The Securities Authority, Jerusalem, Israel

The Tel Aviv Stock Exchange, Tel-Aviv, Israel

The Registrar of Companies, Jerusalem, Israel

Dear Sirs,

Re: Immediate Report

Further to Note 1(E)(1) to the financial statements of the Company of 31st December, 2002, Note 1(B)(2) of the financial statements of the Company of 31st March, 2003, the immediate report of the Company dated 1st January, 2003 and the immediate report of the Company dated 14th July, 2003, concerning approval of the recommendations of the Commission for Regulating the Tariffs of the Company ("the Grunau Commission"), an immediate report is hereby submitted as follows:

On 15th July, 2003 a letter was received at the Company's offices from the Director General of the Ministry of Communications, containing the decision of the Prime Minister in his capacity as Minister of Communications in connection with  the interconnect fee payments from Bezeq to the cellular companies.

As noted in the financial statements of the Company referred to above, the Minister of Communications has intervened in the past in the dispute between the Company and some of the cellular companies in the matter of regulating the charge and collection between them in relation to calls from the Company's subscribers to subscribers of the cellular companies, in everything relating to the question of which of the parties should bear the bad debts in connection with such calls, and determined that the Company would transfer these payments to the cellular companies in accordance with the volume of traffic and irrespective of the extent of collection, less 1.1% of those payments, which was set as a temporary deduction rate.

Hereunder the main points of the decision:

1.         For the period from 2nd October, 2000 to 31st August, 2003, the deduction rate will be 1.1%. This percentage will apply to all the cellular operators, even if the Company had come to a different arrangement in this matter with some of them.

2.         For the period from 1st September, 2003 onwards, the Company must transfer interconnect fees to the cellular companies according to actual traffic minutes, with no deduction. In the recommendations of the Grunau Commission's report, this matter will be reflected in the next update of the Company's tariffs, which is scheduled to take effect at the beginning of September 2003, subject to receipt of the duly required approvals.

3.         For the period from 1st March, 2000 to 1st October, 2000, an appeal filed by Partner against the Company is pending in the Supreme Court. It is proposed that the determination of the deduction rate at 1.1% should apply also to this period if the parties give their consent and subject to the decision of the court.

The significance of the above decision is that the Company's request to set the deduction at 2.5% until 1st January, 2003 and at a rate higher than 1.1% for the subsequent period, which reflected the bad debts and collection expenses – was rejected.

In the past, the financial statements of the Company included a provision in respect of the effects of the setting of the temporary deduction rate by the Minister of Communications at 1.1% of the volume of traffic for the period from 2nd October, 2000. Therefore, the decision relating to setting the final deduction rate for that period has no further effect on the financial statements of the Company. However, the Ministry of Communications' decision to cancel the deduction starting from 1st September, 2003 will result in a decrease in revenues of approximately NIS 50 million per year (based on airtime data in 2002 and compared with a deduction rate of 2.5%).

The Company is considering its next steps, including an appeal against the decision.

Yours sincerely,

Shlomo Koppel

Company Secretary

Disclaimer: The above information constitutes a translation of the Immediate Report published by the Company.  The Hebrew version was submitted by the Company to the relevant authorities pursuant to Israeli law, and represents the binding version and the only one having legal effect.  This translation was prepared for convenience purposes only.