (Bezeq on line), 2.4 Products and Services ix 2.4.1 Bezeq Fixed-line This segment of Bezeq provides a wide range of services like Fixed-line telephony, Internet access infrastructure, Transmission and data communication services and various other services. Products and Services Offered - Fixed-line Telephony: The Fixed-line telephony services mainly includes the basic telephony services on the domestic telephone line with associated value added services such as voice mail, caller ID, call forwarding and conference call. Bezeq also offers business customer services such as national toll free numbers and allows their customers to make full or partial payments. Bezeq s Fixed-line Telephony offers a variety of 2,150 payment plans, ranging from a monthly subscription fee per fixed telephone line and charge per second of use, 2,050 to various fixed-line telephony packages comprised of monthly amounts of minutes for a fixed monthly fee. As of December 31, 2015, Bezeq had 2.18 MM active fixed telephone lines with an estimated market share of 65% in Israel. However, it reduced slightly to 2.14 MM as of the end of 3Q 2016. Exhibit 3: Fixed-line: Number of Access Line (Volume) vs. Average Revenue Per Line (Price) Seen as a trend across the globe, increased penetration of mobile services & telephony services using VoIP technology has led to a decline in both volume (number of access lines) & price i.e. Average Revenue per Lines (ARPL) in the Fixed-line telephony market. To arrest this decline, Bezeq is currently working on its innovation and marketing strategy by focusing on the development and penetration of new services, both in the private sector and in the business sector (Bcloud, Free Wi-Fi). Bezeq plans to launch more such products based on market trends and customer needs. 2,550 2,450 2,350 2,250 84 83 2,367 74 63 60 59 58 58 2,268 2,216 2,205 2,181 2166 2151 2137 FY11 FY12 FY13 FY14 FY15 1Q16 2Q16 3Q16 Total Access Lines (000's) (LHS) 90 80 70 60 50 40 30 20 10 0 ARPL (NIS) (RHS) B Communications Ltd. Arrowhead BID 8 NASDAQ / TASE: BCOM

- Internet Infrastructure & Access Revenue: Bezeq provides broadband Internet access infrastructure services in xdsl technology, which is one of the key growth drivers for Bezeq. The total numbers of Broadband Internet lines were approximately 1.48MM as of December 31, 2015 representing an estimated market share of 65%. During the third quarter of 2016, average broadband speeds reached 41.8 Mbps compared with 40.2 Mbps sequentially, and 36.7 Mbps in the corresponding quarter of 2015, representing an increase of 15.0% compared to the corresponding quarter of 2015. Bezeq provides its services by utilizing VDSL technology with bandwidth of up to 100 Mbps (download) speed. On December 31, 2013, Bezeq completed the deployment of its NGN network with 84% of all its subscribers using NGN services (those with packages which offer speed of 10 Mbps or higher). Exhibit 4: Broadband: Internet Lines vs. Average Revenue Per User Exhibit 5: Broadband: ARPU vs. Broadband Speed per Subscriber 1,600 1,500 1,400 1,300 1,200 1,100 1,000 82 83 1,169 1,111 85 85 1,263 1,364 89 91 90 90 1503 1521 1539 1,479 FY11 FY12 FY13 FY14 FY15 1Q16 2Q16 3Q16 92 90 88 86 84 82 80 78 76 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 37.8 38.9 90 89 91 40.2 89 41.8 85 85 83 82 32.5 18.1 6.7 9.6 FY11 FY12 FY13 FY14 FY15 1Q16 2Q16 3Q16 92 90 88 86 84 82 80 78 76 Broadband Internet Lines (000's) (LHS) ARPU (NIS) (RHS) Avg broadband speed (end of period, Mbps) (LHS) Broadband Internet ARPU (NIS) (RHS) - Transmission and Data Revenue: Bezeq provides a wide variety of data and high-speed transmission services to business customers and other telecommunication operators. Bezeq s data service offerings include point to point, point to multi point, and network topology for business to business and multi-branch business customers, as well as connectivity, Internet access and remote access services. Bezeq provides these services on multiple platforms, from its legacy infrastructures to its newer and more advanced infrastructures, such as IPVPN and metro Ethernet. - Other Services Miscellaneous Services to Communications Operators: Bezeq provides services for other communications operators, such as cellular operators, international call operators, HOT, NEP operators, ISPs, Domestic Carriers, and Palestinian communications providers. The services provided by Bezeq include infrastructure services, infrastructure upgrades, connection to Bezeq's network, transmission services, billing services, leasing of space, services in leased premises. Broadcasting Services: Bezeq operates and maintains radio transmitters, which are operated, inter alia, by Israel Broadcasting Corporation, Israel Army Radio (GaleiZahal), and the broadcasts of several regional radio stations. It also operates the Digital Terrestrial Television (DTT) transmitters for the Second Authority. Bezeq is responsible only for operating and maintaining the transmitters, and not for the content of the broadcasts. Contract Works: Bezeq carries out set-up and operation works of networks or sub-networks for various customers (e.g. the Ministry of Defense, HOT, radio and television broadcasting companies, cellular operators, international call operators, local authorities, municipalities, and government bodies). Bezeq has agreements with HOT Telecom to provide installation, maintenance, and hosting of networks using Bezeq's infrastructures from the exit point of the operation of the license-holders to the delivery point at the entrance of the homes of the subscribers. (The connection and maintenance from these points to the subscribers' homes is not the responsibility of Bezeq). IP Centrex: IP Centrex service is a private and virtual exchange service in a public network Data Center: A service enabling a backup and survivability solution for the customer B Communications Ltd. Arrowhead BID 9 NASDAQ / TASE: BCOM

144 Internet Site (B144): A search engine for finding the telephone numbers of businesses and private persons, including a classified search Free Wi-Fi services: 2.4.2 Pelephone Pelephone is the third largest cellular communication player in Israel with an estimated market share of 22% as of September 30, 2016. x In addition to mobile services, it also sells and services terminal equipment. Pelephone, a 100% subsidiary of Bezeq, became a part of Bezeq through its acquisition in 2004. Until the end of 2011, only four companies operated in the cellular services segment of Israel s cellular communications market. However, with a view to make mobile services more affordable to its customers, the Ministry of Communications introduced numerous regulatory measures through which the cellular telephony market has become more competitive. By taking regulatory moves like removal of barriers to the movement of customers between cellular operators, and by giving licenses to additional operators during 2012, several cellular operators started their operations in the country. The entry of these new operators has led to fierce competition, resulting in higher churn rates among the existing operators and price wars between participants leading to erosion in price and profits across the sector. During the year 2013, Alon Cellular (MNVO) signed a hosting agreement with Pelephone; shifting from Partner s network demonstrating Pelephone s high level of advanced network infrastructure. Exhibit 6: Pelephone: Subscriber vs MOU Exhibit 7: Pelephone: ARPU and Churn Rate Exhibit 6 displays an increase in the number of subscriber from 2,260K in 2Q 2016 to 2,348K in 3Q 2016, and a decrease in the number of subscriber from 2,651k in 4Q2015 because of writing-off 499,000 CDMA subscribers who did not make use of outgoing calls or take any Internet action in the network during the last six months. Exhibit 6 & 7 displays Pelephone s strategy to grow its revenue through volume growth (MOU) and at the same time counter the high subscribers churn rate through reduced pricing. Products and Services Offered Products: Pelephone offers its customers various types of cellular telephone, on-board telephones, and hands-free devices, as well as support for its range of services. It also supplies its customers with modems, laptop computers, and tablets for surfing the Internet through the Pelephone network. Services: Pelephone provides its subscribers with comprehensive services of voice transmission, transmission of text messages, data communications and advanced multimedia services. These services are offered using both the technologies, UMTS/HSPA & CDMA. However, since 2009, recognizing advantages like download speed of up to 42 Mbps and upload speeds of up to 5.7 Mbps of UMTS/HSPA technology, Pelephone has solely focused on the UMTS/HSPA technology as the primary network technology to efficiently cater to its customers needs. Pelephone will also provide 4G services for the first time after receiving 15MHz. B Communications Ltd. Arrowhead BID 10 NASDAQ / TASE: BCOM

