TABLE OF CONTENTS

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INTRODUCTION

     As used herein, references to “we,” “our,” “us,” “Partner” or the “Company” are references to Partner Communications Company Ltd. and to its wholly-owned subsidiary, Partner Future Communications 2000 Ltd., except as the context otherwise requires. In addition, references to our “financial statements” are to our consolidated financial statements except as the context otherwise requires.

     In this document, references to “$,” “US$,” “US dollars” and “dollars” are to United States dollars and references to “NIS” and “shekels” are to New Israeli Shekels. This annual report contains translations of NIS amounts into US dollars at specified rates solely for the convenience of the reader. No representation is made that the amounts referred to in this annual report as convenience translations could have been or could be converted from NIS into US dollars at these rates, at any particular rate or at all. The translations of NIS amounts into US dollars appearing throughout this annual report have been made at the representative exchange rate on December 31, 2003 of NIS 4.379= US$1.00 as published by the Bank of Israel, unless otherwise specified. See “Item 3A. Key Information—Selected Financial Data—Exchange Rate Data.”

     We maintain our financial books and records in shekels. Our financial statements included in this annual report are prepared in accordance with accounting principles generally accepted in the United States, or US GAAP, and the accompanying discussion of the results of our operations is based on our results under US GAAP. See “Item 18. Financial Statements” and “Item 5A. Operating and Financial Review and Prospects—Operating Results”.

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FORWARD-LOOKING STATEMENTS

     This annual report includes forward-looking statements within the meaning of Section 27A of the US Securities Act of 1933, as amended, Section 21E of the US Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about Partner.

     Words such as “believe,” “anticipate,” “expect,” “intend,” “seek,” “will,” “plan,” “could,” “may,” “project,” “goal,” “target” and similar expressions often identify forward-looking statements but are not the only way we identify these statements. All statements other than statements of historical fact included in this annual report, including the statements in the sections of this annual report entitled “Item 3D. Key Information—Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects” and located elsewhere in this annual report regarding our future performance, plans to increase revenues or margins or preserve or expand market share in existing or new markets, reduce expenses and any statements regarding other future events or our future prospects, are forward-looking statements.

     Because such statements involve risks and uncertainties, actual results may differ materially from the results currently expected. Factors that could cause such differences include, but are not limited to:

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as well as the risks discussed in “Item 3D. Key Information—Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects”. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this annual report might not occur.

     We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

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ITEM 3. KEY INFORMATION

3A. Selected Financial Data

     The following table sets forth our selected financial data as at and for each of the years in the five-year period ended December 31, 2003 prepared in accordance with US GAAP. The selected financial data for each of the years in the three-year period ended December 31, 2003 and at December 31, 2003 and 2002 are derived from our consolidated financial statements set forth elsewhere in this annual report. The selected financial data for each of the years in the two-year period ended December 31, 2000 and at December 31, 2001, 2000 and 1999 are derived from our audited financial statements not appearing in this annual report. We were incorporated in September 1997 and began full commercial operations on January 1, 1999. The selected financial data set forth below should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and the financial statements and notes thereto included elsewhere in this annual report.

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Exchange Rate Data

     The following table sets forth, for the years indicated, exchange rates between the shekel and the US dollar, expressed as shekels per US dollar and based upon the daily representative rate of exchange on the last day of each year as published by the Bank of Israel.

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On April 25, 2004, the exchange rate was NIS 4.569 per US dollar as published by the Bank of Israel. Changes in the exchange rate between the shekel and the US dollar could materially affect our financial results.

3B. Capitalization and Indebtedness

Not applicable.

3C. Reasons for the Offer and Use of Proceeds

Not applicable.

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3D. Risk Factors

We operate in a highly regulated telecommunications market which limits our flexibility to manage our business. In particular, the regulator’s decisions, including those relating to tariffs, may materially adversely affect our results of operations.

     Our business is highly regulated. We are subject to government regulation regarding telecommunications licenses, antitrust, frequency allocation and costs and arrangements pertaining to interconnection and leased lines. Our business and operations could be adversely affected by changes in laws, regulations or government policy affecting our business activities, such as decisions by the regulator:

     The Ministry of Communications reduced call termination tariffs from NIS 0.50 to NIS 0.45 at the beginning of 2003. In January 2004, the Ministry of Communications appointed an international telecommunications consultancy firm to study both call and SMS termination tariffs of the mobile telephone networks in Israel. In addition, the Ministry of Communications recently amended our license and the relevant regulations, reducing SMS termination tariffs from NIS 0.38 to NIS 0.285 effective May 1, 2004. The Ministry of Communications indicated that this reduction is only an interim measure until the consultancy firm completes its study. Following completion of this study, the Ministry of Communications may further reduce both call and SMS termination tariffs, which could have a significant and adverse effect upon our results of operations. The Antitrust Authority has also been reviewing SMS interconnect agreements and has informed us preliminarily that it believes the SMS interconnect arrangements appear to be in restraint of trade. The Antitrust Authority has indicated that it will refrain from action for the time being to allow the Ministry of Communications to resolve the matter. The results of either of these two inquiries could be the reduction or elimination of SMS termination tariffs, which would adversely affect our results of operations.

We expect our subscriber growth rate, and consequently our revenue growth rate, to slow, because Israel’s mobile telephone services market is highly penetrated, making it more difficult for us to obtain new subscribers than in the past.

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     Although Israel’s mobile telephone services market has experienced substantial growth, and we have experienced substantial subscriber growth since our commercial launch in 1999, the Israeli market for mobile telephone services is now highly penetrated, and we expect the growth of the overall Israeli market and of our own subscriber base to be slower than in the past. The population of Israel at December 31, 2003 was approximately 6.8 million. At December 31, 1998, prior to our full commercial launch, approximately 35% of the Israeli population had mobile telephones. At December 31, 2003, that percentage is estimated to be 99%, although this includes dormant subscribers as well as other subscribers who are not included in the Israeli population figures, such as Palestinians, new immigrants, and foreign workers. Because the Israeli market for mobile telephones is highly penetrated, it will not grow at the same rate as in the past, and our own subscriber growth will not develop at the same rate as in the past. Similarly, whereas in the past our revenue growth has largely resulted from growth in the overall market, our future revenues will depend significantly on our ability to retain existing subscribers and to attract subscribers from the other mobile telephone network operators. While our market share, based on internal estimates, has increased from approximately 13% of Israeli mobile subscribers at December 31, 1999 to approximately 31% at December 31, 2003, our market share growth was slower during 2003 than in 2002 and we expect this trend to continue into 2004.

Competition from existing competitors may require us to continue to reduce our tariffs, increase our subscriber acquisition costs and customer retention costs and increase our churn rate.

     We compete primarily with Cellcom and Pelephone, two of the other mobile telephone network operators in Israel. We were the only GSM network operator in Israel until the second half of 2002. Cellcom then began providing GSM 1800 services, and consequently competition has intensified. As a result we have lost and do not expect to regain a material part of our revenues from roaming services offered to GSM subscribers visiting from abroad and Israelis traveling abroad. In addition, because of the relative ease of switching between GSM network operators, we have already faced and may continue to face an increase in our churn rate and may be forced to increase our customer retention costs, including subsidies towards upgrades of subscribers’ handsets, in order to retain our subscribers. These developments may adversely affect our market share, financial condition and results of operations.

     During 2003, Cellcom and Pelephone launched new technologies enabling faster transfers of data: EDGE technology, in the case of Cellcom, and CDMA-1X, in the case of Pelephone. If Cellcom or Pelephone successfully maximizes the potential of these technologies before we successfully

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launch UMTS third generation technology, or if any of our competitors successfully launches third generation services before we do, we will be at a competitive disadvantage.

     To the extent that fixed-line telephones are used instead of mobile telephones, we also compete with Bezeq, which is the only incumbent public fixed-line operator in Israel. As well, a company jointly owned by the three cable companies in Israel recently received a fixed-line telephone service license. We may also face competition from additional fixed-line operators, if additional fixed-line licenses are granted. If any of our existing competitors is granted a fixed-line telephone service license or acquires or cooperates with a fixed-line operator, we may be at a competitive disadvantage relative to those operators who may be able to offer combined packages of fixed-line, mobile telephone and other telecommunication services. The Ministry of Communications may also choose to grant additional mobile telephone operator licenses, which may further intensify competition in the mobile market in Israel. In particular, the Minister of Communications recently appointed a tender committee for allocating additional bands of 800, 1,800 and UMTS spectrum to existing and new mobile network operators.

     Increased competition may require us to increase our subscriber acquisition costs and customer retention costs. Competition may also limit our ability in the future to increase tariffs, or cause us to reduce tariffs. We experienced a material increase in churn in each of 2002 and 2003. In 2004, we may face a similar or greater churn rate than that experienced in 2003. For more information, see “Item 5A. Operating Results—Churn”. Competition may further increase our expected level of churn.

Risks and uncertainties in connection with UMTS third generation technology mean that we may not profit from our investment in acquiring UMTS third generation spectrum, establishing a UMTS third generation network, or developing UMTS third generation services.

     The technology for new UMTS third generation services has not yet been fully developed by the limited number of suppliers of the handsets, network equipment and software to be used by us and our competitors in providing those services. We have selected Nortel Networks to supply the infrastructure necessary to build-out our UMTS third generation network. We are one of the first UMTS third generation networks in the world to be built with Nortel equipment, and we cannot assure you that Nortel will be able to successfully deliver all of the requirements of our network, including interoperability with our existing GSM network. If we cannot obtain reasonably priced devices, technologically proven network equipment or software with sufficient functionality or speed from Nortel or other suppliers, or if we experience delays in the delivery or functional deployment of devices,

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handsets and related network equipment or software, our ability to develop our UMTS third generation network, and our customers’ ability to access it, will be impaired.

     We also rely on applications developers to develop services that will stimulate demand for our UMTS third generation network. We cannot predict whether customer demand will develop as expected. If applications developers fail to develop such services, or experience delays in their development of such services, our ability to generate revenues from our UMTS third generation network will be adversely affected.

     UMTS third generation technology is newer and has less mature standards than second generation technology. We may not be able to roll-out or operate new technologies to perform as expected or as favorably when compared to existing or emerging competing communications technologies.

     Establishing our UMTS third generation network and developing services requires investing substantial capital resources. There is no assurance that subscribers will adopt UMTS third generation services, how widespread the usage of these new services will be, how many subscribers will be willing to pay for these services and new devices and whether the revenue generated from these services will justify the costs involved in establishing and operating our UMTS third generation network.

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The political and military conditions in Israel may adversely affect our financial condition and results of operations.

     The political and military conditions in Israel directly influence us. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. Hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners and political instability within Israel or its neighboring countries are likely to cause our revenues to fall and harm our business.

     Since October 2000, there has been a substantial deterioration in the relationship between Israel and the Palestinians, which has resulted in increased violence. Ongoing violence between Israel and its Arab neighbors and Palestinians may have a material adverse effect on the Israeli economy, in general, and on our business, financial condition or results of operations.

     Some of our directors, officers and employees are currently obligated to perform annual reserve duty. Additionally, all reservists are subject to being called to active duty at any time under emergency circumstances. We cannot assess the full impact of these requirements on our workforce and business if conditions should change, and we cannot predict the effect on us of any expansion or reduction of these obligations.

     During an emergency, including a major communications crisis in Israel’s national communications network, a natural disaster, or a special security situation in Israel, control of our network may be assumed by a lawfully authorized person in order to protect the security of the State of Israel or to ensure the provision of necessary services to the public. During such circumstances, the government also has the right to withdraw temporarily some of the spectrum granted to us. We cannot assure you that we are fully prepared for every disaster or emergency situation, or that we could recover fully from any such occurrence. This may materially harm our ability to provide services to our subscribers in such emergency circumstances.

The telecommunications industry is subject to rapid and significant changes in technology which could reduce the appeal of our services.

     We may face competition from existing or future technologies, including fixed-line and cordless technologies, satellite-based personal communications services, private and shared radio networks, wireless broadband access services and other communications services that have the technical capability to handle mobile telephone calls and to interconnect with the fixed-line telephone network. The effect of emerging and future technological changes, including the convergence of technologies, on the viability or competitiveness of our network cannot be accurately predicted. We cannot assure

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you that the technologies we employ or intend to employ, including UMTS third generation technology, will not become obsolete or subject to competition from new technologies in the future.

If we do not implement successfully the new national numbering plan, which came into effect in April 2004, we may experience a failure or disruption of our critical information technology, core network or value added services systems, including our billing system, which could adversely affect our operations and our financial results.

     The Ministry of Communications has instructed all mobile network operators to implement a new national numbering plan, which gives each mobile network operator a single prefix, and adds a new digit to the beginning of each subscriber’s current number. The new plan entered into effect on April 20, 2004.

     Implementing the new numbering plan involves changes in most of our information technology, core network and value added services systems. We have been preparing operationally for the implementation of the plan. However, systems which are not properly adapted for the new numbering plan by the required date could fail or cause disruptions in our operations. A failure or disruption of any critical information technology, core network or value added services system, including our billing system, may adversely affect our financial and operational performance.

There are alleged health risks related to antenna sites and the use of mobile telecommunications devices, including handsets, which could expose us to liability and lead to reduced usage of mobile phones or increased difficulties in obtaining sites or permits to erect sites for base stations.

     We are aware of recent allegations that there may be health risks associated with the effects of electromagnetic signals from antenna sites and from mobile telephone handsets and from other mobile telecommunications devices. In the construction and operation of our base stations we observe the standards established by the International Radiation Protection Agency, which sets guidelines for the safe exposure level for all uses of radio spectrum. These standards have been adopted by the Ministry of the Environment.

     We have received type approval from the Ministry of Communication for all of the handsets and other terminal equipment we sell. The Ministry of the Environment also has authority to regulate the sale of handsets in Israel. However, in accordance with the current practice among mobile telephone operators in Israel, we have not obtained approvals or exemptions from the Ministry of the Environment for the handsets we provide because, to date, neither the Ministry of the Environment nor the Ministry of Health has issued standards for the permitted level of radiation emissions from

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handsets. Since June 15, 2002, we have been required to provide information to purchasers of handsets on the Specific Absorption Rate, or SAR, of the handset, as well as its compliance with certain standards pursuant to a regulation promulgated by the Ministry of Industry and Trade under the Consumer Protection Law. In the event that new standards for permitted radiation emission levels from handsets are issued, we will be obliged to comply with them.

     While there is currently no substantiated link between exposure to electromagnetic signals at the level transmitted by our base transceiver stations and our mobile telephone handsets and long-term damage to health, the actual or perceived health risks of mobile telephone communications devices could adversely affect us through a reduction in subscribers, reduced usage per subscriber, increased difficulty in obtaining sites for base stations, and exposure to potential liability. Furthermore, we are unable to obtain insurance with respect to such liability.

We have had difficulties obtaining some of the permits for which we have applied, and have not yet applied for other permits that are required for the erection of our antenna sites. These difficulties could continue and therefore affect our ability to erect or maintain antenna sites. This could have an adverse effect on the extent, quality and capacity of our network coverage which could prevent us from achieving or maintaining the network coverage, including the planned UMTS coverage, and quality requirements contained in our license and adversely affect our business.

     In order to establish our mobile telephone network and achieve the coverage required by our license, we have undertaken the rapid deployment of antenna sites throughout Israel. In addition, in order to adapt our network for GSM 1800 and UMTS third generation technology, we are required to erect additional antennas and make modifications to our existing antennas. The erection and operation of most of these antenna sites require building permits from local or regional zoning authorities, as well as a number of additional permits from governmental and regulatory authorities, such as:

     In addition, as part of our UMTS third generation network build out, we are erecting additional antenna sites and making modifications to our existing antenna sites, for which we require new consents and approvals.

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     Like our competitors, we have experienced difficulties in obtaining some of these consents and permits, especially from local building authorities. As of December 31, 2003, 35% of our antenna sites were operating without local building permits. A substantial portion of these are microsites. We believe that a portion of the sites operating without permits from local authorities do not require local building permits under the Planning and Building Law. Our ability to maintain and improve the extent and quality of our network coverage depends in part on our ability to obtain appropriate sites and approvals to install our network infrastructure, including antenna sites. If we continue to experience difficulty in obtaining approvals for the erection of antenna sites, this could adversely affect our existing network, delay the erection of additional antenna sites to our network and adversely impact our UMTS third generation network build-out. This difficulty could have an adverse effect on the extent, quality and capacity of our network coverage and on our ability to continue to market our products and services effectively. Our inability to resolve these issues in a timely manner could also prevent us from achieving or maintaining the network coverage and quality requirements contained in our license.

     As well, since National Building Plan 36 was approved, some planning committees have started to require that, as a precondition for issuing new permits for communications installations, we submit an undertaking to indemnify the committee against claims for depreciation in the value of nearby properties as a result of issuing a permit to build, and the building of, communications installations. Our position, like that of the other mobile network operators, is that under existing law and the National Building Plan, the planning committees have no authority to require us to submit such an undertaking. However, the matter has not yet come to a judicial decision. Although we are unable to estimate our financial exposure should we be forced to submit such undertakings, this may have a material adverse effect our financial condition and results of operations.

     In addition, we, like the other mobile telephone operators in Israel, provide repeaters, also known as bi-directional amplifiers, to subscribers seeking an interim solution to weak signal reception within specific indoor locations. In light of the lack of a clear policy of the local planning and building authorities, and in light of the practice of the other mobile telephone operators, we have not requested permits under the Planning and Building Law for the repeaters. However, we have received from the Ministry of Communications an approval to connect the repeaters to our communications network. We have also approached the Ministry of the Environment, asserting that no permits are necessary for the repeaters, based on the Ministry’s previous advice that permits are not necessary for devices with comparable levels of emission called “Fixed Cellular Terminals”. If the local planning and building authorities determine that permits are necessary for the installation of these devices, it could have a negative impact on our ability to obtain permits for our repeaters.

     The erection of an antenna site without a required local building permit is a violation of the Planning and Building Law, 1965 and, in some cases, has resulted in a demolition order being imposed on us and in the filing of criminal charges and civil proceedings against us and our officers and directors. To date, we have been largely successful in avoiding or delaying the execution of demolition orders. So far, settlements have resulted in the imposition of demolition orders for the relevant sites, execution of which has been stayed for a period of time to allow us to obtain the necessary permits or to relocate the relevant antenna site. These settlements have not involved any admission of guilt by our officers and directors. We cannot assure you that we will continue to be successful in this regard or that we will not be faced with demolition orders and criminal charges, including against our officers and directors. In addition, we, like the other mobile telephone operators

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in Israel, may be required to dismantle antenna sites for which we have not yet obtained the required consents and permits.

     To date, we have been subject to minimal monetary penalties. There is no certainty that future penalties will be in the same amounts, but we believe that the total amount of these penalties would not have a material effect on our business and financial condition.

We may be required in the future to offer access to our network infrastructure to other operators. This may lower the entry barriers for potential new competitors and adversely affect our financial condition and our ability to provide services to our subscribers.

     Under the Communications Law (Telecommunications and Broadcasting), 1982, the Ministry of Communications has the power to require us, like the other telephone operators in Israel, to offer access to our network infrastructure to other operators, although the Ministry of Communications has not required us to do so yet. Our license also requires us, upon demand by the Minister of Communications, to permit other operators to provide telecom services using our network. Access to our network would lower the entry barriers for potential new competitors and increase the likelihood of additional new competitors entering the mobile telephone market in Israel. Our capacity is limited, and if we are required to allocate capacity to other operators, the services to our subscribers may be harmed. If we fail to agree with new operators that are given access to our network regarding the tariffs for the usage of our infrastructure, the Ministry of Communications may determine those tariffs. If the Ministry of Communications sets those tariffs too low, this may adversely affect our financial condition.

Our company is controlled by a small number of shareholders.

     On December 31, 2003, our principal shareholders, comprising our founding shareholders Hutchison Whampoa Limited, Elbit Limited, Matav-Cable Systems Media Ltd., Eurocom Communications Ltd., and Polar Communications Ltd. collectively held approximately 66% of our shares. At December 31, 2003, Hutchison Whampoa Limited indirectly owned approximately 43.2% of our shares, Elbit Limited owned approximately 8.7%, Matav-Cable Systems Media Ltd. indirectly owned approximately 5.3%, and Eurocom Communications Ltd. and Polar Communications Ltd., owned approximately 6.3% and 2.4%, respectively.

     Each of the principal shareholders directly holding Partner shares and Elbit.COM Limited, Elbit’s wholly owned subsidiary, is a party to a relationship agreement relating to its investment in our company which governs their collective relationship as shareholders of Partner. This relationship agreement sets forth, among other things, each of these parties’ rights and obligations among

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themselves with respect to the composition of our Board of Directors, the transfer of shares and other material issues pertaining to their investment in our company.

     These principal shareholders together have the ability to influence our business through their ability as a group to control all actions that require shareholder approval and through their representatives on our Board of Directors. They are not obligated, however, to provide us with financial support or to exercise their rights as shareholders in our best interests or the best interests of our minority shareholders and noteholders, and they may engage in activities that conflict with such interests. If the interests of these principal shareholders conflict with the interests of our other shareholders and noteholders, those shareholders and noteholders could be disadvantaged by the actions that these principal shareholders choose to pursue. In addition, our principal shareholders may cause our business to pursue strategic objectives that may conflict with the interests of our other shareholders and noteholders.

     One of our principal shareholders, Hutchison, is a global leader in the mobile telecommunications market. It has a substantial interest in 3G operating companies in Austria, Australia, Denmark, Hong Kong, Ireland, Italy, Sweden and the United Kingdom. We rely on and benefit from the assistance, knowledge and experience of Hutchison. Hutchison has announced that it has filed an application with The Stock Exchange of Hong Kong for the listing of a new company to which Hutchison would transfer its holdings of our shares, together with its telecommunications business interests in certain other companies. Subject to the approval of The Stock Exchange of Hong Kong and the final decision of Hutchison’s board of directors and shareholders, Hutchison proposes that the new company would conduct a public offering in Hong Kong. Hutchison would, immediately following the public offering, control the new company. No final decision has yet been reached by Hutchison’s board of directors or shareholders as to whether and when the proposed transfer of its holdings of our shares and its interests in certain other businesses will take place or the public offering will be launched. We cannot assure you that Hutchison will continue to be our principal shareholder, or if it ceases to be our principal shareholder, that we will continue to enjoy the benefits of our relationship with Hutchison that we currently do.

A continuing deterioration in the economic conditions in Israel may adversely affect our financial condition and results of operations.

     We are incorporated and based in, and currently derive almost all our revenues from markets within, the State of Israel. Primarily due to the global economic downturn in recent years and Israel’s security and political situation, the Israeli economy slipped into recession. During 2003 the rate of unemployment rose, consumer spending decreased and many businesses experienced financial difficulties. A continuing deterioration in the economic conditions in Israel may adversely affect usage patterns of our services and the ability of our customers to pay for our services, which would adversely affect our financial condition and results of operations.

Our business, financial condition and results of operations could be adversely affected if we have underestimated future capital requirements or overestimated anticipated revenue and profits.

     We expect to incur substantial capital expenditures in building out our UMTS third generation network and increasing the capacity of our existing network. We began build-out of our network at the end of 2003. We estimate that capital expenditures in connection with building out our UMTS third generation network will be approximately $250 million over the three years from the beginning of the network build-out, with approximately $90 million in capital expenditures required in the first twelve months of the build-out. Although at present we believe we have a fully funded business plan, we may have underestimated our future capital requirements or overestimated our future revenues and operating profits in the build-out and operation of a third generation network. For example, testing UMTS third generation networks in live environments has been limited, and it is not yet clear how

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large-scale usage will affect the capacity and functionality of UMTS third generation networks and therefore what the optimal network density, which determines the cost of our network roll-out, will be. If we have underestimated our future capital requirements or overestimated our future revenues and operating profits, our future business, financial condition and results of operations could be materially adversely affected.

Our credit facility and our indenture each contain a number of restrictions and obligations that limit our operating and financial flexibility.

     Our credit facility and the indenture governing our 13% senior subordinated notes due 2010 each contain a number of financial, operating and other covenants that limit our operating and financial flexibility. These covenants, among other things, restrict our ability to pledge our assets, enter into certain types of lease financing, dispose of assets, make loans or give guarantees, make certain acquisitions or engage in mergers or consolidations, incur borrowing (other than permitted borrowings, as defined), make any substantial change to the nature of our business or engage in any other business.

     In addition, under our credit facility, we may not pay dividends or similar payments on our ordinary shares or repay principal or interest on shareholders’ loans or principal on subordinated debt, or make payments to shareholders generally by way of return or repurchase of capital, other than by way of a permitted distribution. A permitted distribution means an amount not exceeding, in the aggregate, 50% of the excess cash flow arising in the previous financial year, and is subject to our compliance with additional conditions, including that an actual or potential event of default does not exist, that we are able to meet outstanding operating expenditure requirements, that we have repaid (and cannot re-borrow) at least 50% of the total bank commitments under the credit facility, that such distribution is made no earlier than December 31, 2005, and that we comply with certain minimum coverage ratios. Payments of interest on our notes are restricted in the event amounts due under the credit facility are unpaid or an event of default has occurred. Our credit facility also contains covenants regarding achieving certain levels of financial ratios during each of the ratio periods (semi-annual or annual periods) during the term of the credit facility.

     Our ability to continue to comply with these and other obligations depends in part on the future performance of our business. There can be no assurance that such obligations will not materially adversely affect our ability to finance our future operations or the manner in which we operate our business. In particular, any non-compliance with performance-related covenants and other undertakings of our credit facility or indenture could result in an acceleration of our outstanding debt

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under the credit facility and the indenture and restrict our ability to draw additional funds, which could have a material adverse effect on our business, financial condition or results of operations.

Our substantial leverage could adversely affect our financial health.

     We are highly leveraged. At December 31, 2003, our total long-term indebtedness was approximately NIS 2,454 million ($560 million).

     This debt represents approximately 69.5% of our total capitalization (bank loans plus notes payable plus shareholders equity) at December 31, 2003. Our credit facility and the indenture governing our notes permit us to incur additional indebtedness subject to some limitations. The indenture does not place a limit on the amount of indebtedness that we may incur in financing the acquisition of network assets, including licenses, equipment and inventory, or for capital expenditures and working capital for our business.

     Our substantial debt could adversely affect our financial health by, among other things:

We may not be able to make our debt payments in the future.

     Our ability to meet our debt obligations will depend on whether we can successfully implement our strategy, as well as on financial, competitive, legal and technical factors, including some factors that are beyond our control. If we are unable to generate sufficient cash flow from operations to meet principal and interest payments on our debt, we may have to refinance all or part of our indebtedness.

     We cannot ensure that any such refinancing would be possible on terms that we could accept or that we could obtain additional financing. If refinancing will not be possible or if additional financing will not be available, we may have to sell our assets under circumstances that might not yield the

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highest prices, or default on our debt obligations, including the notes, which would permit our noteholders and holders of other outstanding indebtedness to accelerate their maturity dates.

Our business may be impacted by the shekel exchange rate fluctuations and inflation.

     Substantially all of our revenues and a majority of our operating expenses are denominated in shekels. However, through December 31, 2003, a substantial amount of our operating expenses were linked to non-shekel currencies. These expenses related mainly to the acquisition of handsets where the price paid by us is based on various foreign currencies. In addition, a substantial majority of our capital expenditures (including with respect to our UMTS third generation network) are incurred in, or linked to, non-shekel currencies, and our notes are denominated in US dollars and require US dollar interest and principal payments. Thus, any devaluation of the shekel against the dollar (or other foreign currencies), will increase the shekel cost of our non-shekel denominated or linked expenses and capital expenditures. Such an increase may have an adverse impact on our results, which may be material. Material changes in exchange rates may cause the amounts that we must invest to increase materially in shekel terms.

     We hedge some of our foreign currency commitments, but we do not currently hedge the principal payable on our notes. As of December 31, 2003, the notional amounts of our foreign currency derivatives were approximately $208 million. Our derivative transactions are mainly designed to hedge the cash flows related to the payments of dollar interest on our notes and those related to anticipated payments in respect of purchases of handsets and capital expenditures in foreign currency. The transactions are primarily foreign currency transactions and purchases and sales of currency options.

     Our bank credit facility borrowings are currently in shekels, some of which are linked to the Israeli consumer price index, or CPI. We may not be permitted to raise our tariffs pursuant to our license in a manner that would fully compensate for any increase in the Israeli CPI. Therefore, an increase in the rate of inflation may also have a material adverse impact upon us by increasing our financial expenses without an offsetting increase in revenue.

Operating a mobile telecommunications network involves the inherent risk of fraudulent activities and potential abuse of our services, which may cause loss of revenues and non-recoverable expenses.

     There is an inherent risk of potential abuse by individuals, groups, businesses or other organizations that use our mobile telecommunications services and avoid paying for them. The effects of such fraudulent activities may be, among others, a loss of revenue and out of pocket expenses

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which we will have to pay to third parties in connection with those services, such as interconnect fees, payments to international operators or to operators overseas and payments to content providers. Such payments may be non-recoverable. Although we are taking measures in order to prevent fraudulent activities, we have suffered in the past, and may suffer in the future, from these activities. The financial impact of fraudulent activities that have occurred in the past has not been material. However, we cannot assure you that fraudulent activities, if they occur in the future, will not materially affect our financial condition and results of operations.

We are dependent upon our ability to interconnect with other telecommunications carriers. We also depend on Bezeq and other suppliers for transmission services. The failure of these carriers to provide these services on a consistent basis could have a material adverse effect on us.

     Our ability to provide commercially viable mobile telephone services depends upon our ability to interconnect with the telecommunications networks of existing and future fixed-line, mobile telephone and international operators in Israel in order to complete calls between our customers and parties on the fixed-line or other mobile telephone networks. All fixed-line, mobile telephone and international operators in Israel are legally required to provide interconnection to, and not to discriminate against, any other licensed telecommunications operator in Israel. We have signed interconnection agreements with Pelephone, Cellcom and MIRS, the other mobile telephone network operators in Israel, and with Bezeq International and Barak, two of the three international operators in Israel, and we have an operating arrangement with the third Israeli international operator, Golden Lines. We have no control over the quality and timing of the investment and maintenance activities that are necessary for these entities to provide us with interconnection to their respective telecommunications networks. The failure of these or other telecommunications providers to provide reliable interconnections to us on a consistent basis could have a material adverse effect on our business, financial condition or results of operations.

     We currently lease most of our transmission capacity from Bezeq, and we lease additional capacity from other suppliers, primarily Cellcom. We have no control over the quality and timing of the investment and maintenance activities that are necessary for these suppliers to provide us with transmission services. Disruptions, stoppages, strikes and slowdowns experienced by them may significantly affect our ability to provide mobile telephone services. In particular, Bezeq has experienced labor disputes with its employees, including stoppages, notably in recent years as the privatization of Bezeq and liberalization of the telecommunications market in Israel have developed. The failure by our suppliers to provide reliable transmission services to us on a consistent basis could have a material adverse effect on our business, financial condition or results of operations.

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We can only operate our business for as long as we have a license from the Ministry of Communications.

     We conduct our operations pursuant to a general license granted to us by the Ministry of Communications on April 7, 1998. Our license is valid until February 2022. Our license may be extended for an additional six-year period upon our request to the Ministry of Communications and confirmation from the Ministry that we have met certain performance requirements. We may request renewal of our license for successive six-year periods thereafter, subject to regulatory approval. We cannot be certain that our license will not be revoked, will be extended when necessary, or, if extended, on what terms an extension may be granted.

     Additionally, although we believe that we are currently in compliance with all material requirements of our license, the interpretation and application of the technical standards used to measure these requirements, including the requirements regarding population coverage and minimum quality standards, and other license provisions may not be certain, and disagreements have arisen and may arise in the future between us and the Ministry of Communications. We have provided a bank guarantee to the Ministry of Communications in the amount of $10 million to guarantee our performance under our license. For more information, see “Item 5B. Operating and Financial Review and Prospects—Liquidity and Capital Resources.” If we are found to be in material breach of our license, the guarantee may be forfeited and our license may be revoked.

Our marketing strategy is based upon the international Orange Brand. If our license agreement terminates or is revoked, we will lose one of our main competitive strengths.

     Our marketing strategy is based upon the international Orange Brand. We can operate our business under the Orange Brand only if we have the right to use it under the brand license agreement with Orange International Developments Limited, a subsidiary of Orange plc. Under this license agreement, we are required to comply with the Orange Brand guidelines established by Orange International. We have the right to use the Orange Brand as long as we are able and legally eligible under the laws of Israel to offer telecommunications services to the public in Israel. However, the brand license agreement may be terminated by mutual agreement, or at our discretion, or by Orange International if a court determines that we have materially misused the brand and we continue to materially misuse the brand after such determination of material misuse. If we lose the right to use the Orange Brand, our financial condition and results of operations may be materially adversely affected.

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We depend on a limited number of suppliers for our network equipment. Our results of operations could be adversely affected if our suppliers fail to provide us with adequate supplies of network equipment or maintenance support on a timely basis.

     We purchase our network equipment, such as switching equipment, base station controllers and base transceiver stations and network software, from Nortel, Ericsson and Nokia. Although our network utilizes standard equipment that is produced by several suppliers, we cannot be certain that we will be able to obtain equipment from one or more alternative suppliers on a timely basis in the event that any of these suppliers is unable to satisfy our equipment requirements. Our results of operations could be adversely affected if Nortel, Ericsson, Nokia or an alternative supplier fails to provide us with adequate supplies of equipment, as well as ongoing maintenance support, in a timely manner. In addition, our results of operations could be adversely affected if the price of network equipment rises significantly. In our experience, suppliers from time to time extend delivery times, limit supplies and increase the prices of supplies due to their supply limitations and other factors.