2.4.3 Bezeq International Bezeq International s operations include ISP services, international telephony services; domestic internal telephony services, based on a Voice over Broadband (VoB) infrastructure, NEP services, ICT (Infrastructure and Communication Technology) and data services. As on December 31, 2015, Bezeq International had estimated market share of 44% & 21% in ISP & ILD respectively, in Israel. Products and Services Offered - Internet Services: In the internet services sector Bezeq International provides internet access services for private and business customers, including requisite terminal equipment and support over DSL based transmission and cable infrastructure; hosting services offering site and server storage services at a designated installation, including value added services (such as monitoring and control); information security services; internet and LAN network connection security using required terminal equipment or software, including monitoring; data services including international IP based data communication solutions for business customers with global deployment; and high speed Wi-Fi services, including public hotspots. Bezeq International provides these internet services primarily via its exclusive wholly-owned Jonah submarine cable, launched in December 2011. As aforesaid, Bezeq International is the only ISP operating in Israel that owns infrastructure. - Voice (Telephony) Services: In the voice services sector Bezeq International provides international direct dialing (IDD) services to business and private customers; toll-free dialing overseas for business customers; international call hubbing and routing services - transferring international calls between foreign telecommunication providers (worldwide); phone-card services enabling prepaid and postpaid dialing from Israel overseas and from abroad to Israel, and the 1809 service that allows dialing from Israel to other countries. Furthermore, Bezeq International provides domestic telephony services. - International Data Services: Providing international data communication solutions for business customers including customized global deployment. Customers can choose from a range of the most advanced data communication methods worldwide via Bezeq International's submarine cable and the optic cables deployed from Israel to Europe over which Bezeq International has long-term user rights, and through its business partnerships with leading global telecom providers such as BT, which provide its customers access to their sophisticated global network services. In addition to the foregoing services, Bezeq International offers ITS licensees to provide Bezeq International's services and ISP licensees the use of its international capacities (through leasing or by purchasing indefeasible rights of use), over Bezeq International's submarine cable, and the user rights it acquired in European terrestrial infrastructures and in other international networks. - ICT Solutions for Business Customers: Bezeq International provides ICT (Information and Communication Technology) solutions for business customers. These ICT solutions include a broad range of communication services such as server and site hosting services, maintenance and technical support services, networking and system services, out-tasking and outsourcing services, security and risk management services, IP based services, exclusive state-of-the-art cloud computing services, online backup services and sale of equipment. - In July 2014 Bezeq International launched a service for the self-employed and small business sector in which it offers its "Bigger" service, an innovative digital platform for managing the business's marketing and advertising. - PBX Services: Bezeq International markets and maintains communication systems for the entire the Israeli market, and PBX exchanges, telephony networks and IP communications, mainly for its business customers. As part of its service contracts, Bezeq International provides maintenance services for various PBX exchange manufacturers. These services are given for gateways, PBX exchanges and network end points (NEP) for lines used as both internal and external lines. 2.4.4 Digital Broadcast Satellite (DBS) DBS, also known by its trade name YES, provides encoded and digital multi-channel broadcast services as well as other satellite services to subscribers in Israel, and the Judea and Samaria region. There are only two digital multi-channel service providers with DBS the only digital multi-channel satellite provider in Israel and HOT, which provides multichannel television broadcasting through cable in Israel with combined penetration rates of 62% of households in Israel. xi B Communications Ltd. Arrowhead BID 11 NASDAQ / TASE: BCOM

As on September 30, 2016, Bezeq had a 100% stake in DBS, after purchasing the remaining stake held by parent company Eurocom. The sale was waiting the approval of Israeli Ministry of Communications which was approved on June 23, 2015. YES is Israel s sole satellite provider and first television provider to offer digital broadcasts and interactive services. It has nationwide satellite availability with subscriber count of 618,000 subscribers at the end of 3Q16 with estimated market share of over 44%. xii In the first quarter of 2014 YES launched its revolutionary television service yesgo. This service allows viewers to watch dozens of TV channels, including movie channels, TV show channels, kids channels, sports channels, lifestyle channels, and thousands of VOD titles, including thousands of free titles direct from YES channel broadcasts - anytime, anywhere, on their tablets, cell phones, and all other supported devices. In 2015, DBS launched its state-of-the-art HDPVR converter known as Yes Quattro that allows recording of up to 4 channels simultaneously, in addition to the channel being viewed. It has enlarged recording volume and allows automatic recording of prime-time content (6:00 PM to midnight) on two channels that the subscriber can select, for seven days (known as PrimeTime service). Products and Services Offered - Broadcasts: DBS s broadcasts provide its subscribers with a wide variety of channels: there are approximately 150 video channels (including several pay per view (PPV) channels and more than 20 are HD (High Definition) channels), in addition to radio, music and interactive services. - Under the terms of DBS's broadcasting license and the Council's decisions, these broadcasts include a basic package or one of the base packages that every subscriber is required to purchase (the maximum price for the basic package is supervised by the Ministry of Communications), as well as additional user selectable channels, either as packages or as individual channels, and PPV channels. Exhibit 8: DBS: Subscribers vs. ARPU - Advanced Services: DBS markets PVR set top boxes which interface with DBS s electronic broadcasting schedule and enable receipt of exclusive services, including advance booking of recordings, recording of series and pausing of live broadcasts. - DBS provides HD broadcasts which can be received through HD Zapper set top boxes. These broadcasts allow superior quality viewing. - DBS also markets HDPVR set top boxes that enable HD broadcasts and PVR services. In addition, these set top boxes also enable MultiRoom service through which, via a home network, content recorded on such set top boxes can also be viewed through other (HD Zapper or HDPVR) set top boxes in the subscriber's home. - Most DBS subscribers use advanced set top boxes (HDPVR, PVR or HD Zapper). DBS believes that an increase in the number of subscribers using PVR set top boxes will contribute to increasing its revenues from these subscribers and to retaining them as subscribers; however, this requires material financial investment. - DBS also operates its yesgo service, allowing subscribers to view the channels included under this service that they have purchased for home television viewing and VOD content, over a variety of terminal devices (smartphones, tablets and PCs) - Video on Demand (VOD) Services: DBS provides VOD services for its subscribers via the internet, allowing user selectable content viewing. These services are provided for a service subscription fee, with additional charge for some of the content. Connecting to a service requires, among other things, certain types of set top boxes. In recent years, the number of DBS subscribers connected to VOD services and the consumption of VOD services has increased B Communications Ltd. Arrowhead BID 12 NASDAQ / TASE: BCOM

significantly, inter alia, due to the increased supply of available content, increase in available band width at subscribers' homes and significant increase in use of advanced set top boxes. - Others: The Others segment consists of the Internet Portal, Walla! Communication, and BezeqOnLine 1. Internet portal - Walla! Communication: Walla! Communication is a 100% subsidiary of Bezeq and is one of the most popular websites in terms of traffic generation in Israel. Key services provided by the website include news, email, online shopping, on demand music, mobile downloads, information officially taken from Wikipedia. 2. Call Center BezeqOnLine: xiii BezeqOnLine is a 100% subsidiary of Bezeq, which specializes in setting up, managing, and operating call centers that provides services such as service and information centers, telemarketing sales centers, meeting coordination centers, conducting surveys and data enrichment, event, and appointment scheduling, after hours answering services. B Communications Ltd. Arrowhead BID 13 NASDAQ / TASE: BCOM