Our share price has been and may continue to be volatile in response to general conditions in the global securities markets, developments in Israel’s securities market and in the communications and technology sectors in particular.

     Our share price has been subject to significant volatility, in part due to highly volatile securities markets generally, particularly for communications and technology companies’ shares. Factors other than our results of operations that may affect our share price include low trading volume, market expectations of our performance and projected growth in the mobile communications market. In addition, our share price may be affected by factors such as the Israeli economy and the political situation and the level of business activity or perceived growth (or the lack thereof) in the market in general, the performance of other mobile telecommunications companies, announcements by or the results of operations of our competitors, customers and suppliers, potential litigation and regulation involving ourselves or our industry, and announcements concerning the success of UMTS third generation mobile networks, products and services, as well as general market volatility.

Our telecommunications license imposes certain restrictions on who can own our shares. If these restrictions are breached, we could lose our license.

     As with other companies engaged in the telecommunications business in Israel, our license requires that, at a minimum, 20% of the economic and voting interest, and certain other defined means of control, of our company be owned by Israeli citizens and residents. In addition, no transfer or acquisition of 10% or more of any of such means of control, or the acquisition of control of our company, may be made without the consent of the Ministry of Communications. Our license also

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restricts cross-ownership and cross-control among competing mobile telephone operators, including the ownership of 5% or more of the means of control of both our company and of a competing operator, without the consent of the Ministry of Communications, which may limit certain persons from acquiring our shares. Shareholdings in breach of these limits could have two consequences. First, the shares that are in excess of the limits will be converted into “dormant” shares, with no rights other than the right to receive dividends or other distributions to shareholders, and to participate in rights offerings. Second, the breach of the limits could be the basis for revoking our license unless our principal shareholders, who currently hold an aggregate of approximately 66% of our ordinary shares, continue to hold an aggregate of at least 51% of our ordinary shares.

There is a risk that our investment in Matav may not happen or that it will be on different terms than currently proposed.

     On March 15, 2004, we announced that we had entered into a non-binding memorandum of agreement with Matav Cable Systems Media Ltd., or Matav, and its shareholders, Dankner Investments Ltd., or Dankner, and Delek Investments and Properties Ltd., or Delek, to invest $137 million in Matav for approximately 40% share of Matav’s equity. The memorandum of agreement is subject to approval of the parties’ respective boards of directors, as stipulated in the memorandum of agreement, and other necessary corporate approvals. As well, the memorandum of agreement provides that it will expire after 60 days or upon the execution of a detailed, definitive investment agreement, whichever is earlier. We are currently conducting a due diligence review and are in negotiations regarding the terms of the investment.

     The memorandum of agreement further provides that the transaction is subject to a number of significant conditions precedent (many of which are outside the control of the parties) which include, among others:

There can be no assurance that the parties’ boards of directors will approve the memorandum of agreement, or that the parties will execute a definitive agreement by the deadline set out in

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the memorandum of agreement or at all. In that event, or in the event that the conditions to the transaction are not satisfied, the transaction may not be completed, and the anticipated benefits of the transaction will not be realized and we may be at a competitive disadvantage to any competitor that is able to offer both mobile telephone and fixed line services. Further, the terms of the definitive agreement, if signed, may be materially different from those set out in the memorandum of agreement.

Benefits from our investment in, and cooperation with, Matav may not be achieved to the extent or within the time period that is currently anticipated.

   Following our proposed investment in Matav and the commencing of commercial cooperation with Matav, we intend to leverage our distribution network and customer base to offer Matav’s services to our customers and, possibly, to bundle their services with our own. We may encounter unanticipated costs and difficulties as we do this, or the bundling of Matav’s services may not achieve as broad customer acceptance as we expect. We understand that Matav intends to provide new services, including fixed telephony over cable networks, using a technology that is not yet mature, and as a result, it may encounter unforeseen difficulties. In addition, we cannot assure you that we will not encounter unanticipated costs or delays, or that we will achieve the cost synergies that we anticipate or that we will be able to exercise effective control over Matav’s business. Further, the process of integrating Matav’s business with our existing business could also divert management’s attention from our day-to-day business.

We expect that our investment in Matav will be substantially dilutive to our earnings, at least in the short term, and may result in additional leverage.

   The cable television industry in Israel has experienced significant financial difficulties, characterized by operating losses from the provision of cable television services. If our investment in Matav is completed, we will account for our interest in Matav either on a consolidated or equity accounting basis, depending on the ultimate terms of the investment. We expect that Matav’s results will have a substantially dilutive impact on our earnings at least in the short term. In addition, Matav will incur or assume substantial additional indebtedness to acquire the cash assets necessary to attain 500,000 subscribers and satisfy one of the conditions precedent for our investment in Matav. Although we anticipate that some indebtedness will be non-recourse to Partner, we expect that our investment in Matav will increase the amount of our consolidated indebtedness. Further, we may choose to fund our investment in Matav through additional indebtedness incurred by us.

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ITEM 4. INFORMATION ON THE COMPANY

4A. History and Development of the Company

     We were incorporated in Israel under the laws of the State of Israel on September 29, 1997 as Partner Communications Company Ltd. Our products and services are marketed under the Orange Brand. Our principal executive offices are located at 8 Amal Street, Afeq Industrial Park, Rosh Ha’ayin 48103, Israel (telephone: 972-67-814-888). Our website address is www.orange.co.il. Information contained on our website does not constitute a part of this annual report. Our agent for service in the United States is CT Corporation, 111 Eighth Avenue, New York, New York 10011.

     In our short history, we have achieved a number of important milestones:

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     For information on our capital expenditures, see “Item 5B Liquidity and Capital Resources—Commitments and Contractual Obligations”.

Proposed Investment in Matav

     On March 15, 2004, we announced that we had entered into a memorandum of agreement with Matav Cable Systems Media Ltd., or Matav, and its shareholders, Dankner Investments Ltd., or Dankner, and Delek Investments and Properties Ltd., or Delek, to invest $137 million in Matav for approximately 40% share of Matav’s equity.

     Matav is one of three operators of broadband cable television services in Israel, which according to its public filings had 267,000 subscribers as of December 31, 2003, revenues in 2003 of NIS 545 million and a net loss in 2003 of NIS 5 million (with Matav revenue and net loss figures presented under Israeli GAAP). Matav is also one of Partner’s principal shareholders. As of December 31, 2003, Matav held approximately 5.3% of Partner’s ordinary shares.

     If we consummate our investment in Matav, we intend, subject to regulatory and other approval procedures to enhance our competitive position by leveraging synergies in marketing, sales, technology and other areas and by offering a variety of services to customers, including multi-channel cable television, broadband internet transmission, fixed line telephony and cellular telephony.

     The acquisition is subject to a number of significant conditions precedent described below. We intend to finance the transaction from external sources.

Description of Matav Memorandum of Agreement

     As noted above, Partner entered into a memorandum of agreement on March 15, 2004 with Matav and its shareholders, Dankner and Delek, to invest $137 million in Matav for approximately 40% share of Matav’s equity. The memorandum of agreement will not be binding until approved by the parties’ respective boards of directors, as stipulated in the memorandum of agreement, and other necessary corporate approvals. As well, the memorandum of agreement provides that it will expire after 60 days or upon the execution of a detailed, definitive investment agreement, whichever is earlier. There can be no assurance that the parties will execute a definitive agreement, and the terms of the definitive agreement, if signed, may be materially different from those set out in the memorandum of agreement.

     Under the memorandum of agreement, upon the closing of Partner’s proposed investment in Matav, the holdings of Delek and Dankner will each be diluted to approximately 12%. Each of Delek

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and Dankner will have an option during the two years following the closing to purchase up to an additional 6% of Matav shares from Partner at a price to be determined on the basis of the price of Matav’s shares and the price of the Partner shares to be received by Matav’s shareholders as a distribution from Matav during the option exercise period. In addition, we will have the option at the end of the option exercise period to repurchase Matav shares from Delek and Dankner at a material premium over the Delek and Dankner option price, so that our holding in Matav will be at least 2% greater than that of Delek and Dankner together, should they exercise their options.

     Additionally, under the memorandum of agreement, during the two years following the closing, for as long as Delek and Dankner hold Matav shares and subject to certain additional conditions, we will receive from Delek and Dankner limited proxies that will grant us voting power over 50.01% of the voting shares of Matav. As a result, we will have the voting power to appoint all of the directors of Matav, and have agreed to vote in favor of two directors designated on behalf of each of Delek and Dankner for as long as each holds at least 5% of Matav.

     In the memorandum of agreement, Matav and Partner agree that they will act in good faith to ensure (i) the signing of a detailed, definitive investment agreement in accordance with the conditions and principles set out in the memorandum of agreement within 60 days of the date of the memorandum of agreement and (ii) the completion of due diligence by Partner no later than the signing of the definitive investment agreement. The memorandum of agreement further provides that the transaction is subject to a number of significant conditions precedent (many of which are outside the control of the parties) which include, among others:

     We have not yet completed our due diligence review, and our board has not approved the memorandum of agreement. Partner, Matav, Dankner and Delek are currently in the process of

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negotiating the definitive investment and ancillary agreements. We understand that Matav is in discussions to acquire the cable and communications assets of Tevel Israel International Communications Ltd. If this transaction were completed, Matav would have over 500,000 cable subscribers, representing approximately 60% of the Israeli cable market. In addition, if this transaction were completed, Matav will incur or assume substantial additional indebtedness. However, we can provide no assurance as to whether this transaction will be completed or, if completed, on what timeframe or on what terms and conditions, including price.

4B. Business Overview

     We were the first GSM mobile telephone network operator in Israel. We received our mobile telephone license in April 1998 and commenced full commercial operations of our digital GSM 900 mobile telephone network in January 1999. Since then we have expanded rapidly and on December 31, 2003 we had 2,103,000 subscribers, representing an estimated 31% of total Israeli mobile telephone subscribers at that date. During 2003, we increased our customer base by approximately 14%, an increase of approximately 266,000 subscribers. At December 31, 2003 our network covered approximately 97% of the Israeli population. We had constructed and installed 2,138 base transceiver stations (including microsites) by December 31, 2003, with 103 of those stations installed in 2003. At December 31, 2003, most of our subscribers had post-paid tariff plan contracts with us, approximately 30% of our subscribers were in pre-paid subscriber plans, and approximately 16% of our subscribers were business subscribers.

     We market our services by capitalizing on the strong international Orange Brand and the experience of our principal shareholders and their affiliates, primarily Hutchison Whampoa Limited. The Orange Brand, which is licensed to us, has been used successfully in other markets to promote mobile telephone services. Market surveys show that we have achieved strong brand awareness in Israel.

     We currently operate in the 900 MHz and 1800 MHz bands. Our services include standard and enhanced GSM services, as well as value added services and products such as voice mail, voice messaging, color picture messaging, icon, ringtone and game downloads, information services, High Speed Circuit Switched Data or HSCSD, General Packet Radio Services, or GPRS, which enables the packet transfer of data in an “always on” mode at a speed of up to 20-30 Kbps, personal numbering and data and fax transmission services. We also offer our subscribers the ability to roam using their mobile phones outside Israel. At December 31, 2003, we offered international roaming through 281 operators covering 126 countries.

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     We have set forth in the following table an estimate of each operator’s share of total subscribers in the Israeli cellular market at December 31, 1999, 2000, 2001, 2002 and 2003:

     We operate in one business segment, GSM mobile telephony and related services, and one geographic segment, Israel.

Overview of Mobile Telecommunications Industry in Israel

     There are currently four mobile telephone network operators in Israel: Partner, Pelephone, Cellcom and MIRS. Pelephone is an Israeli corporation owned by Bezeq, the public fixed-line operator in Israel (50%) and by Pelephone Holdings, LLC (50%), a Delaware corporation owned by Shamrock Holdings. In February 2004, Bezeq announced that its Board of Directors had approved the exercise of its option to purchase the shares of Pelephone owned by Shamrock Holdings. According to the announcement, Bezeq has until August 2004 to give a notice of exercise of the option. Pelephone currently operates nationwide mobile telephone networks in Israel using both the N-AMPS analog and the CDMA digital system and recently upgraded its network to CDMA1x. The major beneficial shareholders of Cellcom are BellSouth, the Safra Group and Discount Investment Corporation Ltd. Cellcom operates a nationwide mobile telephone network based on D-AMPS digital technology, and it began providing GSM services in the DCS 1800 band in the second half of 2002. Published reports state that Cellcom will launch EDGE technology during 2004. MIRS is an Enhanced Specialized Mobile Radio, or “trunking,” iDEN network. MIRS’s major shareholders are Motorola Communications (Israel) Ltd. (66.7%) and Ampal Israel Ltd. (25%).

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     In addition, the Palestine Telecommunication Co. Ltd., or Paltel, operates a GSM mobile telephone network under the name “Jawwal” in the Palestinian Authority administered areas of the West Bank and Gaza Strip, as well as a fixed-line network. Paltel’s GSM network competes with our network in some border coverage overlap areas.

     Mobile telephones were first introduced in Israel in 1986. For the first eight years of operation the growth of mobile telephone services in Israel was slow. There was a single operator, Pelephone, offering analog service, and prices were relatively high. It was not until the end of 1994, and the launch of the second mobile telephone operator, Cellcom, that growth in mobile phone usage in Israel increased significantly. Within two years, subscriber numbers had increased by more than seven times.

     Since the end of 1996, there has been continued strong growth in the Israeli mobile telephone market. Market data from industry sources indicates that the total market size was approximately 6.7 million subscribers at December 31, 2003, representing nearly 99% of the Israeli population.

     In an auction process completed in December 2001, the Ministry of Communications awarded us the two additional bands of spectrum for which we had submitted bids: one band of GSM 1800 spectrum and one band of UMTS third generation spectrum. Cellcom was also awarded a band of GSM 1800 spectrum in the auction and began providing GSM 1800 services in the second half of 2002. Cellcom and Pelephone were also each awarded one band of UMTS third generation spectrum in the auction.

     The following are some of the special characteristics that we believe differentiate the Israeli market from other developed mobile telecommunications markets:

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Strategy

     Our mission is to continue and maintain our position as a leading provider of quality and innovative mobile communications solutions in Israel and to promote the Orange Brand into a leading consumer brand in Israel. In order to achieve our mission, we are implementing strategies designed to:

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Competitive Strengths

     We believe that the following competitive strengths differentiate us from our competitors and will assist us in achieving our mission and implementing our strategies:

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Marketing and Brand

     We believe that a focused marketing strategy is critical to support our goal of sustaining our position as a leading provider of quality and innovative mobile communications solutions in Israel. Our marketing strategy is based upon the strong international Orange Brand and emphasizes network quality, feature rich services, innovation and customer service. In carrying out this strategy we have made a substantial effort in promoting the Orange Brand in Israel as a vehicle for differentiating our services from those of our competitors. We believe the brand, which is licensed to us, has been a significant factor in our success.

     Our marketing strategy is based on the concept of high value for money and introducing advanced services for subscribers. In order to carry out our strategy, we offer our subscribers tariffs which are generally at the level of those charged by our competitors, and technologies and services that we believe are advanced, such as our information and content services. We offer WAP mobile services, HSCSD and GPRS services.

     In addition, during 2002 we launched orange obox services and orange oklik services. We consider both orange obox services and orange oklik services as our major platforms for future growth in usage.

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     In November 2003 we rearranged our content services marketing, uniting them under a content cellular portal branded “orange obox”. This portal is divided into 8 content groups: obox music, obox gamez, obox love, obox mystic, obox sport, obox entertainment, obox news and obox business.

     In order to promote our advanced new services and to increase awareness of these services, we are taking many promotional steps, using a broad range of advertising media. We also intend to maintain our advertising presence in the media in order to maintain high exposure for our brand and advanced technologies.

     Our marketing also focuses on promoting our services to the various segments of the Israeli population. We advertise our services in several languages. We also target campaigns to the large Orthodox Jewish community. In addition to traditional media, we promote our services by sponsoring cultural and community programs, including the International Film Festival which takes place every year in Jerusalem, and which is a major cultural event in Israel, attracting interest both in Israel and abroad. We use the distinctive Orange Brand logo in all our promotional activities and advertising and all mobile phones sold to our subscribers bear the logo.

     On December 31, 2003, approximately 16% of our subscribers were business subscribers. We are continually developing tailored value added services to meet the special needs of business subscribers.

     We have a license to use the Orange Brand. Under the brand license agreement, we have the right to use the Orange Brand in connection with promoting our network services in Israel for as long as we hold a license to operate a mobile telephone system in Israel. See “Item 4B. Information on the Company—Business Overview—Intellectual Property.”

Services and Products

     Our principal business is the provision of mobile telephone services in Israel. Our goal is to offer our subscribers a wide range of sophisticated and easy to use services based upon the latest proven technology. In addition to our standard and enhanced GSM services, including international dialing and roaming, we offer our customers value added services, including voice mail, short message services, intelligent network services, content based on our mobile portal, data and fax transmission and other services. Our use of HSCSD and GPRS Technologies enables high speed data transmission. Our orange obox services enable the downloading of rich applications and content, and our orange oklik services enable subscribers to send photos, multimedia and animation from handset to handset and from handset to web, using our MMS platform. We also offer 24-hour, seven

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days a week customer service, as well as handset repair and replacement services, to subscribers who acquire these services.

     In January 2001, we received the accreditation of the ISO 9002 Standard from the Israeli Institute of Quality and Control. ISO 9002 is a quality management system specification whose requirements are aimed primarily at achieving customer satisfaction by preserving standardization at all stages, and throughout company processes.

Tariff Plans

     Since the beginning of our full commercial operations, we introduced tariff plans aimed at bringing innovation to the Israeli mobile communications market. Our original tariff plans were based on one or more of the following basic elements:

     Most of the above elements existed in the private market since the beginning of our full commercial operations and still exist primarily in the business market.

     In May 2000, we introduced the post-paid tariff plans without a minimum monthly fee, which we branded “orange to go.” Most of our orange to go plans are based on the following basic elements:

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     The elements of the orange to go tariff plans are applied, packaged and marketed in various ways to create tariff packages designed to appeal primarily to the private sector and target markets, including families, soldiers, Orthodox Jewish, Arab and Russian communities, young adults (b.u.) and students.

     Many of our subscribers sign up to the orange family plan. Under this plan, two to five individuals, who subscribe as a group are given large discounts on calls made to each of the other family members’ orange phones. For our orange family subscribers under the orange to go tariff plan, we offer a fixed rate for calls made to other family members’ orange phones.

     Until September 2003, we offered our orange b.u. subscribers who are under the orange to go tariff plan a monthly refund, which could be used towards voice and SMS usage. Since September 2003, each b.u. subscriber can choose three out of six tariff bundles:

     From 2002, our new orange soldiers and orange students tariff plans, as well as our main tariff plan for the Jewish Orthodox community (from 2001), include a uniform airtime tariff for all calls made in Israel, both for calls within our network and for calls originating on our network and terminating on a Bezeq fixed-line network or other cellular networks. Since December 2003 we have offered our orange student subscribers a new plan which includes:

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     Under our original tariff plans for business customers, which are still available, we offer lower airtime tariffs, which vary according to the size of the business, and extra discounts for calls between employees of the business.

     To date, we have a wide range of tariff plans for our business customers, based on one or more of the following elements:

     Our pre-paid plan, known as “Big Talk,” was launched in June 2000. Under the plan, our subscribers purchase a handset and a nationally distributed phone charge card, available in fixed denominations. Upon purchase of the phone card or prepaying by credit card, customers can use our network, including some of our value added services, without the need to register with us or enter into any contract. Under this plan, there are some reduced tariffs for certain hours with no obligation to use our network for a minimum period of time and no monthly subscription fee or monthly bill. Since December 2002, we offer our pre-paid customers a limited roaming service, which includes incoming calls and SMS only, provided that the customer is registered for this service. Our pre-paid plan enables us to compete in the growing pre-paid mobile services market. Certain pre-paid customers receive handset subsidies. These subsidies are usually lower than those received by other subscribers.

     In addition, we have some GPRS, WAP and orange obox services packages, which include a monthly payment for these services.

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     We developed several retention and churn prevention plans to retain our subscribers. Some of these plans are based on a subscriber’s ranking according to financial and economic parameters. In addition, we have developed tools to predict a subscriber’s potential to churn from our network, thus enabling us to proactively approach the subscriber with an attractive offering.

     We believe that the combination of our tariff plans and our advanced technology and content services provides attractive value in the Israeli mobile telephone market and that our pricing strategy has facilitated subscriber growth.

International Roaming

     Israelis are frequent travelers. According to the Israel Central Bureau of Statistics, in 2003, more than three million overseas departures of Israelis were recorded, and more than one million people visited Israel during 2003. Roaming allows a mobile phone subscriber to place and to receive calls while in the coverage area of a network to which he or she does not subscribe and to be billed for such service by his home network. Unique among mobile telephone technologies, facilitating international roaming was a primary design goal of the GSM system from its inception. A GSM roamer can therefore expect to enjoy substantially the same services, features and security while traveling as he does at home. We consider international roaming to be a significant source of revenue.

     At December 31, 2003, we had open commercial roaming relationships with 281 operators in 126 countries or jurisdictions. We also have agreements with satellite operators, providing global coverage, requiring the use of unique handsets, some of which can be used with the standard customer SIM card. Creating roaming relationships with multiple operators in each country increases potential incoming roaming revenue for us and gives our subscribers more choice in coverage, services and prices in that country.

     Since we operate on the 900 MHz band, which is the most widely-used among GSM operators worldwide in terms of handsets, and also on the 1800 MHz band, all of our roaming enabled subscribers may roam to most countries where we have roaming capability using their own handsets without modification. In some countries GSM networks use either the 1900 MHz band of GSM or other technologies (GSM 850, CDMA or UMTS) with which we have established international roaming. Our subscribers who own dual- or tri-band handsets that work on GSM 1900 as well as GSM 900 may also use their own handsets in those countries with networks using GSM 1900. Other subscribers who advise us of their intention to visit those countries are lent free-of-charge a compatible handset into which they insert their SIM, thus retaining their own phone number, phone book and all other regular features.

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     900 MHz is the most widely-used GSM band, and most GSM handsets in the world are already compatible with our network. Since we also operate in the 1800 MHz band, most GSM subscribers worldwide who roam are therefore capable of using our network immediately upon their arrival in Israel.

Value Added Services

     In addition to standard GSM value added services, including voice mail, Short Message Service (SMS), voice messaging, fax mail, call waiting, call forwarding, caller identification and conference calling, we currently offer and are developing a variety of additional value added services. Value added network services are important to our business as they create differentiating factors and increase customer usage and satisfaction. We follow all major market developments regarding value added network services, and we intend to implement and offer those services that are likely to be popular with customers and which would add value to our business. Some of the value added services that we offer are available only to subscribers who have certain handset models. The value added services we currently offer include the following:

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Handsets

     We provide handsets to our contract subscribers at discounts of up to 100% when they first become subscribers. The price at which the handset is provided depends upon the tariff package and special promotions. When subscribers under our “orange to go” and “Big Talk” plans receive handset

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subsidies, such subsidies are significantly lower than those received by our subscribers who sign 36-month contracts. Since October 2001, subscribers who return the handset of a competing network are entitled to discounts, depending on their actual monthly bill and the type of handset purchased.

     We currently offer a range of different handset models supplied by a number of manufacturers, all of which are branded with the Orange logo. We offer handsets to satisfy our subscribers’ roaming needs in the 900 MHz, 1800 MHz and 1900 MHz bands. We evaluate the technical features of every new mobile handset and, if we decide to make it available to subscribers, we obtain a type approval from the Ministry of Communications for such handset. We advise our sales representatives and dealers on compatibility and technical issues. All our handsets are EFR compatible to provide high voice quality. Most of our handset models have Hebrew language displays. Because of the wide international acceptance of GSM technology, handset manufacturers generally make their latest model handsets available for use on GSM networks before networks based on other technology. We have begun selling some innovative handsets with enhanced applications, including multicolor screens, 16 poly ringtones and MMS capabilities.

Customer Division

     Our Customer Division consists of Customer Service and Sales and Distribution:

Customer Service

     We aim to provide high quality customer service in Israel through quick, simple and reliable handling of all customer needs and interactions. We invest in both state of the art technology and training of customer service skills in order to achieve this goal. At December 31, 2003, approximately 1,564 employees, on a full-time equivalent basis, worked in our customer service division. Our customer service division consists of both call center services and face-to-face service centers. Call center services are divided into different centers—general, finance, network, international roaming, business, data and pre-paid—in order to provide focused and professional responses to our customer inquiries in four languages 24 hours a day, seven days a week.

     Our face-to-face customer service consists of 34 service points serving the customer as a one-stop-shop in both sales and service areas.

     In addition, we give our customers various self-service channels, such as IVR, Web-Based service and service via SMS.

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Sales and Distribution

     We have developed a multi-channel approach to target the various segments of the market and to coordinate our sales strategy. We distribute our services primarily through:

     Direct Sales

     Orange Sales and Service Centers. We currently operate six Orange Brand stores which focus on sales to individual customers. These stores are sales and service centers with a uniform design, typically 1,100 square feet (100 square meters) in size, and offer high service standards. The Orange Brand stores are conveniently located in highly visible locations, such as shopping malls, in the Tel Aviv area, Jerusalem, Haifa and Be’er Sheva. These stores serve as flagship stores to help introduce the Orange Brand and our services to the Israeli market and to generate a high level of repeat business and referrals. In the future, we also expect these stores to become involved in the sale of advanced data services and other technologically sophisticated applications. In addition, we have opened 27 service centers, each approximately 3,000-6,000 square feet (300-600 square meters) in size. These centers serve as “one-stop shops” for direct customer service, in which our representatives will demonstrate the use of new products and services, including handset maintenance services.

     Direct Sales Force. Our sales force is comprised of sales representatives, account managers and area managers, targeting business clients. We primarily focus on small- and medium-sized enterprises which tend to use more airtime and yield higher margins. Small to medium-sized businesses are serviced by a team of regional representatives and customer account managers located in five regional offices. Large corporate customers are serviced by a team of national representatives and customer account managers. Prominent individuals are served by national VIP representatives. We provide our sales force with regular training to ensure that they are capable of selling advanced solutions such as mobile data, intranet extension and connectivity, virtual private networks and other value added services that appeal to corporate customers. Our direct sales force is supported by a telemarketing department which makes initial contact with prospective customers and makes appointments for the sales representatives. The telemarketing department is another channel for direct sales by phone.

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     Indirect Sales

     Traditional Dealer Networks. On December 31, 2003, we had agreements with 43 traditional dealers providing 66 points of sale, consisting of specialists selling a range of our products. The private dealer network is an important distribution channel because of its ability to attract existing cellular users to our network. Our dealer network focuses primarily on sales to individual customers and, to a lesser extent, small business customers. Our dealers are highly professional and some of them have previous experience selling cellular services in Israel. One of our dealers has a workforce of approximately 100 salesmen for “door-to-door” sales. In addition, we have specific dealers that target different segments of the Israeli population with the appropriate style, language and locations. We provide regular training to employees of our dealers to update them on our products and services. We believe that the ongoing sales success of our existing distribution channels will continue to attract dealers to our network. Our dealer managers visit dealers on a regular basis to provide information and training, answer questions and solve any problems that may arise in the activation process. We pay our dealers competitive commissions and provide handset subsidies to them. However, dealers are not entitled to commissions for any customers that terminate their service within 60 days of activation.

     Non-Traditional Dealer Networks. Non-traditional dealers consist of generalist retailers or specialist stores that sell related products. This distribution channel is not common in the Israeli cellular market today, and we believe that it provides us with a competitive advantage over and differentiates us from our competitors.

     We have a contract with Super-Pharm, the largest drug store chain in Israel, to sell our network services in their stores. At December 31, 2003, our services were sold in 107 Super-Pharm stores nationwide in a variety of formats, including Partner shop-in-shops, kiosks, wall-unit displays and at front counters. In 2003, approximately 18% of our new subscribers were recruited through sales by Super-Pharm. Under our agreement with Super-Pharm, in addition to Super-Pharm continuing to sell our network services in their stores, we are cooperating with them in a new chain of stores that Super-Pharm has established, called Super-Link, and that is dedicated to selling communications services and equipment. Six such stores have been opened to date, and the intention is to open 10 more. The agreement was amended on February 12, 2004, effective as of January 1, 2004, subject to the necessary corporate approvals and to obtaining an exemption from approval for arrangements in restraint of trade under the Restrictive Trade Practices Law, 5748-1988, from the Commissioner for Restrictive Trade Practices. Such an exemption was granted with respect to the previous agreement and is effective until June 2004 or the termination of the agreement, whichever is earlier. If it receives the necessary corporate approvals, the term of the amended agreement will be until December 31, 2005, renewable for an additional one year unless one of the parties provides the other party 180 days prior notice of termination

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     The amended agreement amends, among other things, the rate of commissions and other remuneration to which Super-Pharm is entitled. In the event that the necessary corporate approvals are not obtained, the parties have agreed to resume their cooperation in accordance with the previous agreement, until no later than December 31, 2004.

     In addition, we are developing our distribution network with other non-traditional dealers, such as the Ituran chain, which sells, installs and maintains car security and tracking systems in approximately 46 locations throughout Israel. They also sell and install our car kits in these sites. Another non-traditional dealer is Eurocom Communications Ltd. See “Item 7. Major Shareholders and Related Party Transactions.” We provide regular training to the employees of our non-traditional dealers to update them on our products and services.

Customer Contracts, Credit Policy, Billing Bad Debt and Disconnection

     Part of our subscriber contracts for customers on our original tariff plans provide for a 36-month term. Under the terms of these contracts, customers who terminate their contracts prior to the expiration of the 36-month term and have purchased their handset from us or our dealers can be charged by us for payment of the residual price of their handset. This charge reflects the difference between the price they paid for the handset, if any, and the list price, adjusted for the number of months that the customer has been a subscriber. Subscribers are billed monthly in arrears for airtime charges and charges per services. We outsource the printing and sending of bills to third parties. Most of our business customers have signed 36-month contracts.

     Most of our individual subscribers subscribe and pay for their services by credit card. All credit card accounts are subject to an initial maximum credit limit each month, which varies depending upon the type of credit card and for which we obtain prior approval from the card issuer. When a subscriber account reaches this limit, we may seek approval from the card issuer. If the approval is not granted by the card issuer, we may require the customer to provide other means of payment or arrange an increase in the approved limit from his credit card issuer. If this does not occur, the customer’s usage may be limited or suspended until we receive a cash deposit or guarantee from the customer.

     All business subscribers and some of our individual subscribers can subscribe and pay for their services by credit card or direct debit. Customers acquiring more than fifteen handsets (or eight

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through our dealers) are subject to a credit scoring review performed by outside credit agencies. All customers are subject to a monthly maximum credit limit. When the monthly limit is exceeded, usage may be limited. Roaming access for direct debit subscribers is subject to credit scoring by outside credit agencies and may require additional guarantees or credit checks.

     Subscribers are subject to periodic credit risk reviews, taking into consideration payment history, disconnection history and new circumstances. If payment for a subscriber’s monthly bill is not received within 27 days of the issue of the bill, roaming and international call service is suspended. After 31 to 36 days, all outgoing call service is suspended. After 45 days, all services are suspended, after 60 days, we begin legal proceeding regarding the debt collection and ultimately, after 150 days, all services are disconnected. If the subscriber does not reinstate service after being disconnected, we may require him to pay the residual value of his handset.

Our Network

     We have built an extensive, resilient and advanced mobile network system in Israel, allowing us to offer our services with extensive coverage and consistent high quality. Through December 31, 2003, we have made net capital expenditures of NIS 2,565 million ($586 million) in our network infrastructure and other related fixed assets.

Overview

     The “first generation” of wireless communications, based on analog technology, provides simple voice telephony. The “second generation” of wireless communications, such as the digital GSM standard, provides additional data facilities ranging from short messaging services to narrow band data, which is sufficient for the basic data services offered by network operators, but cannot support high resolution video or multimedia applications.

     New types of services are made possible by the roll out of technological developments that increase the speed and efficiency of existing GSM networks such as GPRS, which is a 2.5G technology. 2.5G technology network operators are able to deliver multimedia and high speed services before “third generation” services are introduced. Packet data rates vary from 20 Kbps-44 Kbps, depending mainly on handset capabilities. Approximately 50% of our customers who have GPRS enabled handsets use and pay for GPRS services.

     Third generation wireless communications, which are expected to offer full interactive multimedia capabilities at data rates of up to 2 Mbits per second, are expected to bring wirefree networks significantly closer to the capabilities of fixed line networks or sometimes even better.

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Improvements in coding and data compression technology will provide better voice quality and more reliable data transmission. UMTS is the global standard adopted for the implementation of third generation wirefree telecommunications.