2.5 Company Premiums - Strong Management Team: The Company s management team includes highly qualified professionals who are either Certified Public Accountants or hold an MBA degree and have significant experience in the field of Management, Communication, and Operational & Financial Management. The Company s management team includes Mr. Shaul Elovitch, who is the founder of Eurocom Communications and Chairman of the Board of Directors (BOD), Bezeq and its subsidiaries, enjoys a highly respectable position in Israel s business community. He holds a controlling power over the Company s operations and business strategy, which is favorable, as he holds significant experience in building leading communication businesses and other major investments businesses. Further, Mr. Doron Turgeman, CEO, who has been with the Company since 2001. His significant experience of 20 years in Management and 18 years in Communication has enabled him to prove his capabilities across strategy creation and strategic planning, marketing and brand development, operational and financial management, managing mergers and acquisitions, creation of partnerships, capital raising methods. He has successfully executed 14 major transactions, which include two IPO s for IGLD and BCOM, 12 bond issues in Israel and just recently successfully closed a private offering to qualified institutional buyers of US$ 800 MM, 7⅜% Senior Secured Notes due 2021 and issue of Series C Debenture maturing in 2024. The presence of these consummate personalities provides the Company with an advantage to experience excellent business opportunities. - Positive rating by S&P: Standard & Poor s rating services has affirmed the Company s international corporate credit rating of BB- with a positive outlook in July, 2016. The rating agency believes that Bezeq will remain the market leader in Israel, with a leading brand name and market position in most segments, high-quality networkbased services across all telecommunications segments, and higher-than-average profitability. Further, S&P evaluated the company s liquidity position to be strong and adequate, and mentioned that the positive outlook reflects the potential for a one notch upgrade over next one year. - Positive Debt Rating: On September 05, 2016, Midroog Ltd., an Israeli rating company affiliated with Moody s ( Midroog ), approved the local rating of the Series C Debentures of BCOM to Aa3 Israel local rating with a stable outlook. Basis of the rating was Bezeq Aa2 rating with stable outlook, largest communications group in Israel, strong business positioning, a broad communications infrastructure, and activity in many segments in the communications industry. Further, difference between the rating of the Company and the rating of Bezeq reflects the additional credit risk arising from the deferred debt of the Company compared to Bezeq s debt, and from the Company s reliance on Bezeq as the only source for servicing its debt. - Positive rating by Fitch: Fitch ratings revised the outlook on the company from stable to positive in March 2016 while affirming the company s long term rating of B+. This reflects Fitch's expectation that a significant share of the proceeds from the sale of the Bezeq stake will be used to buy back 2021 senior secured bonds. This would improve the company s debt service coverage. - Bezeq Holds Strong Market Positions in all Telecom Segments: The Company s business is solely dependent on the business of Bezeq, which is the leading provider of advanced telecommunications operations and services in Israel. All its service segments are well positioned with respect to its competitors in the market as discussed below: 1. Domestic Fixed-line segment: Bezeq holds a 68% market share of the Fixed-line and broadband services in Israel and provides advance network services such as Next Generation Network (NGN), which is an advanced communication network in Israel covering over 99% of Israeli households. 2. Pelephone: Cellular Communication is the third leading provider of cellular services holding a 22% market share in Israel, and to differentiate its services in the market, it has focused on providing high quality network such as HSPA (High Access Packet Speed) cellular technology offering 4G speed. Pelephone has also proved its capability of well managing its business during crisis, in terms of experiencing lowest increase in churn, least loss of subscriber s market share during 2011-2014 as compared to its incumbent operators. It also launched LTE-4G in 2014 with a limited bandwidth of 5 Megahertz keeping further expansion planned in 2015. A strong platform of rising smartphone demand and advanced data services stand in favor of BCOM. 3. Bezeq International: It provides several key services, but under Internet Service Provider (ISP) segment, Bezeq is regarded as one of the leading broadband service providers in Israel, holding 44% Internet market share xiv, and continuously striving to maintain its position by presenting subscribers with customized service plans, advanced IP services and high speed 4G services. Therefore, we believe that Bezeq s leading market shares in most of the segments and its proven ability to survive crisis situations help sustain its position of dominant telecommunication service provider in Israel, which ultimately is favorable for BCOM s business. B Communications Ltd. Arrowhead BID 14 NASDAQ / TASE: BCOM

2.6 Company Risks xv - Risk of Non-compliance with respect to Financial Agreement Norms and too much dependency on Bezeq for Repayment of Debt: In 2010, BCOM acquired a 30.96% controlling interest in Bezeq. To facilitate its funding requirements, it entered two financial agreements totaling a principal amount of NIS5.1B. The Company has provided security to the lenders by pledging Bezeq s shares (excluding 29.6MM shares acquired in 2011) and shares of the subsidiary that was established to acquire Bezeq s stake. In addition, the Company is highly dependent on Bezeq s dividend to repay its debt, and any change in Bezeq s dividend distribution policy can significantly impact the Company s ability to pay-off its debt. However, it is important to note that Midroog Ltd has provided the Company with an Israel local rating of Aa3 with a Stable outlook. The Stable outlook and rating upgrade from A1 to Aa3 strengthens our belief in the Company s ability to meet its debt obligations in the short and medium term. - Holding Controlling Interest in Bezeq is Subject to the Control Permit Norms: BCOM has acquired a 30.96% controlling interest in Bezeq in 2010 and as of September 30, 2016 holds 26.3% stake in Bezeq. Therefore, as per Israel s Communications Law and Communications Order (The: Control Permit ), the Company has been granted an authority to control Bezeq. This makes it mandatory for BCOM and its subsidiaries to hold not less than 25% controlling interest in Bezeq at any point of time. In case of failure to abide by the terms of Control Permits or with other regulatory provisions associated to the control of Bezeq, such permits would be cancelled and the Company may lose the controlling interest in the Bezeq. Since Bezeq is the Company s only source of earning, the loss of controlling interest can hamper BCOM s cash flows. Additionally, if the Company losses its authority in Bezeq, it shall then be identified as an Investment Company, which the Company practically is not. Further, the loss of control in Bezeq will make it obligatory for the Company to fulfill the following conditions: to either change its business model to evade from being subjected to the Investment Company Act., or to register as an Investment Company. - Recent Development: Creation of Wholesale Market: The Ministry of Communication (MoC) is in process to develop a Wholesale market for Fixed Communication Services which is currently dominated by two players, Bezeq and Hot. As per the new regulation, the MoC has released a list of services which the infrastructure owners of nationwide fixed access networks should offer as wholesale services to other license holders. This will encourage new players to enter as they would incur lower capital expenditure as they would be allowed to use the infrastructure of the existing players. Thus, creation of the Wholesale market can lead to increase in competition and loss of subscriber base as well as revenue. The ARPL at the end of 3Q 2016 stood at NIS 58 compared to NIS 60 at the end of 3Q 2015. - Legal Risk: Examples of legal risk faced by the Company include (a) Pelephone has been notified by the New General Federation of Labor - Internet, Cellular and Hi-Tech Workers Union that it had declared a labor dispute in accordance with the Labor Dispute Settlement Law, 5717-1957, and of a strike as of November 17, 2016 onwards; (b) A class action certification motion has been filed against DBS Satellite Services (YES) with the Tel Aviv Court. The petitioners assert that the standard contract offered by DBS contained discriminatory and unreasonable terms. They further went on to accuse DBS of consumer deception and bad faith conduct in breach on part of DBS and requested court to order DBS to compensate its customers who were affected by the term. The aggregate sum of such compensation is NIS 736 MM; (c) Another similar motion was filed against Pelephone on March 23, 2016 seeking reimbursement for non-provision of service on March 21, 2016. The compensation sought is reimbursement of pro rata payment paid by the customers with respect to the malfunction date plus an additional NIS 10 per private customer and NIS 1,010 for each business customer. Any adverse outcome of these litigations remain risk to our earnings and valuation estimates. B Communications Ltd. Arrowhead BID 15 NASDAQ / TASE: BCOM

2.7 Corporate Strategy Since BCOM has no business operations of its own it is dependent on the business activities of Bezeq to derive its revenue, the report highlights strategies adopted by Bezeq. - Building and Maintaining Competitive Position: Bezeq is one of the leading service providers for its broad array of telecommunication services in Israel. In case of fixed line telecommunication services, Bezeq holds approximately 65% of market share in Israel. Therefore, to sustain its leadership position and to deal with the competition Bezeq devised a strategy to reinforce the apparent value of products and services by launching new communication services, value added applications, and product packages. This helped them to broaden its subscriber base. Bezeq was engaged in making regular investments to modernize its infrastructure, thereby offering advanced services and products to its subscribers. Further, the services offered incorporates the services provided by its competitors so that subscribers get a joint package of products and services, which will eventually help Bezeq in building strong customer loyalty. - Focused on Increasing Next Generation Networks (NGN) Penetration in Israel: In Israel, NGN communication network covers about 99% of the Israeli households. Therefore, Bezeq, the leading service provider for NGN services, is focused on the penetration of its high-speed NGN Internet infrastructure and increasing its subscription base for the service. Bezeq s NGN technology is based on fiber optics, which enables broadband highspeed services and advanced IP telephony services. Moreover, broadband services offered to subscribers over NGN FTTC (Fiber to the curb) network, which make transmission possible at a speed of 100 Megabits per second enabling subscribers to enjoy the most advanced communications and content services. During the third quarter of 2016, average broadband speeds reached 41.8 Mbps compared with 40.2 Mbps sequentially, and 36.7 Mbps in the corresponding quarter of 2015, representing an increase of 15% compared to the corresponding quarter of 2015. In 2013, Bezeq also accelerated its strategic roll-out of fiber-optic network, which currently covers more than 1.3MM households. - Simplified Tariff Structure: Bezeq offers a simplified tariff structure to both fixed and mobile phone customers and provides them with alternative payment packages for a service package, tracks and campaigns. For instance, special tariff packages are offered based on the needs of the customers (with the approval from the Ministry of Communications and Knesset Finance Committee). But, to create a competitive edge and improve its turnover, Bezeq devised a strategy to utilize use-based packages and service tracks, which will help them to increase subscription base for its telephony service. - Cost Control: Bezeq invests in fixed assets and in projects that shall not only help in improving efficiency of the production process but also reduce operating costs. However, Bezeq s ability to adjust its expenses in the short & medium term is limited since its costs structure is majorly rigid, as it includes depreciation and wage expenses, as well as the operating costs such as infrastructure maintenance, lease fees, and building upkeep fees. 2.8 Company Financial Performance Overview Exhibit 9: BCOM Financial Performance Overview xvi January 1, 2014 September 30, 2016 Value of BCOM's holdings in Bezeq shares (NIS Billions) 4.97 5.15 Net Financial Debt 2.74 2.15 NAV (NIS in B) 2.23 3.00 LTV 55% 42% Total Liquidity (NIS in B) 0.66 0.45 Local rating of BCOM s Debentures A2 Aa3 Series B Debentures YTM 4.13% 1.41% B Communications Ltd. Arrowhead BID 16 NASDAQ / TASE: BCOM