Infrastructure

     On December 31, 2003, our GSM network consisted of 1,409 macrobase transceiver stations and 729 microbase transceiver stations, all linked to 30 base station controllers. The base station subsystem is controlled by 11 mobile switching centers. Base transceiver stations, mobile switching centers and base station controllers are interconnected by approximately 3,600 transmission links. In addition, our network is interconnected with the public switched telephone network operated by Bezeq in several locations across Israel. Our network is also directly connected to the mobile networks of Pelephone, Cellcom and the three Israeli international operators, Bezeq International, Barak and Golden Lines, and indirectly to MIRS and the fixed and mobile telephone networks of Paltel. During 2002, our network was directly connected to the mobile networks of Pelephone and Cellcom for the purpose of bilateral transfer of SMS’s. In February 2003, we added an SMS direct connection to MIRS. See “Item 4B. Information on the Company—Business Overview—Interconnection.” Ericsson and Nokia supply our base station controller and base transceiver station sites for our 2G and 2.5G network in Israel.

     Our transmission network is made up of leased lines from Bezeq, Cellcom and Pelephone and our own microwave links. Currently most of our transmission network consists of leased lines. As our network currently covers more than 98% of the Israeli population, we are now selectively expanding the capacity and quality of our network primarily in urban areas by adding infrastructure to improve outdoor and indoor coverage. We plan to continue increasing the capacity and quality of our network due to the growth of voice and data in the GPRS traffic and in order to accommodate the anticipated growth in the number of our customers.

Network Design

     Our primary design objective is to build a mobile telephone network engineered to provide excellent voice quality, call reliability, high capacity and high coverage quality and to maintain technical advantages over our competitors. In formulating our network design objectives, we have been guided by our business strategy to build the highest quality network. We work to quality standards which exceed those set forth in our license. The quality parameters that we seek to satisfy are those that we believe are important to mobile phone users: voice quality, low “blocked call” rate, low “dropped call” rate and deep indoor penetration, especially in densely populated areas or areas of

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special commercial interest. Blocked calls are calls that fail because access to the network is not possible due to insufficient network resources. Dropped calls are calls that are involuntarily terminated.

     With these quality parameters in mind, we have rolled out an advanced radio network, using macrocellular and microcellular base transceiver stations and advanced frequency planning software in very high density metropolitan areas in order to provide “deep” indoor coverage and sufficient capacity for latent demand. This technology is designed to maximize spectrum utilization and enhance service quality. Our transmission network design confers the following benefits: (i) necessary bandwidth for GSM services; (ii) resilience; (iii) use of high transmission rate back-bone routes based on Synchronous Digital Hierarchy; and (iv) the ability to utilize a new generation of sophisticated technology to optimize the system and increase capacity where necessary. Our switching architecture is based on two transit switches connected to all of our systems and platforms, which improves reliability and facilitates expansion. We are optimizing our network with an advanced radio method called Synthesized Frequency Hopping. This method increases the capacity of our network and improves the quality of the performance we supply to our subscribers. Because our network was planned with our key quality parameters in mind, we believe that we will be able to continually upgrade the quality of our network as our business develops.

Spectrum Allocation and Capacity

     Spectrum availability is limited and is allocated by the Ministry of Communications through a licensing process. Pursuant to the terms of our license and subsequent allocations, we were allocated 2x10.4 MHz in the 900 MHz frequency band, of which 2x2.4 MHz are shared with Paltel in the West Bank and the Gaza Strip. We also have an agreement to use an additional 2x2.4 MHz of spectrum in the 900 MHz frequency band on a shared basis with Paltel. Under this agreement, which has been endorsed by the Ministry of Communications, we are permitted to use this additional spectrum in Israel so long as we do not cause interference in areas where Paltel operates.

     In the December 2001 spectrum auction in Israel, the Ministry of Communications awarded us the two bands of spectrum for which we had submitted bids: 2 x 10 MHz of GSM 1800 spectrum and 2 x 10 MHz and 1 x 5 MHz of UMTS third generation spectrum. During 2002, we started deploying GSM 1800 MHz band base transceiver stations to enhance the capacity of our GSM 900 MHz network, and to further improve our GSM 900 MHz network’s quality. We are the sole operator which has one network operating both in the 900 MHz frequency band and in the 1800 MHz frequency band. As a result, our network’s capacity is larger than that of other cellular networks in Israel.

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     We seek to optimize the use of our current spectrum allocation by adding more base transceiver stations in combination with advanced design and operation techniques. We have experienced in the past, and may experience in the future, interference in the GSM 900 spectrum allocated to us. We intend to continually enhance the quality of our coverage and capacity in response to changing consumer demands.

Dropped Calls

     Dropped calls are calls that fail to complete when dialed or are terminated involuntarily. Since the launch of full commercial operations, our dropped call rate has steadily improved. Our monthly dropped call rate has declined from 3.50% for January 1999 to 1.71% for December 1999, to 1.44% for December 2000, to 1.3% for December 2001 to 1.15% for December 2002, and to less than 0.9% for December 2003.

Other Systems

     Our Home Location Register, or HLR, stores details of our subscribers and their location. We have installed a special purpose HLR which prevents a single point of failure in our network from affecting the service to all our subscribers. Our Authentication Center automatically verifies each SIM’s authenticity by performing an encrypted transaction when the mobile telephone is switched on. Our Short Message Service Center handles short messages sent by our subscribers to other mobile telephones. The Voice Mail System takes messages for subscribers and allows them to retrieve and forward messages and faxes after being notified by short message of the receipt and source of the voice message. The Partner Information Hub that we launched in January 2000 enables all our subscribers to receive data information services on their handsets using SMS technology. During 2000, we increased our SMS Center capacity four-fold. The system is used for mobile originated, SMS information services and other monitor and control systems based on SMS. We also extended our information services with an IVR system by CTware Ltd., which allows voice access to many information services. Dozens of such services are currently available including news, games, entertainment, jokes, radio and others. We have purchased Ericsson’s Mobile Positioning System (MPS) platform. This is a technology platform which enables us to provide location-based services to a large number of subscribers. A system which enables location-based services has been launched in 2001. During 2002, we launched orange oklik services, which are based on Multimedia Messaging Service Center (MMSC), an Ericsson platform. In addition, we have developed with Samsung (Korea) a system which enables the downloading of rich applications and content. These services, which are branded “orange obox”, are based on GVM, a technology which was originally developed in Korea on CDMA-1x technology and has been implemented on our GSM network. Our “test bed” laboratory

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enables start-up companies to develop and evaluate new GSM services without interfering with the operation of our network. Since September 2000, we have also offered foreign GSM users roaming in Israel, and our subscribers while roaming abroad, the ability to use some of their home services’ dialing codes during their stay in Israel with a system developed by star*home.

     We have also enhanced the authentication ability in our network, in order to strengthen the protection of our network against fraud and interception.

     In June 2000, we installed and launched an Ericsson pre-paid system. In May 2002, we upgraded the Ericsson platform in order to support our larger pre-paid subscriber base and to allow us to offer a wider range of services. Also in June 2000, we launched WAP services based on a platform designed by Exalink (now Comverse), an Israeli provider of internet-based services over wireless devices. We have chosen Ericsson to provide us with a GPRS system that enables the high speed packet transfer of data in an “always on” mode. The WAP over GPRS system allows our subscribers to have mobile internet services on line.

     We have completed the national deployment of our GPRS network and have launched a variety of supported services in 2002. As part of our GPRS service, we are using mainly Cisco’s IP Core System. The IP Core System is the first step towards new advanced services, and can be used on third generation UMTS networks as well.

Site Procurement

     Once a new coverage area has been identified, our technical staff determines the optimal base station location and the required coverage characteristics. The area is then surveyed to identify antenna sites. In urban areas, typical sites are building rooftops. In rural areas, masts are usually constructed. Technical staff also identify the best means of connecting the base station to the network, for example, via leased or owned and operated microwave links or wired links leased from Bezeq. Once a preferred site has been identified and the exact equipment configuration for that site decided, we begin the process of obtaining necessary approvals.

     The erection of most of these antennas require building permits from local or regional authorities, as well as a number of additional permits from governmental and regulatory authorities, such as:

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     See “Item 4B. Information on the Company—Business Overview—Regulation” for a description of the approvals that are required for the erection and operation of antenna sites.

Suppliers

     Our network utilizes standard equipment, which is available from a limited number of suppliers. One of our major GSM equipment suppliers is Ericsson and its affiliates, which supply us with mobile switching centers, base station controllers, base transceiver stations, transit transmission centers, operation support systems and transmission systems equipment. Ericsson is also our major supplier of GPRS network equipment, including GPRS support nodes and gateway GPRS support nodes. Nokia also supplies us base station controllers, base transceiver stations and network management system equipment. See “Item 3D. Key Information—Risk Factors—We depend on a limited number of suppliers for our network equipment. Our results of operations could be adversely affected if our suppliers fail to provide us with adequate supplies of network equipment or maintenance support on a timely basis.” We have agreements with Baran Raviv, Bintech and H. Mer, all Israeli engineering companies, for the construction of our sites. We continue to purchase certain network components from various other key suppliers. We believe that our network suppliers’ price structure is competitive with industry standards.

     In November 2003, we entered into a frame agreement with Nortel Networks to supply what is expected to be Israel’s first third generation UMTS wireless network. The cost of the network under the frame agreement is expected to be $93 million.

Interconnection

     All telecommunications providers with general licenses in Israel have provisions in their licenses requiring them to allow interconnection of their networks with all other telecommunications networks in Israel. Currently, our network is connected to all other telecommunications networks operating with general licenses in Israel. Our network is directly interconnected to the networks of Bezeq, Cellcom, Pelephone, MIRS, Bezeq International, Barak and Golden Lines. Our network is indirectly interconnected to the network of Paltel through the Bezeq network for the purpose of bilateral transfer of calls. During 2002, our network was connected to the networks of Cellcom and Pelephone for the purpose of bilateral transfer of SMSs, and in February 2003, we connected our network to the network of MIRS for the same purpose.

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     We are currently operating without any formal interconnection agreements with Bezeq. We are not aware of any interconnect agreement that Cellcom, Pelephone or MIRS has signed with Bezeq. Our day-to-day arrangements with Bezeq substantially conform to a draft interconnect agreement negotiated with Bezeq. The interconnect rates charged by Bezeq are set by Israeli legislation and Bezeq is required by law not to discriminate against any licensed telecommunications operator in Israel with respect to the provision of interconnect services. As of March 1, 2000, Bezeq began calculating interconnect (call termination) fees due to us based on fees actually collected by Bezeq from its subscribers and imposing an additional collection fee on us. Until that time, interconnect fees were calculated on the basis of actual usage. In October 2000, a new Interconnect Regulation became effective, stating that interconnect fees among cellular and fixed line operators should be based upon actual usage.

     Nevertheless, Bezeq continued calculating interconnect fees due to us based on fees actually collected from its subscribers and imposing an additional collection fee on us. From the end of 2001 until July 2003, several proceedings took place, in which the Minister of Communication reviewed the issue. On July 15, 2003, the Ministry of Communications gave its final decision in the matter, according to which Bezeq must pay mobile operators based on traffic, not collection from its subscribers. However, with respect to the period from October 2, 2000 until August 31, 2003, the Ministry permitted Bezeq to deduct a 1.1% fee. As of September 1, 2003, Bezeq may no longer deduct any fees from the traffic-based interconnect tariffs it pays the mobile operators. The Ministry made no decision concerning the period from March 1, 2000 until October 1, 2000 (which was subject to legal proceedings which we initiated, and which ended in a settlement whereby the 1.1% deduction would apply). Bezeq appealed the Ministry of Communication’s final decision. The outcome of this appeal would also apply to the period from March 1, 2000 until October 1, 2000.

     We currently pay Bezeq an interconnection fee based on a tariff structure that came into force on May 1, 2000.

     We have formal interconnection agreements with Cellcom, Pelephone and MIRS. The agreements have one-year terms and are renewable for an unlimited number of additional one-year terms. The agreements can be terminated on 90 days’ written notice by either party. The interconnection agreements with Cellcom, Pelephone and MIRS do not contain any pricing terms. The interconnection tariffs charged by Cellcom, Pelephone and MIRS are set by a Ministry of Communications regulation that, coupled with a change to the mobile telephone operators’ licenses, imposes a uniform call termination tariff for all mobile telephone operators. The uniform tariff is currently NIS 0.45 per minute. The uniform call termination tariff for incoming international calls to cellular networks is NIS 0.25 per minute. Because we transfer and receive all traffic to and from

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Paltel’s network through the Bezeq network, we pay Bezeq a transit fee for each call. In January 2004, the Ministry of Communications appointed an international telecommunications consultancy firm to study both SMS and SMS termination tariffs of the mobile networks in Israel. In addition, the Ministry of Communications recently amended our license and the relevant regulations, reducing SMS termination tariffs from NIS 0.38 to NIS 0.285 effective May 1, 2004. The Ministry of Communications indicated that this reduction is only an interim tariff until the international telecommunications consultancy firm, which was appointed by it, completes its study.

     We have a written interconnection agreement with Bezeq International and with Barak. We currently have an operating arrangement with the other international operator, Golden Lines. As noted already, the Ministry of Communications regulation and the change to the mobile telephone operators’ licenses discussed above also impose a uniform call termination tariff for incoming international calls of NIS 0.25 per minute.

Competition

     There are currently four mobile telephone network operators in Israel: Partner, Cellcom, Pelephone and MIRS. The major beneficial shareholders of Cellcom are BellSouth, the Safra Group and Discount Investment Corporation Ltd. Cellcom operates a nationwide mobile telephone network based on D-AMPS digital technology. Cellcom was awarded spectrum in the DCS 1800 band in the December 2001 spectrum auction in Israel and began providing GSM services in the second half of 2002. For more information, see “Item 3D. Risk Factors—Competition from existing competitors may require us to continue to reduce our tariffs, increase our subscriber acquisition costs and customer retention costs and increase our churn rate”. Our second competitor is Pelephone. Pelephone is an Israeli corporation owned by Bezeq, the public fixed-line operator in Israel (50%) and by Pelephone Holdings, LLC (50%), a Delaware corporation owned by Shamrock Holdings. In February 2004, Bezeq announced that its Board of Directos had approved the exercise of its option to purchase the shares of Pelephone owned by Shamrock Holdings. According to the announcement, Bezeq has until August 2004 to give a notice of exercise of the option. Pelephone currently operates nationwide mobile telephone networks in Israel using both the N-AMPS analog and the CDMA digital system and recently upgraded its network to CDMA1X. Our third competitor is MIRS, an Enhanced Specialized Mobile Radio, or “trunking,” network, which was granted a general license to operate as a mobile telephone operator on February 5, 2001. MIRS’s major shareholders are Motorola Communications (Israel) Ltd. (66.7%) and Ampal Israel Ltd. (25%).

     According to the Company’s estimate, at December 31, 2003 Cellcom had an estimated 2,325,000 customers, representing approximately 35% of the Israeli mobile telecommunications

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market. Pelephone had approximately 1,986,000 paying customers at December 31, 2003, representing approximately 30% of the Israeli mobile telecommunications market. MIRS is estimated to have had over 260,000 users at December 31, 2003, representing approximately 4% of the Israeli mobile telecommunications market. We compete with Cellcom, Pelephone and MIRS principally on the basis of telecommunications service quality, brand identity, variety of handsets, tariffs, value added services and the quality of customer services.

     To the extent that mobile telephones are used in lieu of fixed telephones, we also compete with Bezeq.

     In addition, the Palestine Telecommunication Co. Ltd., or Paltel, operates a GSM mobile telephone network under the name “Jawwal” in the Palestinian Authority administered areas of the West Bank and Gaza Strip, as well as a fixed-line network. Paltel’s GSM network competes with our network in some border coverage overlap areas.

Information Technology

     We depend upon a wide range of information technology systems to support network management, subscriber registration and billing, customer service and marketing and management functions. These systems execute critical tasks for our business, from rating and billing of calls, to monitoring our points of sale and antenna sites, to managing highly segmented marketing campaigns. As our subscriber base has grown, we have devoted significant resources to expanding and enhancing our information technology systems, adopting and implementing new systems, including Customer Relations Management, or CRM, systems, which have contributed to our customers’ satisfaction with our service, as well as updating our financial management and accounting system. We believe these systems have been an important factor in our achievements since our commercial launch.

     While many of our systems have been developed by third-party vendors, all of them have been modified and refined to suit our particular needs. In certain instances, we have developed critical information technology systems internally to meet our specific requirements. For example, significant segments of our CRM and business information infrastructure were developed internally and were designed to integrate our customer service outreach with our overall sales and marketing effort. In other cases, conversely, we have outsourced responsibility for certain systems to third parties. We have completed upgrading our billing system to increase our flexibility to offer new tariff packages and to support data packet switching services for 2.5 generation and for third generation in the future.

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Intellectual Property

     We are the registered owners of the trademark “Partner” in Israel with respect to telecommunications-related devices and services as well as additional trademarks. We have also registered several internet Web domain names, including, among others: www.partner.co.il, www.orange.co.il and www.partnergsm.co.il.

     We have entered into a brand license agreement with Orange International Developments Limited, a subsidiary of Orange plc. Under this agreement, Orange International appointed us as a permitted user of its trademarks in Israel. Under this license agreement, we have the exclusive right to use the Orange Brand in advertising and promotional materials in Israel. The term of the brand license began on July 1, 1998. The trademark license is royalty-free for the first 15 years of its term. In 2012, the parties are to discuss the royalties to be paid for a five-year term beginning July 1, 2013. In 2017, the parties are to again consider the royalties to be paid for an additional five-year term beginning July 1, 2018. Under this license agreement, we are required to comply with the Orange Brand guidelines established by Orange International. We have the right to use the Orange Brand as long as we are able and legally eligible under the laws of Israel to offer telecommunications services to the public in Israel. However, the license agreement may be terminated by mutual agreement, or at our discretion, or by Orange International if a court determines that we have materially misused the brand and we continue to materially misuse the brand after such determination of material misuse.

     We have also entered into a brand support/technology transfer agreement with Orange Personal Communications Services Limited. Under this agreement, Orange Personal will provide us with information and expertise to support the Orange Brand in Israel at an agreed cost for a minimum of five years beginning December 1, 1998. We may also request additional, optional support from Orange Personal at a daily rate. From May 2003, either party may terminate the agreement effective as of November 30 of a particular year by giving written notice in May of that year. See “Item 3D. Risk Factors—Our marketing strategy is based upon the international Orange Brand. If our license agreement terminates or is revoked, we will lose one of our main competitive strengths.”

     In addition, we are a full member of the GSM Association. In conjunction with the promotion and operation of our GSM network, we have the right to use their relevant intellectual property, such as the GSM trademark and logo, security algorithms, roaming agreement templates, and billing transfer information file formats. We are eligible to remain a member of the GSM Association for as long as we are licensed to provide GSM service.

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Regulation

Overview

     We operate within Israel primarily under the Communications Law (Telecommunications and Broadcasting), 1982 (the “Telecommunications Law”), the Wireless Telegraphy Ordinance (New Version), 1972 (the “Wireless Telegraphy Ordinance”), the regulations promulgated by the Ministry of Communications and our license. The Ministry of Communications issues the licenses which grant the right to establish and operate mobile telephone service in Israel, and sets the terms by which such mobile telephone service is provided. The regulatory framework under which we operate consists also of the Planning and Building Law, 1965 and the Consumer Protection Law, 1981. Additional areas of Israeli law may be relevant to our operations, including antitrust law, specifically the Restrictive Trade Practices Law, 1988, and administrative law. The Israeli telecommunications market is in a state of transition, moving to a more liberalized environment in which various markets, such as the mobile, international services, and domestic markets and infrastructure, are gradually being opened to competition and in which government-owned monopolies are being privatized. As a result, there is a possibility that changes may take place in the regulatory framework described below.

Telecommunications Law

     The principal law governing telecommunications in Israel is the Telecommunications Law and related regulations. The Telecommunications Law prohibits any person, other than the State of Israel, from providing public telecommunications services without a license issued by the Ministry of Communications.

     General licenses, which relate to telecommunications activities over a public network or for the granting of nationwide services or international telecommunications services, have been awarded to Bezeq, and to a company jointly owned by the three cable television operators in Israel, to the four mobile telephone operators, Pelephone, Cellcom, Partner and MIRS, and to the three international operators, Barak, Bezeq International and Golden Lines. In addition, the Ministry of Communications may issue additional mobile telephone operator and other licenses in the future.

     Recently, the Ministry of Communications decided to open the international call market to new competitors. However, the Ministry notified that it will not allow mobile operators to enter the international call market.

     The Ministry of Communications has the authority to amend the terms of any license. The grounds to be considered in connection with such an amendment are government telecommunications policy, public interest, the suitability of the licensee to perform the relevant services, the promotion of competition in the telecommunications market, the level of service and changes in technology. The Ministry of Communications may also make the award of certain benefits, such as new spectrum, conditional upon the licensee’s consent to a license amendment. The Ministry of Communications also

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has the authority to revoke, limit or suspend a license at the request of the licensee or when the licensee is in breach of a fundamental condition of the license, when the licensee is not granting services under the license or is not granting services at the appropriate grade of service or when the licensee has been declared bankrupt or an order of liquidation has been issued with respect to the licensee. Public interest may also be grounds for the rescission or suspension of a license.

     The Ministry of Communications, with the consent of the Minister of Finance, may also promulgate regulations to determine interconnect tariffs, or formulae for calculating such tariffs. Moreover, the Ministry of Communications may, if interconnecting parties fail to agree on tariffs, or if regulations have not been promulgated, set the interconnect tariff based on cost plus a reasonable profit, or based on each of the interconnecting networks bearing its own costs.

     The Ministry of Communications has promulgated regulations that, coupled with a change effected in the mobile telephone operators’ licenses, impose a uniform call termination tariff. The Ministry of Communications has recently amended the mobile telephone operators’ licenses, reducing SMS termination tariffs. For more information, see “—Interconnection”.

     The Telecommunications Law also includes certain provisions which may be applied by the Ministry of Communications to general licensees, including rights of way which may be accorded to general licensees to facilitate the building of telecommunications networks or systems and a partial immunity against civil liability which may be granted to a general licensee, exempting the licensee, inter alia, from tort liability with the exception of direct damage caused by the suspension of a telecommunications service and damage stemming from intentional or grossly negligent acts or omissions of the licensee. The Ministry of Communications has applied the partial immunity provisions to us, including immunity in the event that we cause a mistake or change in a telecommunication message, unless resulting from our intentional act or gross negligence.

     Royalties. Pursuant to the Telecommunication (Royalties) Regulations, 2001, we must pay royalties to the State of Israel every quarter based on our chargeable revenues, as defined in the regulation, from mobile telephone services (including, among other, airtime, monthly subscription fees, roaming services and non-recurring), on a cumulative basis, excluding value added tax. Revenues for purposes of royalty calculation also exclude revenues transferred to other telecommunications license holders, bad debts, payments for roaming services to foreign mobile telephone operators and certain other revenues. The regulation provided a rate of 4% in 2003 and currently provides a rate of 3.5% in 2004 and thereafter.

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Fair Competition and Antitrust Law

     Provisions protecting Partner from anti-competitive practices can be found in our license and in the licenses of the other telecommunications operators, in the various telecommunications regulations and in the Restrictive Trade Practices Law. Our license emphasizes the principle of granting users equal access to the systems of each of the operators upon equitable terms. The Telecommunications Law also provides certain protection against disruption of service by Bezeq, whose interconnection and transmission services are necessary in order for us to be able to provide certain services.

     The Restrictive Trade Practices Law is the principal statute concerning restrictive practices, mergers and monopolies. This law prohibits a monopoly from abusing its market position in a manner that might reduce competition in the market or negatively affect the public. The law empowers the Commissioner of Restrictive Trade Practices to instruct a monopoly abusing its market power to perform certain acts or to refrain from certain acts in order to prevent the abuse. Bezeq has been declared a monopoly in certain markets, a ruling it is challenging. For more information see “Item 3D. Risk Factors—We operate in a highly regulated telecommunications market which limits our flexibility to manage our business. In particular, the regulator’s decisions, including those relating to tariffs, may materially adversely affect our results of operations”.

Our License

     On April 7, 1998, the Ministry of Communications granted to us a general license to establish and operate a mobile telephone network in Israel for which we paid a license fee and associated costs totaling approximately NIS 1,571 million, including an amount of approximately NIS 12 million as a license fee adjustment to reflect changes in the Israeli CPI from the time we submitted a bid for our license until the time our license was granted by the Ministry of Communications. We paid this additional fee under protest and requested a refund of the fee from the Ministry of Communications. As a result of the rejection of our request by the Ministry of Communications, we filed a suit in the Jerusalem District court.

     In the December 2001 spectrum auction in Israel, we were awarded additional spectrum (GSM (1800 MHz) spectrum and UMTS third generation (1900 MHz and 2100 MHz) spectrum). Following the award of this spectrum, the Minister of Communications amended and extended the license through 2022.

     The cost of the license fees is NIS 180 million (approximately $41 million) for the GSM 1800 spectrum, payable in two installments and NIS 220 million (approximately $50 million) for the UMTS third generation spectrum, payable in six installments. To date, we have paid NIS 180 million and NIS

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131 million for the GSM 1800 spectrum and the UMTS third generation spectrum, respectively. For more information, see “Item 5B. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

     Under the terms of the amended license, we have provided a $10 million guarantee to the State of Israel to secure the Company’s adherence to the terms of the license. For more information, see “Item 5B. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

     On February 18, 2004, the Minister of Communications appointed a tender committee for allocating additional spectrum bands to existing and new mobile network operators. The committee will be responsible for the process of holding a tender in which the Ministry of Communications will extend the licenses of the existing mobile network operators in order to enable them to offer their services in the additional spectrum bands that will be offered and allocated in the tender. In addition, the tender will include the possibility of granting a general license to a new mobile network operator. Under the tender, the Ministry of Communications will offer GSM 1800 MHz bands and third generation UMTS bands.

     Term. Our license authorizes us on a non-exclusive basis to establish and operate a mobile telephone network in Israel. A mobile telephone network is a wireless telephone network through which mobile telephone service is provided to the public. Our license allocates to us specified frequencies and telephone numbers. Our license was originally valid for a period of ten years (until April 2008). As described above, we were granted an amended license as a result of our success in the December 2001 auction for additional spectrum in Israel. Among other changes, the amendment extended our license until 2022.

     The license may be extended for an additional six-year period upon our request to the Ministry of Communications, and a confirmation from the Ministry of Communications that we have met the following performance requirements:

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     At the end of this additional six-year period, we may request renewal of our license for successive six-year periods thereafter, subject to regulatory approval.

     Contracting with Customers. Pursuant to our license, our standard agreement with customers must receive Ministry of Communications approval. We have submitted our standard agreement to the Ministry of Communications for approval pursuant to our license. The agreement is still under review by the Ministry of Communications.

     Tariffs. Our license requires us to submit to the Ministry of Communications our tariffs (and any changes in our tariffs) before they enter into effect. Our license allows us to set and change our tariffs for outgoing calls without approval of the Ministry of Communications. However, the Ministry of Communications may intervene in our tariffs if it finds that our tariffs unreasonably harm consumers or competition.

     Payments. Our license specifies the payments we may charge our subscribers. These include one-time installation fees, fixed monthly payments, airtime fees, payments for the use of other telecommunication systems, payments for handset maintenance and payments for additional services. In most of our tariff plans we have chosen to charge only for airtime and use of services. See “Item 4B. Information on the Company—Business Overview—Services and Products—Tariff Plans.”

     Interconnection. Like the licenses of Pelephone, Cellcom and MIRS, our license requires that we interconnect our mobile telephone network to other telecommunications networks operating in Israel, including that of Bezeq, the other mobile telephone operators and the international operators.

     Conversely, Partner must allow other network operators to interconnect to its network. See “Item 4B. Information on the Company—Business Overview—Interconnection.”

     Service Approval. The Ministry of Communications has the authority to require us to submit for approval details of any of our services (including details concerning tariffs). In addition, we are required to inform the Ministry of Communications 30 days prior to the activation of any service on a specified list of services.

     Access to Infrastructure. The Ministry of Communications has the power to require us, like the other telephone operators in Israel, to offer access to our network infrastructure to other operators. We may also be required to permit other operators to provide value-added services using our network.

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     Universal Service. We are required to provide any third generation service with the same coverage as our existing network within 24 months from the commercial launch of each such service.

     Territory of License. Our license authorizes us to provide mobile telephone services within the State of Israel. In May 2000, we were also granted a license from the Israeli Civil Administration, which is responsible for administering the territories of the West Bank and Gaza that are not under the administration of the Palestine Authority.

     License Conditions. Our license imposes many conditions on our conduct. We must at all times be a company registered in Israel. Our license may not be transferred, mortgaged or attached without the prior approval of the Ministry of Communications. We may not sell, lease or mortgage any of the assets which serve for the implementation of our license without the prior approval of the Ministry of Communications, other than in favor of a banking corporation which is legally active in Israel, and in accordance with the conditions of our license.

     Our license provides that no direct or indirect control of Partner may be acquired, at one time or through a series of transactions, and no means of control may be transferred in a manner which results in a transfer of control, without the consent of the Ministry of Communications. Furthermore, no direct or indirect holding of 10% or more of any means of control may be transferred or acquired at one time or through a series of transactions, without the consent of the Ministry of Communications. In addition, no shareholder of Partner may permit a lien to be placed on shares of Partner if the foreclosure on such lien would cause a change in the ownership of 10% or more of any of Partner’s means of control unless such foreclosure is made subject to the consent of the Ministry of Communications. For purposes of our license, “means of control” means any of:

     In addition, Partner, any entity in which Partner is an Interested Party, as defined below, an Office Holder, as defined below, in Partner or an Interested Party in Partner or an Office Holder in an Interested Party in Partner may not be a party to any agreement, arrangement or understanding which may reduce or harm competition in the area of mobile telephone services or any other telecommunications services.

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     Our license also provides that a foreign mobile radio telephone operator, as defined below, or its controlling corporation, must hold during the five year period commencing on the date our license was granted by the Ministry of Communications, 25% of the voting rights and of the rights to appoint directors or the general manager of Partner. The foreign mobile radio telephone operator must also provide us all with the information in its possession required for the establishment of a mobile telecommunications system and for the provision, marketing and sale of mobile telecommunications services. Accordingly, no transfer may occur if as a result the foreign mobile radio telephone operator, or a controlling corporation, will hold less than 25% of the voting rights or the right to appoint directors or the general manager in Partner. After such five-year period, this holding may be reduced with the approval of the Ministry of Communications. On September 14, 2003, the Ministry of Communications notified us that the undertaking to provide information as mentioned above need no longer remain in force.

     In connection with our initial public offering, our license was amended to provide that our entering into an underwriting agreement for the offering and sale of shares to the public, listing the shares for trading, and depositing shares with the depositary or custodian will not be considered a transfer of any means of control, as defined below. Pursuant to the amendment, if the ADSs (or other “traded means of control,” that is, means of control which have been listed for trade or offered through a prospectus and are held by the public) are transferred or acquired in breach of the restrictions imposed by the license with respect to transfer or acquisition of 10% or more of any means of control, we must notify the Ministry of Communications and request the Minister’s consent within 21 days of learning of the breach. In addition, should a shareholder, other than a founding shareholder, breach these ownership restrictions, or provisions regarding acquisition of control or cross-ownership or cross-control with other mobile telephone operators or shareholdings or agreements which may reduce or harm competition, its shareholdings will be converted into dormant shares, as long as the Minister’s consent is required but not obtained, with no rights other than the right to receive dividends and other distributions to shareholders, and to participate in rights offerings.

     The dormant shares must be registered as dormant shares in our share registry. Any shareholder seeking to vote at a general meeting of our shareholders must notify us prior to the vote, or, if the vote is by deed of vote, must so indicate on the deed of vote, whether or not the shareholder’s holdings in Partner or the shareholder’s vote requires the consent of the Ministry of Communications due to the restrictions on transfer or acquisition of means of control, or provisions regarding cross-ownership or cross-control with other mobile telephone operators or shareholders. If the shareholder does not provide such certification, his instructions shall be invalid and his vote not counted.

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     The existence of shareholdings which breach the restrictions of our license in a manner which could cause them to be converted into dormant shares and may otherwise provide grounds for the revocation of our license will not serve in and of themselves as the basis for the revocation of our license so long as:

     The amendment of our license providing for the dormant share mechanism does not apply to our principal shareholders.

     The provisions contained in the amendment to our license are also contained in our Articles of Association. In addition, our Articles of Association contain similar provisions in the event the holdings of shares by a shareholder breaches the Israeli and foreign mobile radio telephone operator ownership limits contained in our license. The principal shareholders have informed us that they intend to seek a change to the 51% ownership threshold.

     Revoking, limiting or altering our license. Our license contains several qualifications that we are required to meet. These conditions are designed primarily to ensure that we maintain at least a specified minimum connection to Israel and that we benefit from the experience of a foreign mobile radio telephone operator. Other eligibility requirements address potential conflicts of interest and cross-ownership with other Israeli telecommunications operators. The major eligibility requirements are set forth below. A failure to meet these eligibility requirements may lead the Ministry of Communications to revoke, limit or alter our license, after we have been given an opportunity and have failed to remedy it.

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     Our license may also be revoked, limited or altered by the Ministry of Communications if we have failed to uphold our obligations under the Telecommunications Law, the Wireless Telegraphy Ordinance or the regulations, or have committed a substantial breach of the license conditions. Examples of the principal undertakings identified in our license in this connection are:

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     In addition, our amended license, like the licenses of our competitors, provides that if we participate in a future tender for a mobile telecommunications license, we may be required by the terms of a new tender, if we win such tender, to transfer our network to another operator according to terms which the Minister of Communications may decide upon and to cease providing mobile telephony services.