2.9 BCOM s Shareholding Pattern Exhibit 10: Shareholding Pattern (As of September 30, 2016) xvii 35.22% Internet Gold Exhibit 11: Shareholding Pattern xviii Shareholders No. of Shares % of total Internet Gold 19,363,396 64.8% Public 10,525,649 35.2% Total Shares Outstanding 29,889,045 100% 64.78% Public 2.10 Listing and Contact Details B Communications Ltd is listed on Nasdaq Global Select Market and Tase (Ticker: NASDAQ Global Select Market & TASE: BCOM, Date of Listing on NASDAQ Global Select Market 1 st January, 2011) Contacts : B Communications Ltd, 2 Dov Friedman Street, Ramat Gan 52503, Israel Email ID : idit@igld.com Phone : +972-3-9240000 B Communications Ltd. Arrowhead BID 17 NASDAQ / TASE: BCOM

3. Key variable analysis xix 3.1 Variable 1 Fixed-line Telephony: Total Access Lines Growth rate Fixed-line Telephony is classified as a sub-segment under the segment, Domestic Fixed-line Communication. Fixed-line Telephony contributed 34.4% to the fixed-line revenue in 3Q 2016. The revenue from telephony services declined 5.1% YoY primarily due to 3.3% decrease in average revenue per line and 2.6% decrease in the number of access lines. At the end of 3Q 2016, the total access lines for Bezeq amounted to 2.137 MM declining by 0.7% from 2.151 MM at the end of 2Q 2016. With increased use of cellular services and growing penetration of VoIP provider, volume for the segment measured by Access lines has seen continuous decline for the past three years. With MoC enforcing the Wholesale Market Regulation in Fixed-line, it will result in higher competition and hence we expect a decline in access line s growth rate going forward. Exhibit 12: Total Access lines Growth Rate 2016E 2017E 2018E 2019E 2020E Low estimate (3.0%) (4.0%) (5.0%) (5.0%) (5.0%) High estimate (2.5%) (3.5%) (4.5%) (4.5%) (4.5%) 3.2 Variable 2 Broadband Internet Lines Growth Rate Broadband Internet is one of the key growth drivers for Bezeq, contributing 36.7% of the fixed revenue generated in 3Q 2016. Bezeq, a leader in providing broadband service has consistently strived to improve quality of services to its customer by increasing the average broadband speed per subscriber and ensure consistent growth. The number of broadband internet lines stood at 1.54 MM at the end of 3Q 2016 vs. 1.521 MM at the end of 2Q 2016. With the expected entry of more players in the coming year due to the Wholesale Market Regulation, we expect Bezeq s growth in this segment to slowdown. Exhibit 13: Broadband Internet Lines Growth Rate 2016E 2017E 2018E 2019E 2020E Low estimate 1.4% 0.7% 0.3% 0.3% 0.3% High estimate 1.5% 0.8% 0.4% 0.4% 0.4% 3.3 Variable 3 Cellular Communication: Subscriber s Growth Rate Through Pelephone, Bezeq operates Israel s third largest cellular operator in terms of market share. Cellular services contributed 25.9% to the total revenue in 3Q 2016. Due to the high quality of services and low tariff structure provided by Pelephone, we expect it to record decline in churn rates in the coming years that will further lead to the growth in the subscriber volume. Also, Pelephone received 4G allocations from MoC in January 2015, enabling the network operator to utilize the bandwidth of 15 Megahertz that will improve the internet speeds and help Pelephone to stop the net churn. Further Pelephone acquired YouPhone, which added to 70,000 subscribers to its existing base. Exhibit 14: Cellular communication: Subscribers Growth Rate 2016E 2017E 2018E 2019E 2020E Low estimate 1.5% 2.5% 3.5% 4.5% 5.5% High estimate 2.0% 3.0% 4.0% 5.0% 6.0% 3.4 Variable 4 Cellular Communication: ARPU Due to continuous intense competitive pressure, we expect steady to mild decline in ARPU in the coming years. Due to the wholesale regulation coming in the market, various MVNOs are expected to decrease Pelephone s subscribers, however at the same time Bezeq will earn wholesale revenues which will contribute to increase in the ARPU in 2016. Exhibit 15: Cellular communication: ARPU 2016E 2017E 2018E 2019E 2020E Low estimate 58 58 57 57 56 High estimate 59 58 58 57 57 B Communications Ltd. Arrowhead BID 18 NASDAQ / TASE: BCOM

4. News BCOM xx - Refinanced 7 3/8% senior secured notes through unsecured Series C Debenture: On September 14, 2016, BCOM refinanced its US$ 800 MM, 7⅜% Senior Secured Notes due 2021 with NIS 1.9B, 3.6% Debenture due 2024 and remaining by cash. Principal of the Series C Debentures will be payable in four equal annual installments payable on November 30 of each of the years 2020 through 2023 and one installment payable on November 30, 2024. Each of the first four installments will be equal to 7.5% of the principal amount of the aggregate amount of the Series C Debentures sold and the last installment will equal to 70% of such principal amount. Because of the refinance, the Company will achieve an approximately NIS 150 MM annual decrease in its financial expenses beginning in 2017, the decrease will increase the Company s net profit and will provide a quality yield to the Company s investors. - Announced that S&P Ratings has revised the company s outlook to positive from stable: Standard & Poor s rating services has affirmed the Company s international corporate credit rating of BB- with a positive outlook in July, 2016. The rating agency believes that Bezeq will remain the market leader in Israel, with a leading brand name and market position in most segments, high-quality network-based services across all telecommunications segments, and higher-than-average profitability. Further, S&P evaluated the company s liquidity position to be strong and adequate, and mentioned that the positive outlook reflects the potential for a one notch upgrade over next one year. - BCOM announced that Midroog Ltd. approves Aa3 rating for series C debentures that are expected to be offered pursuant to a shelf prospectus: On September 05, 2016, Midroog Ltd., an Israeli rating company affiliated with Moody s ( Midroog ), approved the local rating of the Series C Debentures of BCOM to Aa3 Israel local rating with a stable outlook. Basis of the rating was Bezeq Aa2 rating with stable outlook, largest communications group in Israel, strong business positioning, a broad communications infrastructure, and activity in many segments in the communications industry. Further, difference between the rating of the Company and the rating of Bezeq reflects the additional credit risk arising from the deferred debt of the Company compared to Bezeq s debt, and from the Company s reliance on Bezeq as the only source for servicing its debt. - Issued a tender offer memorandum for purchase of outstanding 7 3/8% senior secured notes: On May 26, 2016, the Company announced that its wholly-owned subsidiary, B Communications (SP4) LP, had invited holders of the Company s 7⅜% Senior Secured Notes due 2021 to submit tenders to purchase their Notes for cash within a purchase price range of US$ 1.00 to US$ 1.07 per US$ 1.00 nominal amount of Notes. On June 27, the tender offer expired and the clearing price for the tender offer was US$ 1.07 per US$ 1.00 par value of the Notes. The aggregate par value of the Notes tendered and purchased by B Communications (SP4) LP was approximately US$ 18.6 MM. - Distribution of Dividend: On October 6, 2016, Bezeq distributed NIS 665 MM ($177 MM) to shareholders of record as of September 20, 2016. BCOM s share of the dividend distribution was NIS 175 MM ($47 MM). On May 26, 2016, BCOM announced the company s board of directors have approved a dividend of NIS 355 MM, or NIS 11.88 per share. The actual amount of dividends to be paid in USD will be converted from NIS based upon the representative rate of exchange published by the Bank of Israel on June 15, 2016. The dividend will be payable to all the Company s shareholders of record at the end of the NASDAQ trading day on June 15, 2016. The dividend will be paid on June 29, 2016. - Completed Private Placement of NIS 148 MM Par Value of its Series B Debentures: On April 4, 2016, BCOM completed a private placement of NIS 148 MM par value of its Series B Debentures to Israeli institutional investors for NIS 162 MM. The net proceeds of the private placement increased the Company's unrestricted cash. - Announced that Fitch Ratings has revised the company s outlook to positive from stable: On March 30, 2016, BCOM announced that Fitch Ratings has revised the company s outlook to positive from stable while affirming the company s long term rating of B+. The CEO of the company, Mr. Doran Turgeman assured that BCOM s controlling stake in Bezeq reflects a strong profile and the company will continue to create value for its investors. He also added that the 100% dividend policy followed by Bezeq creates a high quality steady cash flow which would support the balance sheet of the company. B Communications Ltd. Arrowhead BID 19 NASDAQ / TASE: BCOM

- Announced that Midroog Ltd. Has Raised the Local Rating for B Communications Series B Debentures to Aa3 with a Stable Outlook: On February 09, 2016, BCOM announced that Midroog Ltd., an Israeli rating company affiliated with Moody s ( Midroog ), has raised the local rating of its Series B Debentures from A1.il to Aa3.il, while maintaining a stable outlook. The rating increase reflects the significant improvement in the Company s liquidity cushion following the sale of about 4.18% of the shares of Bezeq (with proceeds of approximately NIS 982 MM) and a significant decrease in the Company s net financial debt. Midroog estimates that Bezeq will continue to generate strong cash flows and profit, and distribute substantial dividends in the short and medium terms. It also stated that there was a significant improvement in the company s leverage ratios considering the significant increase in the market value of the company s Bezeq shares and a significant decrease in its net debt. Bezeq Group xxi - Rise in tax liability based on assessment for 2011: On December 25, 2016 Bezeq received a best judgment assessment for the year 2011, in which Bezeq s taxable income for 2011 increased by NIS 246 MM. NIS 144 MM of the increased taxable income is due to non-recognition of finance expenses related to distributions and to dividends received (for distribution of current earnings, for dividends received from subsidiaries, and a small part on account of a distribution for a capital reduction), with the balance of NIS 102 MM for timing differences in the recognition of depreciation expenses. The tax liability arising from this assessment (including interest and linkage differences) is NIS 72 MM. Implementation of the principles of the assessment in subsequent years is likely to lead to a material claim for additional tax for those years. Bezeq disagrees with the position of the Tax Authority and believes it has good arguments to support its own position against that of the Tax Authority. Accordingly, Bezeqintends to file an appeal by the date determined in law. - Merger with DBS Satellite Services: The effective date for the merger of DBS Satellite Services with Bezeq is set as December 31, 2016. Upon completion of the merger Bezeq will own all the assets, rights, agreements, licenses and powers, and will be liable for any debt and/or undertaking of DBS and DBS will cease to exist as a separate legal entity and will be dissolved without liquidation. - Cancellation of the corporate separation in the Bezeq Group: The Ministry of Communications notified Bezeq that it is advancing the cancellation of the corporate separation in the Bezeq Group. The activities of Bezeq's subsidiary companies will be structured under a single corporate entity with divisional separation between each of the activities. The regulatory guidelines regarding structural separation between the different activities will be maintained in their competitive aspects. The Notice states that the aforesaid is subject to Bezeq's commitment to invest in infrastructure, as per which Bezeq will accelerate the deployment of a broadband network (fiber optics) to launch the service at the beginning of 2017 and set an accelerated deployment plan for 76% of households within three years, as well as meet the full universal deployment obligation at a date to be determined. The Director- General of the Ministry of Communications clarified to Bezeq that the modification to the license in respect of cancellation of the corporate separation of Bezeq would be accompanied by a hearing. - Addition to broadband Internet lines: In the third quarter of 2016, Bezeq added 18,000 broadband Internet lines (retail and wholesale), totaling 1.54 MM. The number of wholesale broadband Internet lines continued to grow and reached a total of 347,000 lines, representing a sequential increase of 24,000 lines. During the past year, the number of wholesale lines grew by 170,000. - Class action against Bezeq Fixed-Line: On December 12, 2016, Bezeq received a claim together with a class action certification motion which a customer of Bezeq had filed with the Central District Court against Bezeq. It was asserted in the motion that Bezeq was charging a monthly payment of NIS 5.93, unlawfully and without consent, for support and/or warranty services comprising part of its Internet infrastructure use. The petitioner estimates the aggregate damage caused to the class members at an estimated NIS 160 MM. It is noted that another class action certification motion was filed against Bezeq in August 2016 in a similar matter. Bezeq is studying the motion and it is unable to evaluate its likelihood of success at the present stage. - Class action against Pelephone: Bezeq was notified by the subsidiary, Pelephone Communications Ltd. ( Pelephone ) of a claim together with a class action certification motion which had been filed with the Central District Court against Pelephone and an additional cellular company. The claim was filed primarily on grounds that the respondents were not enabling their subscribers to make full use of their pre-purchased international package by establishing a discriminatory and unlawful clause which provided that the international package could be used for only a very short period (between one week and one month only) with the remaining unutilized portion of the package expiring at the end of such period without any refund. The petitioners do not explicitly stipulate the amount sought from the respondents, but estimate that the damage caused to the class members because of the alleged discriminatory clause is estimated at NIS tens 10 MM per year. Pelephone is studying the claim and the class action B Communications Ltd. Arrowhead BID 20 NASDAQ / TASE: BCOM

certification motion, and neither it and/nor Bezeq can evaluate the likelihood of success of the claim at the present stage. - Approval of Settlement for DBS: On November 3, 2016, Bezeq was notified by DBS of a ruling approving the settlement that was signed by the parties, as part of which DBS would give each of the class members a benefit equal to approximately NIS 90, or an aggregate of NIS 14 MM for the entire class (when fully realized). The claim together with a class action certification motion was filed against the subsidiary, DBS Satellite Services (1998) Ltd. on grounds that DBS disconnected customers from Channel 5+ and reconnected only those customers who sent it a request to be reconnected, and continued to collect payment for the channel even from customers who did not contact DBS and were therefore not. - Class Action against Pelephone withdrawal: Further to Bezeq s immediate report of August 3,2015 regarding a claim together with a class action certification motion filed against the subsidiary, Pelephone Communications Ltd. ( Pelephone ) and three additional respondents on grounds that one of the respondents made use of its database unlawfully and contrary to the Privacy Protection Law, 5741-1981, by transferring or selling its customers details to the other respondents, including Pelephone. Bezeq provides notification that it was notified by Pelephone of the court s decision confirming the petitioner s withdrawal of the motion, and to dismiss his personal claim against it. - Bezeq s CFO and deputy CEO, David Mizrahi, announced his resignation, Allon Raveh replaces him: On April 4, 2016, Bezeq CFO and Deputy CEO, David Mizrahi, announced that he will be resigning from his position in Bezeq to pursue other opportunities. Mr. Allon Raveh replaced Mr. Mizrahi starting from September 2016. - Bezeq agreement with the Israeli Tax Authority: On September 15, 2016, Bezeq signed an assessment agreement with the Israeli Tax Authority thereby ending the disputes involving the tax assessor s arguments concerning financing income from the shareholder loans and concerning the rights and shareholdings which Bezeq purchased in D.B.S. Satellite Services (1998) Ltd. and regarding D.B.S. s assertions that its entire losses, as recorded in its statements, should be tax deductible. The primary points of the Assessment Agreement are as follows: Bezeq is to pay tax amounting to approximately NIS 462 MM. D.B.S. s aggregate losses are to total approximately NIS 5.26 B as a final assessment as of December 31, 2013. An additional loss will be added to such amount, with respect to the Tax Issue up to June 2015, in the amount of NIS 315 MM (a total of NIS 223 MM for 2014 and NIS 91 MM for 2015). - Distribution of cash dividend of NIS 665 MM: On August 3, 2016, the Board of Directors of Bezeq resolved to recommend to the general meeting of its shareholders the distribution of a cash dividend of NIS 665 MM, representing Bezeq s profits for the first half of 2016. The dividend was paid on October 6, 2016 to shareholders of record as of September 20, 2016. Bcom s share in this distribution is NIS 175 MM. - Class action against DBS Satellite Services Ltd.: On April 7, 2016, Bezeq was notified by DBS Satellite Services Ltd. ( Yes ) regarding a class action certification motion filed against it with the Tel Aviv District Court. The petitioners complained over the term included in Yes s contract with its customers whereby the possibility of freezing a subscription for a limited time period and avoiding payment of subscription fees for such period was for a minimum period of thirty days. The petitioners deemed it discriminatory and unreasonable. The petitioners also accused Bezeq of consumer deception and bad faith conduct in breach, inter alia, of the contracts law. They also requested the court to order Yes to compensate its customers for the period in which they didn t use the services but were denied right to freeze. The compensation is an aggregate of NIS 736 MM. - Class Action against Pelephone withdrawal: On January 13, 2016, further to Bezeq s immediate report of May 26,2015 regarding a claim together with a class action certification motion filed with the Tel Aviv District Court (the Motion ) against the subsidiary, Pelephone Communications Ltd. for a fundamental breach of the settlement arrangement which had been conferred validity of a court judgment in the context of an earlier class action certification motion against Pelephone on grounds pertaining to non-ionizing radiation in cellular devices. Bezeq provides notification that it was notified by Pelephone of the court s decision confirming the petitioner s withdrawal of the motion, further to the motion for summary dismissal, which had been filed by Pelephone. B Communications Ltd. Arrowhead BID 21 NASDAQ / TASE: BCOM

- Undertaking to Provide Credit to the Bezeq Group for 2017: On January 4, 2016, Bezeq received an undertaking from banking/institutional entities to provide credit for purposes of refinancing Bezeq s future debt in 2017, in an aggregate of NIS 600 MM. Bezeq completed an additional agreement with an institutional entity for the provision of such credit totaling an additional NIS 300 MM. In addition, the average duration and aggregate interest for the total credit amount (NIS 900 MM, including a new undertaking in the amount of NIS 300 MM) remain approximately 4.5 years and approximately 4.3%, respectively. - Hearing on tariff policy and transparency in the multi-channel TV market: On December 30, 2015, Bezeq received a notice from its subsidiary, D.B.S. Satellite Services (1998) Ltd. ( Yes ) on the subject of "setting a tariff policy and implementation of transparency guidelines. The hearing was preceded by the decision of the Chairman of the Council for Cable TV and Satellite Broadcasting not to approve at this point in time the new special offers that were submitted by DBS in connection with an increase in the price of its VOD services, because of prima facie concerns that they are discriminatory. Concurrently, the Chairman of the Council also decided not to approve increases in various tariffs about which the owner of the general cable TV broadcasting license had notified the Council. - Class Action against Pelephone: On November 30, 2015, Bezeq received a notice from Pelephone regarding a claim together with a class action certification motion which had been filed with the Central District Court against Pelephone and two additional cellular phone companies. The claim was filed primarily on grounds that the respondents offer prepaid calling cards at particularly high rates and by coordinating prices among themselves. The class action attributable to Pelephone is estimated to be NIS 2.8 B. - Bezeq received a class action certification motion: The motion was filed with the Central District Court on November 5, 2015 by two of Bezeq s subscribers alleging that it had taken advantage of its monopolistic status by preventing and blocking the existence of competition in Israeli communications market. The petitioners claim damages of NIS 800 MM based on 10% of its excess operating profit resulting from exploitation of its power as a monopoly. - Ran Guron appointed as the CEO of Pelephone: Bezeq s Deputy CEO, Ran Guron, was appointed as the new CEO of Pelephone after Gil Sharon announced his resignation in October 2015. Ron has over 10 years of experience in the telecom industry. Earlier, he held the position of marketing director at Cellcom, Israeli cellular provider. He joined Bezeq in 2006 as VP of marketing after which he was promoted to Deputy CEO of Pelephone. - Pelephone acquired YouPhone: In July 2015, Pelephone acquired YouPhone, a mobile virtual network operator (MVNO), from Mega Group. YouPhone, which uses Pelephone s network, added 70,000 cellular subscribers to the existing base of Pelephone. - Bezeq takes full control of Yes : On March 26, 2015, Bezeq announced that the Antitrust Commissioner approved the acquisition of DBS Satellite Services (1998) Ltd. Accordingly, Bezeq notified that they are ready to exercise the option warrants in its possession, for no consideration, for the issuance of 6,221 shares of Yes to Bezeq. These shares have been issued, and Bezeq's shareholdings of Yes's issued capital increased to approximately 58.4%. Further to Bezeq s shareholder s approval, the Ministry of Communications granted permission for the transfer of the means of control in Yes such that Bezeq would control it and hold all its issued and paid-up capital, unconditionally. The transaction was closed on June 24, 2015. At the closing: (a) a total cash amount of NIS 680 MM (six hundred and eighty million), was paid to Eurocom DBS; (b) Bezeq acquired the entire holdings of Eurocom DBS in Yes (including a right to exercise 43 Yes shares that it holds) and acquired all the shareholder loans provided by Eurocom DBS to Yes (c) Eurocom DBS director in YES, resigned. Because of the closing, Bezeq holds 100% of "YES". B Communications Ltd. Arrowhead BID 22 NASDAQ / TASE: BCOM

5. Management and Governance xxii The Company s management team includes highly qualified professionals having significant experience in the field of Management, Communications, and Operational and Financial Management. Additionally, the Company s management team possesses proven capabilities in strategy creation and strategic planning, marketing and brand development, management of mergers and acquisitions, creations of partnerships and raising capital which is evident from its 15 major transactions, which includes two IPOs - IGLD and BCOM, and nine bond issues. Exhibit 16: Management Team Name Designation Age Background Mr. Doron Turgeman Mr. Itzik Tadmor CEO 48 PFO 35 He holds a B.A. degree in Economics and Accounting from the Hebrew University of Jerusalem and is a Certified Public Accountant (CPA) in Israel He has significant experience of about 20 years in management and 18 years in communications He has been serving the position of CEO with IGLD since October 2011, and previously, he had served the Company holding position of Deputy CEO since October 2004, and CFO since May 2001 Currently, he is also serving as the CEO with BCOM and as the CFO with Eurocom Communications From January 2008 February 2010, he served BCOM s BODs as a member Additionally, he had served as an executive officer for several of the Company s Media and Internet companies, which have been sold, including CEO of MSN Israel which was a joint subsidiary of IGLD and Microsoft Corporation. He holds a B.A degree in Economics and Accounting and an MBA degree from the Tel Aviv University, and is a CPA in Israel. He had joined the Company in May 2011 as a controller and was promoted to Principal Financial Officer in May 2015. In the past, he had served PriceWaterhouseCoopers (PWC) Israel both audit and economic departments. B Communications Ltd. Arrowhead BID 23 NASDAQ / TASE: BCOM

6. Technologies and Markets 6.1 Telecommunication xxiii Telecommunications involves the integration of voice, data, pictures, videos, and different communication technologies with electronic devices to facilitate communication between people and deliver entertainment, information, and other services. The process involves the use of computer, and mobile technology to transmit, receive, and switch voice, data, and video communications over different transmission mediums (including copper, fiber optic cable and cellular communication). Telecommunication networks were originally designed for voice services but with evolution of Internet Protocol (IP), the data and video services are also becoming an important part of telecommunication. Quality and efficiency of telecommunication depend upon the medium (carrier) by which the information is transferred. These transmission carriers or mediums are broadly classified as wire line and wireless modes of communication transmission. Exhibit 17: Basic Components of Telecommunication Transmitter (Radio station, Mobile or Cell tower, Telephone exchange etc) Communication Medium (Wire line or Wireless) Receiver (User of voice and broadband internet services) 6.2 Medium of Telecommunication: 6.2.1 Wire Line Telecommunication xxiv Wire line Communication or Fixed-line communication requires a fixed carrier as the transmission medium. The medium of transportation of information could be either copper wiring or optical fiber wire. The devices (telephones, computers, routers) are connected through a fixed cable and require individual technologies to transmit information. Wire line telecommunication provides data and voice communication services, which includes local and long distance voice service, broadband Internet access, corporate networking solutions, data center and cloud services, and security and managed network services. Wire line communication has an advantage of having higher bandwidth 1 when comparing it to wireless mode communication system. 6.2.1.1 Next Generation Network (NGN) xxv xxvi xxvii NGN is the most advanced communication network, which uses a packet-based network to transports all information and services (voice, data, and media such as video and pictures) by converting them into packets (digital) form. This enables the carrier to carry all types of services including voice, data, video, and signaling through single communication channel. NGNs are commonly built around the IP, and therefore the term All IP is also sometimes used to describe NGN. This technology provides several advantages over other network technologies. For service provider, the NGN offers lower capital expenditure, low operating expenses, greater power saving, less space requirement and low maintenance cost. For, the user it provides benefits of low cost and high speed of services. NGN technology provides information transfer speed in the range of 20 to 100 megabits per second. The future of NGN technology is the enhancement to fiber NGN, which uses fiber Optic as transmission medium. Fiber NGN have transmission rate in the range of 100 megabits per second to 1000 megabits per second. 6.2.1.2 Fiber Optic Communication xxviii Fiber-optic communication is a transmission medium, which transmits information from one place to another by sending light pulses through an optical fiber cable. Fiber optic data transmission systems send information over fiber optic cables by turning electronic signals into light. This medium of transmission is a popular alternative to the conventional cable wires mainly due to high rate of transmission speed. Information transported using fiber optic cables creates an electromagnetic carrier wave that carries information. This technology provides enhanced data security, high bandwidth over a long-distance communication and fastest way of transporting information. 1 In communication, the term bandwidth refers to how much data can be transmitted in a certain amount of time. Higher bandwidth requires less time to transport bundle of information. B Communications Ltd. Arrowhead BID 24 NASDAQ / TASE: BCOM

Froward Link Froward Link 6.2.2 Wireless Telecommunication xxix Wireless telecommunication involves the transmission of information over a distance without the use of wires, cables or any other forms of electrical conductors. The transmitted distance can be anywhere between a few meters to thousands of kilometers (for example, cellular communication). Mobile communication also known as cellular communication is one of the best examples of wireless technology. 6.2.2.1 Cellular Communication xxx A cellular communication system provides a wireless connection to the public telephone network for any user located within the range of the system. This technology is the most popular wireless communication system which has been the catalyst to the wireless revolution. Cellular mobile communication system uses many low power wireless transmitters to create cells. A cell is the basic geographic unit of a cellular system. Each mobile uses a separate temporary radio channel to talk to cell site (physical location of radio equipment that provides coverage within a cell). The cell site uses one channel per mobile to communicate many mobiles at once. Communication channel uses a pair of frequency to establish the connection. One frequency is used for the transmission of the information from the cell site, known as the forward link. The other one is the reverse link, used for the cell site to receive calls from the user. Exhibit 18: Basic Mobile Telephone Service Network xxxi Mobile Base Station (Cellular Tower) (A) Mobile Base Station (Cellular Tower) (B) Mobile Control Equipment Reverse Link Mobile Operator Reverse Link Mobile User #1 Network Interface Equipment Mobile User #2 Public Switched Telephone Network (PSTN) 6.2.2.2 Voice over Internet Protocol (VoIP) xxxii VoIP is a communication technology used to for the delivery of voice communication and multimedia information over IP network. This technology converts analog audio signal (voice) into digital form and transmit it over the Internet. Voice calls using VoIP can be made using computers, special VoIP phones or traditional phones using an Internet connection. The most attractive advantage of making voice calls using VoIP technology is the cost saving as it uses Internet services to make small as well as long distance voice calls. 6.2.3 Broadband Internet Services xxxiii Many of the current and newly-developing Internet services require the transfer of large amounts of data that may not be possible with conventional dial-up Internet service. Broadband Internet provides alternative to this problem as it enables high speed data transmission to access information over World Wide Web (WWW). This technology gives access to the highest quality of Internet services like streaming media (audio and video), VoIP, Internet gaming, and other interactive services. Broadband Internet services are provided through Fixed-line and wireless technologies. The most commonly used Fixed-line broadband Internet technologies are Digital Subscriber Line (DSL) modem, Cable Modems, Fiber Optic and Broadband over Power Lines (BPL). Wireless broadband Internet uses Fixed Wireless Access (Wi-Fi, WiMAX), Mobile Broadband (3G, 4G, 5G) and Satellite Communication techniques to access high speed Internet services. B Communications Ltd. Arrowhead BID 25 NASDAQ / TASE: BCOM

6.2.4 Satellite Television xxxiv Satellite TV system works by broadcasting video and audio signals from geostationary satellites to satellite dishes on the Earth s surface. The television satellites are all in geosynchronous orbit, meaning that they stay in one place in the sky relative to the movement of the Earth. In other words, the satellite keeps pace with the earth rotation. This way, users only have to direct the dish at the satellite once, and from then on it picks up the signal without adjustment. These geostationary satellites orbit the earth in a region of space known as the Clarke Belt, which is approximately 22,300 miles above the equator. Satellite television systems transmits and receive radio signals using specialized antennas called satellite dishes. Each of these satellites carries many transponders, which transmits a signal back to the Earth. Evolution of satellite based television enabled options of multi-channel broadcast thus providing options of multiple channels to the user. Primarily there are three types of satellite television usage: reception direct by the end user (generally called Direct to home or DTH), reception by local television affiliates, or reception by distributors of cable systems. The satellite television provides best quality of picture and video quality and provides a variety of other services to the user. 6.3 Telecommunication Industry - Israel 6.3.1 Industry Overview xxxv The telecommunications industry is comprised of companies that operate or provide access to facilities for voice, data, text, sound and video transmission through wired, wireless or satellite networks. The services they provide include fixed network services such as data retail, Internet retail, voice retail and wholesale services and mobile services xxxvii. The telecommunications industry in Israel has undergone significant transformation over the last two decades from being a market dominated by a single player to a sector consisting of multiple companies operating in a highly competitive business environment. This transition has been majorly driven by the numerous reforms that the country initiated at regular intervals to liberalize and privatize the ICT sectors. Technological advancements and massive amounts of foreign investment in the sector have further driven the telecommunications market. The entry of Mobile Virtual Network Operators (MVNOs) has been a growing trend in the Israeli market as these new players seek to take advantage of the demand for low cost services. The downward pricing trend in the market has been the result of a substantial increase in competition as well as the introduction of policies that have promoted a multi-operator environment. As of 2011, the telecommunications sector in Israel recorded revenue of US$8.0B, representing about 4% of the GDP xxxviii. The Exhibit 19 shows the contribution of each sector to the total revenue of the Israeli telecommunication industry. 6.3.2 Growth Drivers Exhibit 19: Sector wise contribution to total telecommunication revenue, 2011 xxxvi - Technological Advancements: Since the privatization process that started in Israel in the early 1990 s, one of the biggest drivers of growth in the telecom industry has been the ability of the country to constantly innovate and develop new technologies in the information processing and telecommunications field. A major part of the local service provider s networks and applications is produced and designed by Israeli companies, many of whom are start-ups. Significant technological breakthroughs have been witnessed in areas like public switching, transmission, access network technology, wireless local loop systems, data networking devices, network management software, billing systems and value added services software. Technological expertise in areas such as Internet applications, broadband, local area networks, digital wireless devices, network security and management and telemedicine followed by intensive R&D activities and adequate support from Ministry of Industry and Trade s Chief Scientist have further expanded the size of the industry and drastically increased its contribution to the country s overall economic growth. - Foreign Investments: The availability of massive foreign investment has been a key contributor to the growth of the Israeli Telecom Industry. Apart from investments in the manufacturing and R&D facilities, foreign investments have also flown into high-tech Israeli companies. The country s attractiveness to foreign investors can be further B Communications Ltd. Arrowhead BID 26 NASDAQ / TASE: BCOM 26% 13% 5% 56% Cellular services Local landline voice & internet access Multichanned TV services International Voice services

evidenced by the presence of more than 100 dedicated high-tech venture capital funds in the country. Furthermore, institutional and private investors have consistently purchased shares of Israeli companies listed on the New York Stock Exchange as well as in London and other European exchanges, thereby providing indirect investment to Israeli telecommunication companies. - Regulatory Environment: xxxix The Israeli communications market has seen an unprecedented number of reforms over the last two decades. In 1994, the first step toward a more competitive telecommunications market was taken when the government owned Bezeq was required to form subsidiaries to provide services in sectors other than domestic, fixed wire line telephony. xl This led to the introduction of Pelephone, offering cellular services; and Bezeq International, providing international long distance services. Subsequently in September 2000, the Minister of Communications formulated regulations for the licensing of new operators entering the fixed services market thereby ending Bezeq s exclusive monopoly by law in the fixed services market. Some of the recent reforms that have completely changed the dynamics of the telecom market in the country include the interconnection rate cuts, which were aggressively reduced from NIS0.251 to NIS0.073 in 2011. This led to a substantial decrease in pricing plans as new players competed amongst each other to gain significant market shares. Another step that increased competition in the market was the simplification of the process of handset imports, whereby the regulator removed the requirement that handsets certified for US or European markets be specially approved. This move took away a competitive advantage from the operators as it limited their ability to sell handsets at higher prices. The elimination of early termination fees (the fee payable for termination of a contract) and handset subsidies further ended the long run subscription and retention strategy of Israeli mobile operators wherein they had previously attracted subscribers by offering cheaper mobile phones and long term contracts with fixed prices. Apart from regulatory reforms, Israel has also signed bilateral telecommunication agreements with 27 countries and has been an active contributor to the development of international and regional telecommunications cooperation. Thus, over the years, regulatory policies have played an extremely important role in the Israeli telecom market. Going forward also, any changes in regulatory policies will be a key determinant of growth for the industry. 6.3.3 Fixed Telecommunication Services xli The fixed services market in Israel has evolved from being a market dominated only by Bezeq to a sector comprising of multiple operators over the last two decades. Major players in the domestic fixed services market include Bezeq, HOT, 012 Telecom, Cellcom Fixed Telecommunications Services, Partner Fixed Telecommunication Services, etc. As of December 31, 2014, there were approximately 3.5MM fixed- line telephony lines in Israel. The number of fixed-lines has been growing moderately in Israel since 2009, which compares favorably to most Western European countries, where the number of fixed-line telephony lines has declined due to the increasing number of individuals who use only cellular phones. The growth in the number of fixed-line telephony lines is driven by the relatively high population growth rate in Israel, and particularly the growth rate of households, which grew at a CAGR of 1.9% in the period of 2007 to 2012. The Fixed-line telephony market in Israel is characterized by: (1) Pricing Pressure (2) Commoditization (3) Growing Enterprise Data Services (4) Technology Convergence between Communication Systems Recent Development Creation of Wholesale Market: To provide high quality of services at a cheaper price, MoC is in process to develop a Wholesale market for Fixed Communication Services which is currently dominated by two players, Bezeq and Hot. The MoC is enforcing a new regulation by which the infrastructure owners of nationwide fixed access networks must offer few of their services as wholesale services to other license holders. Some of these services include Bitstream Access, Leasing of access elements (unbundling), leasing of dark fibers, duct access and transmission services ( the wholesale services ), and based on non-discriminatory terms. The new entrants will be allowed to use the infrastructure of the existing players to provide their services. This will encourage new players to enter as they would incur lower capital expenditure leading to increase in competition. However, the Wholesale Regulation is still under review and MoC is expected to make the final decision in around second half of 2014. Under the Wholesale Market Regulation, MoC will prescribe maximum prices under the regulations for the services. Under the current draft, the management is expecting the average wholesale pricing to be approximately NIS 50-60 per access line/month. On a much positive note, post implementation of the Wholesale Market Regulation, Bezeq management estimates the possibility of the removal of the structural separation and the removal of the supervision over Bezeq s tariffs. B Communications Ltd. Arrowhead BID 27 NASDAQ / TASE: BCOM

Internet Users ('000) 6.3.4 Cellular Telephony xlii The Israeli cellular telephony market is mature and highly competitive. As of December 31, 2014, there were approximately 10 MM cellular telephony subscribers in Israel, representing a penetration rate of 124%. The Israeli cellular telephony market is characterized by a dominant post-paid market. The Cellular Telephony market in Israel was characterized by the introduction of competition in 1995. Three cellular telephony operators, Cellcom, Partner and Pelephone, have historically led the Israeli cellular telephony market. In 2012, following regulatory changes, two additional cellular telephony operators, Golan Telecom and HOT Mobile, began providing UMTS 3Gbased cellular telephony services. In addition, measures taken by the Israeli government to encourage competition in the cellular telephony market, 11 MVNO licenses were granted by the Israeli government. Currently, only four of the MVNO licensees currently provide services: Rami Levy (which signed hosting agreements with Pelephone), Alon Cellular (which signed hosting agreements with Pelephone), Azi Communications (which signed a hosting agreement with Partner) and Home Cellular (which signed a hosting agreement with Cellcom). A fifth MVNO, Cellact, signed a hosting agreement with Pelephone. The total number of MVNO subscribers was estimated to be approximately 160,000, or approximately 1.6% of all cellular telephony subscribers, as of September 30, 2014. The market recorded revenue worth US$ 2.91 B in 2012 with the number of subscribers at 9.9 MM. This rapid rise in penetration rates can be attributed to the introduction of the Calling Party Pays (CPP) method in 1994, nationwide coverage at low tariffs, superior network quality and effective marketing strategies employed by the players. Regulatory policies like lowering of the regulated rate for termination of calls on mobile networks from approximately NIS 0.27 to NIS 0.07 also led to increased competition and subsequent higher penetration in the country. Following the abolition of early termination fees and handset subsidies in the April 2012, subscribers could move freely between operators that offered the best prices. This has led to an unprecedented rise in the Israeli mobile market churn, thereby forcing operators to focus more on subscriber acquisition through effective marketing strategies and value added services. A substantial increase in competition has also ensured the continuity of the downward pricing trend in the Cellular services sector. 6.3.5 Internet and Broadband xliii Broadband Internet in Israel has now become a household Exhibit 20: Number of Internet Users in Israel xliv product with penetration rate having grown from 4% in 7,000 2002 to approximately 82% in 2010. Major Internet service providers include 012 Smile, Bezeq International, 6,000 Barak-Netvision, Golden Lines and over 45 small license holders. These participants combined serve 3MM users in 5,000 the country covering more than 60% of the households and above 80% of businesses. Factors that have led to this 4,000 rapid rise in broadband Internet usage include reduction in tariffs because of stiff competition among existing 3,000 6,173 players, widespread usage of computers at work and 5,794 5,146 5,349 home, introduction of several sophisticated Hebrewlanguage portals and a variety of Hebrew websites. The 4,725 2,000 Israeli government has also contributed to the growth of 1,000 the Internet in the nation by undertaking several e- government initiatives with numerous activities like 0 license renewal, payments, taxation and viewing of court 2009 2010 2011 2012 2013 documents with government agencies being done online. Furthermore, Israel s reputation of being a world leader in developing Internet technologies and applications has also influenced local interest and usage of Internet services. A key trend that has been developing in the Broadband Internet market is the growing demand of high speed Internet in the country. Recognizing this trend, major players like Bezeq and HOT have already started investing in newer technologies and assets. While the former is completing the rollout of a fiber-to-the-curb network and beginning trials of a fiber-to-the-home network, the latter has started investing in the hybrid fiber-coaxial network to provide higher speeds. The Exhibit 20 depicts the growth in the number of Internet users in Israel. 6.3.6 International Telecommunications Services xlv The monopoly of Bezeq International (a subsidiary of Bezeq) in the International telecommunications services market ended in July 1997, when two privately owned facility based carriers namely Golden Lines and Barak were given licenses to operate. In May 2004, additional licenses were given to Internet Gold, Xphone and Netvision. The International Long Distance (ILD) market in Israel has been characterized by a decrease in call volume in recent years. In 2013, the B Communications Ltd. Arrowhead BID 28 NASDAQ / TASE: BCOM

average annual volume of incoming and outgoing call minutes increased by 5% compared to a decrease of 1.6% in 2012. Aggressive cuts in retail prices along with fair and transparent interconnection arrangements were the primary drivers of growth in the sector. Major developments in the sector include the usage of a modern digital network to deliver services, optical submarine cables, digital satellite links, modern operator facilities and advanced data communication facilities. Excessive competition in the sector has given rise to a new trend of international calling becoming a part of a bundle of services. For instance, several mobile operators in Israel offer unlimited international calling packages to numerous destinations. 6.3.7 Multichannel TV xlvi The multichannel subscriber television market in Israel is supervised by the Minister of Communications and regulated by the Council of Cable and Satellite TV Broadcasting. Currently, this market consists of three major players namely HOT Telecommunication Systems Ltd (known under the brand name HOT ) offering cable TV services, DBS Satellite Services operating under the brand name YES as the satellite TV operator and the Second Authority for TV and Radio offering Digital Terrestrial TV services under the brand named IDAN Plus. Major developments in the sector include a series of reforms passed by the Minister of Communications and the Ministry of Finance in May 2013 under the Economic Arrangements bill. One of the most relevant reforms includes the introduction of a narrow broadcast package by DBS and Hot giving the Minister the authority to lower prices, to intervene in the composition of stations and the authority to require YES and HOT to sell these narrow broadcast packages to companies wanting to enter the television market. These reforms are expected to influence the dynamics of the multichannel market in the country in the future as they would pave the way for more competition in the sector which would further lessen the pricing power of existing players in the sector. While the Israeli pay television market has been stable by number of subscribers since 2009, and stood at approximately 1.5MM subscribers, revenues have expanded from NIS 3.7B in 2009 to NIS 3.9B in 2012. This growth is primarily due to ARPU growth resulting from digitalization and the emergence of a broader offering of channels and additional services. B Communications Ltd. Arrowhead BID 29 NASDAQ / TASE: BCOM

6.3.8 Competitive Landscape xlvii The Communications industry in Israel has undergone rapid changes over the last two decades. Technological advancements and recent changes in regulations governing the industry in the country have been primarily responsible for the developments in the sector. The MOC has consistently encouraged competition in the sector, mainly by segregating infrastructure & service providers, mandating mobile number portability, supporting various innovative technologies, and conceding new licenses at regular intervals. Favorable regulatory policies for the entry of new players have intensified competition in various sub sectors of the industry, which, in turn, has caused a substantial decrease in prices as existing and new operators aggressively compete with one another to capture valuable market share. Increased competition has also affected the structure of the industry with several companies in the sector adopting cooperative marketing strategies with common ownership for the supply of various comprehensive communications service packages. One of the major changes in the competitive landscape of the Israeli communications market has been the change in the number and the size of participants involved in the sector. While in the past, competition was primarily among the independent communications service providers in each segment, over the years the market has consolidated with competition now among large communication groups operating in most segments of the market. The Exhibit 21 depicts the change in the number of participants involved in each sub sector in the industry from 1994 to 2013. Exhibit 21: Participants in Each Sector From 1994-2013 xlviii B Communications Ltd. Arrowhead BID 30 NASDAQ / TASE: BCOM