     Change in license conditions. Under our license, the Ministry of Communications may change, add to, or remove conditions of our license if certain conditions exist, including:

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     During a period of an emergency, control of Partner’s mobile radio telephone system may be assumed by any lawfully authorized person for the security of the State of Israel to ensure the provisions of necessary service to the public, and some of the spectrum granted to us may be withdrawn. In addition, our license requires us to supply certain services to the Israeli defense and security forces. Furthermore, certain of our senior officers are required to obtain security clearance from Israeli authorities.

For the purposes of this discussion, the following definitions apply:

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Our Permit Regarding Cross Ownership

     Our license generally prohibits cross-control or cross-ownership among competing mobile telephone operators without a permit from the Ministry of Communications. In particular, Partner, an Office Holder or an Interested Party in Partner, as well as an Office Holder in an Interested Party in Partner may not control or hold, directly or indirectly, 5% or more of any means of control of a competing mobile radio telephone operator. Our license also prohibits any competing mobile radio telephone operator or an Office Holder or an Interested Party in a competing mobile radio telephone operator, or an Office Holder in an Interested party in a competing mobile radio telephone operator or a person or corporation that controls a competing mobile radio telephone operator from either controlling, or being an Interested Party in us.

     However, our license, as amended on April 14, 2002 also provides that the Ministry of Communications may permit an Interested Party in Partner to hold, either directly or indirectly, 5% or more in any of the means of control of a competing mobile radio telephone operator if the Ministry of Communications is satisfied that competition will not be harmed, and on the condition that the Interested Party is an Interested Party in Partner only by virtue of a special calculation described in the license and relating to attributed holdings of shareholders deemed to be in control of a corporation.

     An indirect shareholder of Elbit, Discount Investment Company Ltd., is deemed to be an Interested Party in both Partner and Cellcom by virtue of the special calculation described above. Accordingly, we applied for and received a permit from the Ministry of Communications which authorized Discount’s indirect ownership of equity in both Partner and Cellcom. Our permit was also amended on April 14, 2002 and on June 2, 2002. Our permit contains certain guidelines which apply to Discount and the related companies PEC Israel Economic Corporation, Elron Electronic Industries Ltd., the parent of Elbit, Elbit and IDB Development Company Ltd., the parent of Discount, and persons who control any one of them (collectively, the “IDB Group”). Our permit establishes limits on the holdings of the IDB Group in the equity of Cellcom and Partner. Changes in these holdings require a permit from the Ministry of Communications, and may require Elbit to significantly reduce its holdings in Partner. In addition, our permit limits the number of directors of Partner that may be appointed by the IDB Group. Our permit also limits the exchange of information regarding Partner within the IDB Group and its subsidiaries, limits the involvement of the three directors and office holders of Discount Investment Company Ltd. who are also directors of Cellcom in matters relating to Partner, and prohibits these directors from certain activities within the IDB Group which would provide them with access to information about Partner.

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ISP License

     In March 2001, we received a special license issued by the Ministry of Communications, allowing us through our own facilities to provide internet access to both mobile and fixed network customers. The license is valid until March 2008.

Other Licenses

     The Ministry of Communications has granted us a trade license pursuant to the Wireless Telegraphy Ordinance. This license regulates issues of servicing and trading in equipment, infrastructure and auxiliary equipment for our network.

     We have also been granted a number of encryption licenses that permit us to deal with means of encryption, as provided in the aforementioned licenses, within the framework of providing mobile radio telephone services to the public.

Antenna Site Permits

          Permits of the Ministry of Environment

     Pursuant to the Pharmacists (Radioactive Elements and Products) Regulations, 1980 (the “Pharmacists Regulations”) issued under the Pharmaceutics Ordinance, the Ministry of the Environment is empowered to grant erection permits and operation permits for our antennas. The granting of such permits is subject to the satisfaction of conditions to which we are subject under the Pharmacists Regulations. The application to the Ministry of Environment must include a discussion of the type of device, its impact on the environment both during ordinary operation and in maximum level of operation, and details of the possible dangers posed by the device and the manner in which these dangers may be prevented or neutralized. In addition, the application includes an engineer’s sketch of the device and its related equipment.

     The Ministry of the Environment has adopted the International Radiation Protection Agency’s standard as a basis for the consents it gives for the erection and operation of our antennas. This standard is an international standard based upon a number of years of scientific study.

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     In addition, a new bill was recently proposed by the Ministry of the Environment that defines the Ministry’s powers and would replace the Pharmacists Regulations.

          Local Building Permits

     The Planning and Building Law requires that we receive a building permit for the construction of most of our antennas. The local committee or local licensing authority in each local authority is authorized to grant building permits, provided such permits are in accordance with National Building Plan No. 36 which came into effect on June 15, 2002. The local committee is made up of members of the local municipal council. The local committee is authorized to delegate certain of its powers to subcommittees on which senior members of the local authority may sit.

     The local committee examines the manner in which an application for a building permit conforms to the plans applying to the parcel of land that is the subject of the application, and the extent to which the applicant meets the requirements set forth in the Planning and Building Law. The local committee is authorized to employ technical, vista, and aesthetic considerations in its decision-making process. The local committee may grant building permits that are conditioned upon the quality of the construction of the structure, the safety of flight over the structure, and the external appearance of the structure. Every structure located on a certain parcel of land must satisfy the requirements and definitions set forth in the building plan applicable to such parcel.

     A decision by a local committee not to grant a building permit may be appealed to the District Appeals Committee. A person harmed by the ruling of the District Appeals Committee may have such ruling examined judicially by means of an administrative petition to the District Court sitting as an Administrative Affairs Tribunal.

          National Building Plan No. 36

     National Building Plan No. 36 which came into effect on June 15, 2002 regulates the growth of telecommunications infrastructure in Israel. Chapter A of National Building Plan No. 36 sets forth the licensing, view, flight safety and electromagnetic radiation requirements for the construction of mobile radio telephone infrastructure. National Building Plan No. 36 also adopts the radiation emission standards set by the International Radiation Protection Agency which were also previously adopted by the Ministry of the Environment. We believe that we currently comply with these standards.

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          Other Approvals

     The construction of our antennas may be subject to the approval of the Civil Aviation Administration which is authorized to ensure that the construction of our antennas does not interfere with air traffic, depending on the height and location of such antennas. The approval of the Israeli Defense Forces is required in order to coordinate site frequencies so that our transmissions do not interfere with the communications of the Israel Defense Forces.

     We, like other mobile telephone operators in Israel, provide repeaters, also known as bi-directional amplifiers, to subscribers seeking an interim solution to weak signal reception within specific indoor locations. These repeaters, which we install at the subscribers’ premises upon their request, consist of an indoor box attached to a small outdoor antenna of between 40 and 70 cm (approximately one to two feet), receive signals from a network antenna site and amplify them within a specific room or rooms. The radiation emission from these outdoor antennas is comparable to that of the handset whose signal it is transmitting. In light of the lack of a clear policy of the local planning and building authorities, and in light of the practice of the other mobile telephone operators, we have not requested permits under the Planning and Building Law for the repeaters. However, we have received from the Ministry of Communications a type approval for the repeaters. We have also approached the Ministry of the Environment, asserting that no permits are necessary for the repeaters, based on the Ministry’s previous advice that permits are not necessary for devices with comparable levels of emission called “Fixed Cellular Terminals.”

     We have received type approval from the Ministry of Communications for all of the handsets and other terminal equipment we sell. The Ministry of the Environment also has authority to regulate the sale of handsets in Israel. However, in accordance with the current practice among mobile telephone operators in Israel, we have not obtained approvals or exemptions from the Ministry of the Environment for the handsets we provide because, to date, neither the Ministry of the Environment nor the Ministry of Health has issued standards for the permitted level of radiation emissions from handsets. Since June 15, 2002, we have been required to provide information to purchasers of handsets on the Specific Absorption Rate, or SAR, of the handsets as well as its compliance with certain standards pursuant to a regulation promulgated by the Ministry of Industry and Trade under the Consumer Protection Law.

4C. Organizational Structure

     We have one wholly-owned subsidiary, Partner Future Communications 2000 Ltd., an Israeli corporation.

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4D. Property, Plants and Equipment

Headquarters

     We lease our headquarter facilities in Rosh Ha-ayin, Israel, as follows:

     We lease a call center at 5 Kornas St. in Haifa—a building of 2,525 square meters. The lease agreement is for a 5 year period commencing in November 2001. We have the option to extend the lease period for 6 years.

Network Sites

     We lease most of the sites where our mobile telecommunications network equipment is installed throughout Israel. At December 31, 2003, we had 2,138 antenna sites (including micro-sites). The lease agreements relating to our cell sites are generally for periods of two to three years. We have the option to extend the lease periods to ten years (including the original lease period).

Service Centers and Points of Sale

     Lease agreements for our retail stores and service centers are for periods of two to five years. We have the option to extend the lease periods to twenty additional years (including the original lease period). The average size of our retail stores and service center is approximately 230 square meters. See also Note 8a(2)(b) to our consolidated financial statements.

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     The following operating and financial review and prospects are based upon and should be read in conjunction with our financial statements and selected financial data, which appear elsewhere in this report. You should also read the risk factors appearing in this annual report for a discussion of a number of factors that affect and could affect our financial condition and results of operations.

Overview

     We were formed in September 1997. We submitted our bid to the Ministry of Communications for our license on October 28, 1997. The Ministry of Communications awarded us our license on April 7, 1998, and we began full commercial operations to the general public in January 1999.

     In December 2001 we were awarded additional spectrum: second generation (“2G”) band (1800 MHz) and third generation (“3G”) UMTS band (1900 MHz and 2100 MHz). We intend to commercially launch our 3G network towards the end of 2004. See “Item 4A. Information on the Company—History and Development of the Company” for significant events since we commenced commercial operations and “Item 5B. Liquidity and Capital Resources” for information on the costs required to build and expand our network and services.

     The attached table is a summary of selected financial and operating data for each of the years ended December 31, 2003, 2002, 2001, 2000 and 1999:

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Revenues

     Our principal source of revenues is from the sale of network services, primarily network airtime usage fees, and is denominated primarily in shekels. In 2003, as in each of 2002 and 2001, over 50% of network airtime usage fees were derived from outgoing calls, with the remainder generated from incoming calls, roaming and value-added services. We also derive revenues from sales of handsets, car kits, accessories and handset maintenance services to subscribers as well as other services. Network airtime usage fees are derived from subscribers originating calls on our network and payments received from other telecommunications network operators, both local and international, for delivering calls originating on their networks and terminating on our network. We recognize revenues from airtime usage and other services at the time we provide the service to the subscriber. We recognize revenues from handset sales, car kits and other equipment only upon delivery and the transfer of ownership to the subscriber.

Cost of Revenues

     Our principal components of cost of revenues are:

Selling and Marketing Expenses

     Our principal components of selling and marketing expenses are:

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General and Administrative Expenses

     Our principal components of general and administrative expenses are:

Financial Expenses

     Our principal components of financial expenses are:

Taxes on Income

     Because we had experienced seven consecutive quarters of net income by the end of 2003, and based on our estimations of our future earnings and profitability, our assessment relating to the cellular market and trends, and our receipt of final tax assessments for the tax years through December 31, 2001, which validated the amount of our previously incurred carryforward tax loses, we recorded a tax benefit of NIS 633.0 million ($ 144.6 million) in 2003.

Key Business Indicators (Operating Data)

     Our primary key business indicators are described below. These indicators are widely used in the cellular telephone service industry to evaluate performance:

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Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. We also evaluate our estimates, on an ongoing basis. We base our estimates on historical experience and on various other assumptions and information that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     Please refer to Note 1 to our consolidated financial statements included in this annual report for a summary of all of our significant accounting policies.

     We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue Recognition

     As described in Note 1j to our consolidated financial statements, we recognize service revenues as services are rendered, and revenues from sale of handsets and other equipment are recognized upon delivery. We recognize service revenues based upon minutes used, net of credits and adjustments for service discounts. Because our billing cycles use cut-off dates, which for the most part do not coincide with our reporting periods, we are required to make estimates for service revenues earned but not yet billed at the end of each reporting period. These estimates are based primarily upon historical data and trends.

     Actual billing cycle results and related revenue may vary, depending on subscriber usage and rate plan mix, from the results estimated at the end of each period.

Income Taxes

     We account for income taxes in accordance with FAS 109, “Accounting for Income Taxes”. Under FAS 109, an asset and liability approach is required. This approach results in the recognition of a deferred tax asset and liability for the expected future tax consequences of carryforward tax losses

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and temporary differences between the amounts presented in our financial statements and those taken into account for tax purposes, in accordance with the related tax laws.

     FAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of such assets will not be realized. In assessing a valuation allowance for a deferred tax asset, the company estimates future taxable income and provides a valuation allowance when it appears more likely than not that the tax asset will not be recovered.

     We evaluate our deferred tax asset with regard to potential realization. Our determination as to our ability to realize of our deferred tax asset considers all available evidence from sources within the company and external to the company, both positive and negative, regarding the likelihood of sufficient future income. The methodology we use involves estimates of future income, which assumes ongoing profitability. These estimates of future income are projected through the life of the related deferred tax asset, using assumptions which we believe are reasonable.

     As of December 31, 2002, we had carryforward tax losses of approximately NIS 2,000 million and net timing differences (an asset) of approximately NIS 300 million. We began to generate net profits and utilize carryforward tax losses (in insignificant amounts) only in 2002. At the end of 2002, we did not have sufficient confidence that the net income realized in 2002 constituted a trend that would continue in the future. In addition, we had not been assessed for income tax purposes since incorporation and therefore we were unable to assess, with any degree of certainty, the tax authority’s position concerning a number of significant topics, which, at that time, might have had a major affect on the amount of our accumulated losses for tax purposes. Due to the uncertainty at the end of 2002 as to validation of those carryforward tax losses, we provided a full valuation allowance to reduce our deferred tax asset.

     During December 2003, following negotiations with the Income Tax Authorities, we reached an agreement on final assessments through the year ended December 31, 2001. These final income tax assessments validated and determined the amount of our carryforward tax losses. In addition our current forecasts indicate that we can sustain significant levels of profitability in the coming 4 -5 years.

     In order to validate the reversal of most of the valuation allowance, we examined our forecasted earnings under various scenarios that might cause a deterioration in our anticipated results, such as: regulatory changes; more competition than expected that could result in, loss of customers, reduction of tariffs and an increase in SAC; failure to achieve revenue forecasts in respect of content and data services; and impairment of our 3G operations. After analyzing the various scenarios and including sensitivity analyses of these scenarios included in our multi-year forecasts, we

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concluded that it is more likely than not that the tax asset will be almost fully utilized within a maximum period of 4-5 years.

     We believe that our income before taxes for the year ended December 31, 2003 along with our forecasts based on the methodology described above, our updated estimates of future earnings and profitability, our assessments relating to the future cellular market growth and trends, and our receipt of final income tax assessments (as described above), that a valuation allowance is no longer necessary.

     Our carryforward tax losses are linked to the Israeli CPI and can be utilized indefinitely.

     In the event that we will determined in the future that we will be unable to realize all or part of our net deferred tax assets, an adjustment (valuation allowance) to the deferred tax assets would be charged to earnings in the period that such determination is made.

Long-Lived Assets

     We have substantial investments in tangible and intangible long-lived assets, primarily our communications network, our license and spectrum. Changes in technology or changes in our intended use of these assets can cause the estimated period of use or the value of these assets to change. We amortize our communications network by the straight-line method mainly over 6.7 years (15% per year). We amortize our license by the straight-line method mainly over the utilization period of the license, which is based upon the license period. Long lived assets relating to 3G, both network equipment and spectrum, are not amortized since the utilization period has not yet commenced. During 2002, our license was extended by 14 years to 2022. Consequently, the amortized balance of our license is amortized as of 2002 over the period ending in 2022. We review our communications network, license and spectrum for impairment annually or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable through undiscounted future cash flows. If necessary, we write down the assets to their estimated fair values. No write-downs of our long-lived assets have been recorded since incorporation.

Allowance for Doubtful Accounts

     We maintain allowance for doubtful accounts for estimated losses resulting from the inability of our subscribers to make required payments. We base our allowance on the likelihood of recoverability of accounts receivable based on the aging of the balances, our historical write-off experience net of recoveries, changes in the credit worthiness of our customers, and collection trends. The allowance is periodically reviewed. The allowance charged to expenses is determined in respect of specific debts

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doubtful of collection, calculated as a specified percentage of the outstanding balance in each debt age group, with the percentage of the allowance increasing as the age of the debt increases. For example, a debt that is between 1 to 1.5 years overdue is reserved for at the rate of 94%. The debt becomes fully reserved once it is at least 1.5 years overdue. Actual customer collections could differ from our estimates. For example, if the financial condition or our customers were to deteriorate, additional allowances may be required. Our bad debt expenses as a percentage of revenues were 0.5%, 0.4% and 0.3% for the years ended December 31, 2001, 2002 and 2003, respectively.

Results of Operations for the Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002

     Our total revenues in 2003 increased to NIS 4,467.7 million (US$ 1,020.3 million), up 10.2% from NIS 4,054.6 million in 2002. Our services revenues in 2003, driven primarily by subscriber growth of 14.5%, but offset in part by lower ARPU primarily from the decline in interconnect rates, increased to NIS 4,117.9 million (US$ 940.4 million), up 9.0% from NIS 3,776.6 million in 2002. Data and content revenues, which include SMS and value added services, continued to grow faster than voice revenues, and in 2003 were 7.3% of total service revenues, compared to 6.3% of service revenues in 2002. Most of the growth in data and content revenues as compared to 2002 was from SMS services. Our equipment revenue in 2003 increased to NIS 349.8 million (US$ 80.0 million), up 21.5% from NIS 288.0 million in 2002. Primarily higher levels of handset sales derived from increased retention and upgrade activities and higher sales prices drove this increase.

     Our cost of revenues increased marginally in 2003 to NIS 3,136.5 million (US$ 716.2 million) up 2.2% from NIS 3,069.5 million in 2002. Our cost of service revenues for 2003 was NIS 2,586.7 million (US$ 590.7 million), up 3.5% from NIS 2,499.5 million in 2002. In 2003, as compared to 2002, despite the decrease in the interconnect tariffs, we incurred higher interconnect charges due to the increased level of subscribers and usage. The increased interconnect charges were offset by cost efficiencies, primarily relating to handset and network maintenance and transmission costs. Our cost of equipment revenues in 2003 was NIS 549.7 million, down 3.5% from NIS 569.9 million in 2002. The decrease was the result of lower handset costs.

     Even with subscriber growth of 14.5%, selling and marketing expenses remained relatively stable in 2003 and were NIS 314.0 million (US$ 71.7 million), up 1.9% from NIS 308.1 million in 2002.

     General and administrative expenses for 2003 were NIS 162.4 million (US$ 37.1 million), compared to NIS 143.6 million in 2002, an increase of 13.1%. The increase in general and

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administrative expenses for 2003 resulted primarily from increased insurance costs, rental expenses and depreciation.

     Operating profit for 2003 increased to NIS 854.9 million (US$ 195.2 million) from NIS 533.4 million in 2002, an increase of 60.3%. Operating profit as a percentage of revenues increased to 19.1% in 2003 from 13.2% in 2002.

     Financial expenses in 2003 were NIS 321.7 million (US$ 73.5 million), down 27.7% from NIS 445.2 million in 2002. Financial expenses were lower in 2003 as compared to 2002, primarily due to our lower levels of average debt, declining interest rates and a stronger Shekel versus the US Dollar. Nevertheless, financial income from the 7.6% increase in the value of the Shekel versus the US Dollar in 2003 was almost completely offset by hedging transactions.

     In 2003, as a result of the factors described above, we recorded net income before taxes of NIS 529.6 million (US$ 120.9 million), as compared to net income before taxes in 2002 of NIS 84.2 million, an increase of 529.0%. Based on these results and our estimates of our future earnings and profitability, assessments relating to the cellular market and trends, and the receipt of final tax assessments for the tax years through December 31, 2001 which validated the amount of the carryforward tax losses, we recorded a tax benefit of NIS 633.0 million in Q4 2003 (US$ 144.6 million). As of December 31, 2003 we would require approximately NIS 1,760 million of future taxable income in order to fully realize our deferred tax asset.

     As of December 31, 2003, our net active subscribers increased to 2,103,000, an increase of 14.5% from our net active subscriber base of 1,837,000 as of December 31, 2002. Our subscriber base as of December 31, 2003 accounted for an approximate market share of 31%, up from 29% at the end of 2002. Our subscriber base comprises 1,117,000 post-paid private subscribers (53% of the base), 639,000 prepaid subscribers (30% of the base) and 347,000 business subscribers (17% of the base). At the end of 2002, our subscriber base consisted of 1,004,000 post-paid private subscribers (55% of the base), 541,000 prepaid subscribers (29% of the base) and 293,000 business subscribers (16% of the base). Our annual churn rate for 2003 was 13.6%, compared to 10.9% in 2002. The increase in churn was driven primarily by increased churn in prepaid subscribers, rotational churn (rotational churn occurs when an existing customer purchases a new handset and a SIM card, and then ceases to use either the new or the old SIM card) and increasing competition.

     Our MOU remained relatively stable and declined by only 1.0% in 2003 as compared to 2002. MOU in 2003 was 277, compared to 280 in 2002. The stability in MOU was driven primarily by stability in the percentage breakdown of our subscriber base between business, post-paid private and prepaid subscribers as compared to prior years. In prior

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years, prepaid subscribers, with substantially lower MOU, grew faster than business and post-paid private subscribers with higher MOU.

     Our ARPU declined by 7.0% in 2003 as compared to 2002. The decline was driven primarily by the 10% decrease, on January 1, 2003, of the interconnect rates as mandated by the Israel Ministry of Communications. ARPU for 2003 was NIS 171, compared to NIS 183 in 2002.

     In 2003, lower handset subsidies caused the average cost of acquiring a new subscriber, or SAC, to decline by 23% from 2002. 2003 SAC was NIS 362 (US$ 82.7), compared to NIS 470 for 2002.

Trends

     We expect the rate of revenue growth in 2004 to decrease primarily due to a lower rate of subscriber growth, resulting from higher levels of penetration in the market, compared to what we achieved in 2003. In addition, we anticipate slightly lower average MOU and ARPU. SAC levels should be lower in 2004 than they were in 2003. However SAC should rise towards the end of the year due to more expensive 3G handsets, requiring higher handset subsidies than before, which we expect to introduce towards year-end. Even though we expect to incur some incremental expenses in ramping up our 3G effort, we expect to maintain approximately the same levels of operating margins in 2004 as in 2003.

     If we succeed in investing in Matav, we expect that this will have a substantially dilutive impact on our earnings at least in the short term. For more information, see “Item 3D. Risk Factors – We expect that our investment in Matav will be substantially dilutive to our earnings, at least in the short term, and may result in additional leverage.”

Results of Operations for the Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001

     Our total revenues in 2002 increased to NIS 4,055 million from NIS 3,249 million in 2001. Our services revenues in 2002, driven primarily by subscriber growth increased to NIS 3,766.6 million from NIS 2,972.1 million in 2001. Our equipment revenue in 2002 increased slightly to NIS 288.0 million from NIS 277.3 million in 2001.

     Our cost of revenues for 2002 was NIS 3,069 million, compared to NIS 2,719 million in 2001. Our cost of services revenue for 2002 was NIS 2,499.5 million compared to NIS 2,187.6 million in

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2001. The increase in our cost of services revenues in 2002 over 2001 was driven primarily by interconnect and other network expenses related to higher subscriber numbers and usage, offset by a decrease of NIS 113 million in our license amortization expenses as a result of the extension of our license until 2022. Our cost of equipment revenue for 2002 was NIS 569.9 million compared to NIS 531.6 million in 2001. The increase in cost of equipment revenue was driven primarily by lower handsets costs.

     Our selling and marketing expenses in 2002 were NIS 308 million compared to NIS 293 million in 2001. The slight increase in selling and marketing expenses was due to increased marketing efforts in response to increased competition.

     General and administrative expenses in 2002 were NIS 144 million compared to NIS 134 million in 2001. The increase in these expenses was driven primarily by insurance costs and also resulted from the fact that in 2001, we received a refund in the amount of approximately NIS 24 million from Bezeq following the Ministry of Communications’ interim settlement regarding our dispute on bad debt collection.

     We had an operating profit for the year ended December 31, 2002 of NIS 533 million compared to NIS 103 million in 2001. Operating profit as a percentage of revenues increased to 13.2% in 2002 from 3.2% in 2001.

     We had net financial expenses in 2002 of NIS 445 million compared to NIS 401 million in 2001, an increase of NIS 44 million. The increase in net financial expenses is attributed mainly to an increase of NIS 222 million in our average total debt outstanding, higher interest rates set by the Central Bank of Israel and the effect of the shekel devaluation on our US $175 million senior subordinated notes.

     Our net income in 2002 was NIS 84 million compared to a net loss of NIS 303 million in 2001.

     We had 1,837,000 subscribers as of December 31, 2002 compared to 1,458,000 subscribers as of December 31, 2001, an increase of 26%. Our churn rate in 2002 was 10.9% as compared to 5.8% in 2001. The increase in the churn rate in 2002 was attributed predominately to increased churn among prepaid subscribers and churn from those subscribers who joined our network in 1999 with three year commitment periods, as well as increasing competition.

     Our MOU declined by 11.9% in 2002 as compared to 2001. The primary cause of this reduction was the increasing percentage of prepaid subscribers in our subscriber base, which have historically provided below-average MOU.

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     Our subscriber acquisition costs per subscriber, for 2002 were NIS 470 compared to NIS 458 in 2001. This slight increase was attributed primarily to the increasing percentage of business subscribers amongst our new subscribers for whom we have traditionally incurred higher subscriber acquisition costs compared to other new subscribers, and higher prices of more sophisticated handsets resulting in higher handset subsidies.

     ARPU for the year ended December 31, 2002 was NIS 183, compared to NIS 214 in 2001. The primary cause of this reduction was the increasing percentage of prepaid subscribers in our subscriber base, which have historically provided below-average ARPU.

Impact of Inflation and Exchange Rate Fluctuations

     Substantially all of our revenues and a majority of our operating expenses are denominated in shekels. However, through December 31, 2003, a substantial amount of our operating expenses were linked to non-shekel currencies. These expenses related mainly to the acquisition of handsets where the price paid by us is based on various foreign currencies. In addition, most of our capital expenditures are incurred in, or linked to, non-shekel currencies, and our notes are denominated in US dollars and require US dollar interest payments. Thus, any devaluation of the shekel against the non-shekel currencies will increase the shekel cost of our non-shekel denominated or linked expenses. Such an increase may have an adverse impact on our results, which may be material. We hedge some of our foreign currency commitments, but we do not currently hedge the principal payable on our notes due 2010. In 2003 financial income from the 7.6% increase in the value of the shekel versus the US Dollar in 2003 was almost completely offset by hedging transactions.

     Although we have the ability to borrow under our bank credit facility in US dollars and Euro, our borrowings are in shekels, and part of our shekel bank borrowings are linked to the Israeli CPI. We may not be permitted to raise our tariffs pursuant to our license in a manner that would fully compensate for any increase in the Israeli CPI. Therefore, an increase in the rate of inflation may also have a material adverse impact upon us by increasing our financial expenses without an offsetting increase in revenue.

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Liquidity and Capital Resources

Liquidity

     The mobile telephone business is highly capital intensive, requiring significant capital to acquire a license, construct mobile telecommunications networks and in the start up phases fund operating losses. The capital requirements of our network are determined by the coverage desired, the expected call traffic and the desired quality and variety of services. Network construction costs are mainly related to the number of cells in the service area, the number of radio channels in the cell and the switching equipment required.

     In July 2000, we entered into an Amending and Rescheduling Agreement, which amended our credit facility, increasing the amount available to $750 million, subject to the meeting of defined milestones. In August 2000, we completed an offering of $175 million aggregate principal amount of unsecured senior subordinated notes due 2010. The net proceeds from that offering (approximately $170.5 million after deducting commissions and offering expenses) were used mainly to repay a portion of the outstanding indebtedness under our credit facility.

     On December 31, 2002, we entered into an Amending Agreement to the Facility Agreement, which amended our credit facility, decreasing the amount available to $710 million. Our credit facility is divided into three tranches: a $410 million multicurrency term loan facility (facility A), a $150 million revolving multicurrency loan facility (facility B), and a $150 million shekel term loan facility (facility C). All facilities are provided by Israeli banks and Citibank N.A., with Bank Leumi Le-Israel B.M. as facility agent and Bank Hapoalim as a coordinating agent.

     Facilities A and B of our credit facility may be drawn in shekels, US dollars or Euro, provided that not less than 60% of the outstanding advances under facilities A and B, at any time, must be in shekels and that not more than 40% of the outstanding advances under facilities A and B may be drawn in US dollars or euros. Facility C may be drawn only in shekels. It is our intention to draw amounts under the credit facility primarily in shekels. Under the amended credit facility, facility A was available for drawing through March 31, 2003, and $383 million had been drawn as of December 31, 2003; facility B is available for drawing until June 30, 2008, and $18 million had been drawn as of December 31, 2003; and facility C is available for drawing until December 31, 2004, and none had been drawn as of December 31, 2003. At December 31, 2003, the balances available for drawing were approximately $132 million under facility B, and $150 million under facility C, and at January 31, 2004 the balances available for drawing were approximately $150 million under facility B, and $150 million under facility C.

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     Repayment under facility A will begin on June 30, 2004 and will continue until June 30, 2008, repayment under facility B will be on June 30, 2008, and repayment under facility C will begin on March 31, 2005 and will continue until June 30, 2009. See also Note 5e to our consolidated financial statements.

     Another source of our liquidity results from our factoring on a non-recourse basis most of our long-term trade receivables resulting from sales of handsets. We record the transfer of accounts receivable as a sales transaction under the provisions of Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. During the years ended December 31, 2002 and 2003, we factored approximately NIS 210 million and NIS 296 million ($68 million), respectively, from long-term trade receivables. The resulting costs amounted to approximately NIS 10 million and NIS 17 million ($ 4 million) for the years ended December 31, 2002 and 2003, respectively, and are charged to “Financial expenses-net”, as incurred.

     Currently, our main sources of liquidity are:

     We generated positive cashflow from operations amounting to NIS 1,031.5 million ($235.6 million) in 2003, compared to NIS 682.2 million in 2002. The difference was primarily due to increased operating profits in 2003 as compared to 2002. Cashflow used in investing activities was NIS 376.8 million ($86.0 million) in 2003, compared to NIS 816.0 million in 2002. The decrease was mainly due to reductions in payments for fixed assets and spectrum in the amount of NIS 335.7 million (US$ 76.7 million) and the proceeds from withdrawal of the NIS 98.9 million (US$ 22.6 million) security deposit for the interest on our US Dollar denominated notes.

     Cash used in financing activities was NIS 652.3 million ($149.0 million) in 2003, compared to NIS 129.9 million cash provided in 2002. The change was primarily due to repayments of borrowings under our long-term loans.

     We expect cash flows from operations net of cash flows from investing activities in 2004 to be stronger and expect to use the net cash flows to reduce our bank debt. We are also contemplating, subject to market conditions, calling our 13% US dollar denominated notes due in 2010 at their first call date, in August 2005, in order to refinance them with lower cost debt, if possible.

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     We have entered into a memorandum of agreement with Matav and its shareholders, to invest $137 million in Matav for approximately 40% share of Matav’s equity, subject to certain conditions. We will finance this investment with additional debt or by issuing equity.

     As a result of obtaining GSM 1800 and UMTS third generation spectrum bands in the December 2001 spectrum auction in Israel, we have payment obligations with respect to each of those spectrum bands. We paid NIS 180 million (approximately $41 million) for the GSM 1800 spectrum. We are also committed to pay NIS 220 million (approximately $50 million) for the UMTS third generation spectrum, in six installments. The first three installments, totaling NIS 130 million (approximately $30 million), were paid in February and June 2002, and June 2003 and the remaining three installments are payable no later than June 1, 2004, 2005 and 2006 in amounts equal to NIS 35 million, NIS 33 million and NIS 22 million, respectively. The remaining three installments will be paid plus interest at the rate set by the Accountant General of the Israeli Ministry of Finance.

     From January 1, 2001 to December 31, 2003, we made cumulative net capital expenditures of approximately NIS 789 million, of which NIS 232 million ($53 million) was incurred in 2003. We expect that capital expenditures for our network will continue to represent the largest portion of our total capital expenditures over the next few years. We expect to incur approximately NIS 650 million ($ 150 million) of capital expenditures in 2004, primarily in order to increase the capacity of our GSM network through the installation of GSM 1800 antennas. We expect that capital expenditures in connection with building out the 3G network will cost $250 million over the next three years. The UMTS third generation network build-out is expected to begin towards the middle of 2004.

     We believe that funds from our operations, together with funds available under the credit facility, will provide us with enough liquidity and resources to fund our expected capital expenditure needs, including our plans to increase the capacity of our existing network and capital expenditures associated with our UMTS third generation network build-out, as well as our obligations under our financing agreements, our license payments and our other material commitments. However, the actual amount and timing of our future requirements may differ materially from our estimates.

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Research and Development, Patents and Licenses

     We are primarily a user rather than a developer of technology. Accordingly, we did not engage in any significant research and development activities during the past three years.

Off-Balance Sheet Arrangements

     There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Aggregate Contractual Obligations

     Set forth below are our contractual obligations and other commercial commitments as of December 31, 2003: