---

---

As
filed with the Securities and Exchange Commission on June 12, 2007

# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 20-F

|o | REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------

OR

|x | ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

| | For
the fiscal year ended December 31, 2006
| | -------------------------------------------

OR

|o | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

| | For
the transition period from ________ to ________
| | ---------------------------------------------------

OR

|o | SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------

| | Date
of event requiring this shell company report ________
| | ----------------------------------------------------------

| | Commission
file number 1-14968
| | ------------------------------

# PARTNER COMMUNICATIONS
COMPANY LTD.

(Exact Name of
Registrant as Specified in its Charter) 
ISRAEL

(Jurisdiction of
Incorporation or Organization) 
8 AMAL STREET 
AFEQ INDUSTRIAL PARK 
ROSH-HAAYIN 48103 
ISRAEL

(Address of Principal
Executive Offices)

Securities
registered pursuant to Section 12(b) of the Act:

NONE

Securities Registered
Pursuant to Section 12(g) of the Act:

Title of Class

American Depositary
Shares 
Ordinary Shares*

*     Not for trading, but only in
connection with the registration of American Depositary Shares representing such ordinary
shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act:

NONE



---

---



Indicate the number of outstanding
shares of each of the issuers classes of capital or common stock as of the close of
the period covered by the annual report:

ORDINARY SHARES OF NIS 0.01 EACH     154,516,217

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES x   NO  o

If this report is an annual or
transition report, indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act 1934.

YES o   NO  x

Indicate by check mark whether the
Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:

YES  x   NO  o

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act.

Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o

Indicate by check mark which
financial statement item the Registrant has elected to follow:

ITEM 17  o   ITEM 18  x

If this is an annual report, indicate
by checkmark whether the Registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act.

YES o   NO  x



---

---



# TABLE OF CONTENTS

|                                                                                      |   
|------------------------------------------------------------------------------------- | --
|
|
|
|
|ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                         | 4 
|ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                       | 4 
|ITEM 3. KEY INFORMATION                                                               | 4 
|ITEM 4. INFORMATION ON THE COMPANY                                                    | 18
|ITEM 4A. UNRESOLVED STAFF COMMENTS                                                    | 41
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                  | 41
|ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                    | 49
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                             | 62
|ITEM 8. FINANCIAL INFORMATION                                                         | 66
|ITEM 9. THE OFFER AND LISTING                                                         | 68
|ITEM 10. ADDITIONAL INFORMATION                                                       | 69
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 78
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 79
|ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 79
|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 79
|ITEM 15. CONTROLS AND PROCEDURES                                                      | 79
|ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                            | 80
|ITEM 16B. CODE OF ETHICS                                                              | 80
|ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                      | 80
|ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                  | 81
|ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES       | 81
|ITEM 17. FINANCIAL STATEMENTS                                                         | 81
|ITEM 18. FINANCIAL STATEMENTS                                                         | 81
|ITEM 19. EXHIBITS                                                                     | 82
|GLOSSARY OF SELECTED TELECOMMUNICATIONS TERMS                                         | 84

1

---

---



# 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 subsidiaries, Partner Future Communications 2000
Ltd., Partner Land-Line Communications Solutions LLP and Partner Business Communications
Solutions, LLP (of which Partner Future Communications 2000 Ltd. serves as the general
partner and the Company serves as the limited partner), 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 29, 2006 of NIS 4.225= 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.

# 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:

| | the
effects of the high degree of regulation in the telecommunications market in which we
operate;
|- | --------------------------------------------------------------------------------------------------

| | regulatory
developments related to the implementation of number portability;
|- | ----------------------------------------------------------------------------

| | regulatory
developments relating to tariffs, including interconnect tariffs, roaming charges, and
SMS          tariffs;
|- | -----------------------------------------------------------------------------------------------------------------------

| | the
difficulties associated with obtaining all permits required for building and operating of
antenna          sites;
|- | ---------------------------------------------------------------------------------------------------------------------

| | the
requirement to indemnify planning committees in respect of claims made against them
relating to the depreciation of property values or to alleged health damage resulting
from antenna sites;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
effects of vigorous competition in the market in which we operate and for more valuable
customers, which may decrease prices charged, increase churn and change our customer mix,
profitability and average revenue per user, and the response of competitors to industry
and regulatory developments;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | regulatory
developments which permit the Ministry of Communications to require us to offer our
network infrastructure to other operators, which may lower the entry barrier for new
competitors;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | uncertainties
about the degree of growth in the number of consumers in Israel using wireless personal
communications services and the growth in the Israeli population;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
risks associated with the implementation of a third generation (3G) network and business
strategy, including risks relating to the operations of new systems and technologies,
potential unanticipated costs, uncertainties regarding the adequacy of suppliers on whom
we must rely to provide both network and consumer equipment and consumer acceptance of
the products and services to be offered, and the risk that the use of internet search
engines by our 3G customers will be restricted;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2

---

---



| | the
results of litigation filed or that may be filed against us;
|- | ----------------------------------------------------------------

| | the
risk that, following a possible rearrangement of spectrum, we may lose some of our
frequencies or we may be allocated spectrum of inferior quality;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
risks associated with technological requirements, technology substitution and changes and
other          technological developments;
|- | ----------------------------------------------------------------------------------------------------------------------------------------

| | alleged
health risks related to antenna sites and use of telecommunication devices;
|- | -----------------------------------------------------------------------------------

| | the
impact of existing and new competitors in the market in which we compete, including
competitors that may offer less expensive products and services, desirable or innovative
products, technological substitutes, or have extensive resources or better financing;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | fluctuations
in foreign exchange rates;
|- | ---------------------------------------

| | the
possibility of the market in which we compete being impacted by changes in political,
economic or other factors, such as monetary policy, legal and regulatory changes or other
external factors over which we have no control; and
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | the
availability and cost of capital and the consequences of increased leverage.
|- | --------------------------------------------------------------------------------

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.

3

---

---



# ITEM 1. IDENTITY OF
DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not
applicable.

# ITEM 2. OFFER STATISTICS
AND EXPECTED TIMETABLE

Not
applicable.

# 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, 2006 prepared in accordance with US GAAP. The
selected financial data for each of the years in the three-year period ended December 31,
2006 and at December 31, 2006 and 2005 are derived from our consolidated financial
statements set forth elsewhere in this annual report. The selected financial data for each
of the years ended December 31, 2003 and 2002 and at December 31, 2004, 2003 and 2002 are
derived from our audited financial statements not appearing in this annual report. 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.

|                                                                                             | Year ended December 31,
|-------------------------------------------------------------------------------------------- | -----------------------
|
|
|
|
|Statement of Operations Data                                                                 |                        
|Revenues, net                                                                                |                        
|Services                                                                                     |                        
|Equipment                                                                                    |                        
|                                                                                             |                        
|                                                                                             |                        
|                                                                                             |                        
|Cost of revenues                                                                             |                        
|Services                                                                                     |                        
|Equipment                                                                                    |                        
|                                                                                             |                        
|                                                                                             |                        
|                                                                                             |                        
|Gross profit                                                                                 |                        
|Selling and marketing expenses                                                               |                        
|General and administrative expenses                                                          |                        
|                                                                                             |                        
|                                                                                             |                        
|Operating profit                                                                             |                        
|Financial expenses, net                                                                      |                        
|Loss on impairment of
     investments in non-
     marketable securities                    |                        
|                                                                                             |                        
|                                                                                             |                        
|Income before tax                                                                            |                        
|                                                                                             |                        
|Tax benefit (tax expenses)                                                                   |                        
|                                                                                             |                        
|                                                                                             |                        
|Income  before                                                                               |                        
|cumulative effect of a                                                                       |                        
|change in accounting                                                                         |                        
|principles                                                                                   |                        
|                                                                                             |                        
|Cumulative effect, at
     beginning of year, of a
     change in accounting
     principles |                        
|                                                                                             |                        
|Net income for the year                                                                      |                        
|                                                                                             |                        

4

---

---



|                                                     | Year ended December 31,
|---------------------------------------------------- | -----------------------
|
|
|
|
|Earnings per ordinary share and per ADS              |                        
|Basic:                                               |                        
|Before cumulative effect                             |                        
|Cumulative effect                                    |                        
|                                                     |                        
|                                                     |                        
|                                                     |                        
|Diluted:                                             |                        
|Before cumulative effect                             |                        
|Cumulative effect                                    |                        
|                                                     |                        
|                                                     |                        
|                                                     |                        
|Weighted average number of shares                    |                        
|Outstanding                                          |                        
|Basic:                                               |                        
|                                                     |                        
|Diluted:                                             |                        
|                                                     |                        
|                                                     |                        
|Other Financial Data                                 |                        
|                                                     |                        
|Capital expenditures, net                            |                        
|                                                     |                        
|EBITDA(1)                                            |                        
|Statement of Cash Flow Data                          |                        
|                                                     |                        
|Net cash provided by 
operating activities           |                        
|                                                     |                        
|Net cash used in investing                           |                        
|activities                                           |                        
|                                                     |                        
|Net cash provided 
by (used in) financing activities |                        
|                                                     |                        
|Balance Sheet Data (at year end)                     |                        
|                                                     |                        
|Current assets                                       |                        
|                                                     |                        
|Investments and long-term                            |                        
|receivables                                          |                        
|                                                     |                        
|Fixed assets, net                                    |                        
|License and deferred charges, net                    |                        
|                                                     |                        
|Deferred income taxes                                |                        
|                                                     |                        
|                                                     |                        
|Total assets                                         |                        
|                                                     |                        
|                                                     |                        
|Current liabilities (2)                              |                        
|                                                     |                        
|                                                     |                        
|Long-term liabilities (2)                            |                        
|                                                     |                        
|Total liabilities                                    |                        
|                                                     |                        
|                                                     |                        
|Shareholders' equity (capital                        |                        
|deficiency)                                          |                        
|                                                     |                        
|                                                     |                        
|Total liabilities and
shareholders' equity           |                        
|                                                     |                        

5

---

---



|(1) | EBITDA
represents earnings before interest, taxes, depreciation and                amortization.
EBITDA is presented because it is a measure commonly used in the
               telecommunications industry and is presented solely to enhance the
understanding                of our operating results. EBITDA, however, should not be
considered as an                alternative to operating income or income for the year as
an indicator of our                operating performance. Similarly, EBITDA should not be
considered as an                alternative to cash flow from operating activities as a
measure of liquidity.                EBITDA is not a measure of financial performance
under generally accepted                accounting principles and may not be comparable
to other similarly titled                measures for other companies. EBITDA may not be
indicative of our historic                operating results nor is it meant to be
predictive of potential future results.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | See
Notes 4 5, and 6 to our consolidated financial statements for information
               regarding long-term liabilities and current maturities of long-term bank
loans.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     | Year ended December 31,
|---------------------------------------------------- | -----------------------
|
|
|
|
|Reconciliation Between Operating Cashflow and EBITDA |                        
|Net cash provided by operating                       |                        
|activities                                           |                        
|Liability for employee rights upon
retirement        |                        
|Accrued interest, exchange and                       |                        
|linkage differences on long-term                     |                        
|liabilities                                          |                        
|Amount carried to deferred charges                   |                        
|Accrued interest, exchange and                       |                        
|linkage differences on security                      |                        
|deposit                                              |                        
|                                                     |                        
|Increase (Decrease) in accounts
receivable:          |                        
|Trade                                                |                        
|Other                                                |                        
|Decrease (Increase) in accounts                      |                        
|payable and accruals:                                |                        
|Trade                                                |                        
|Related parties                                      |                        
|Other                                                |                        
|Decrease (Increase) in inventories                   |                        
|Decrease (Increase) in asset
retirement obligation   |                        
|Financial expenses(*)                                |                        
|                                                     |                        
|EBITDA                                               |                        
|                                                     |                        

|(*) | Financial
expenses excluding any charge for the amortization of deferred           financial costs.
|--- | ---------------------------------------------------------------------------------------------------

|                                                                 | 2004 | 2005 | 2006
|---------------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Industry Data                                                    |      |      |     
|Estimated population of Israel (in thousands)(1)                 |      |      |     
|Estimated Israeli mobile telephone subscribers (in thousands)(2) |      |      |     
|Estimated Israeli mobile telephone penetration(3)                |      |      |     

6

---

---



|                                                                     | Year ended December 31 | Three months ended
|-------------------------------------------------------------------- | ---------------------- | ------------------
|
|
|
|
|Partner Data                                                         |                        |                   
|Subscribers (000's) (at
period end)(4)                               |                        |                   
|Pre-paid                                                             |                        |                   
|                                                                     |                        |                   
|Post-paid (private)                                                  |                        |                   
|Post-paid (business)                                                 |                        |                   
|Share of total Israeli
subscribers (at period
end)(5)                |                        |                   
|Average monthly usage per                                            |                        |                   
|subscriber (mins.)(6)                                                |                        |                   
|Average monthly revenue
per subscriber including
in roaming (NIS)(7) |                        |                   
|Churn rate(8)                                                        |                        |                   
|                                                                     |                        |                   
|Estimated coverage of
Israeli population (at
period end)(9)          |                        |                   
|                                                                     |                        |                   
|Number of employees (full                                            |                        |                   
|time equivalent) (at                                                 |                        |                   
|period end)(10)                                                      |                        |                   

|(1) | The
population estimates are published by the Central Bureau of Statistics in
               Israel.
|--- | ----------------------------------------------------------------------------------------------------

|(2) | We
have estimated the total number of Israeli mobile telephone subscribers from
               information contained in published reports issued by, and public
statements made                by, Pelephone Communications Israel Ltd., or Pelephone,
and Cellcom Israel Ltd.,                or Cellcom, or by their shareholders and from
Partner subscriber data at                December 31, 2004, 2005 and 2006.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Total
number of estimated Israeli mobile telephone subscribers expressed as a
               percentage of the estimated population of Israel. This includes dormant
               subscribers as well as other subscribers who are not included in the
Israeli                population figures, such as Palestinians, visitors, and foreign
workers.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In
accordance with general practice in the mobile telephone industry, we use the
               term subscriber, unless the context otherwise requires, to
indicate                a telephone or a data or video device, rather than either a
bill-paying network                customer, who may have a number of telephones
connected to the network, or a                mobile telephone user who may share a
single telephone with a number of other                users. Subscriber includes
our pre-paid customers. References to the                number of subscribers are stated
net of subscribers who leave or are                disconnected from the network, or who
have not generated revenue for the Company                for a period of over six
consecutive months ending at a reporting date.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Total
number of Partner subscribers expressed as a percentage of the estimated
               total number of Israeli subscribers.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(6) | We
have calculated our average monthly usage per subscriber by (i) dividing, for
               each month in such period, the total number of minutes of usage, excluding
               inroaming usage, during such month by the average of the number of our
               subscribers, and (ii) dividing the sum of such results by the number of
months                in the relevant period.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | We
have calculated Partner average monthly revenue per subscriber by (i)
               dividing, for each month in the relevant year, the Partner revenue during
the                month, excluding revenue from equipment sales and including revenue
from foreign                network operators for calls made by their roaming customers
while in Israel                using our network, by the average number of Partner
subscribers during that                month, and (ii) dividing the sum of all such
results by the number of months in                the relevant period. We have presented
the amounts in NIS.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | We
define the churn rate as the total number of subscribers who
               disconnect from our network, either involuntarily or voluntarily, in a
given                period expressed as a percentage of the average of the number of our
subscribers                at the beginning and end of such period. Our churn rate
includes subscribers who                have not generated revenue for us for a period of
the last six consecutive                months ending at a reporting date. Involuntary
churn includes disconnections due                to non-payment of bills or suspected
fraudulent use, and voluntary churn                includes disconnections due to
subscribers switching to a competing mobile                telephone network or
terminating their use of our services. From July 2002, we                refined our
criteria for reporting active subscribers. As a result, we have                included
in churn for this period those subscribers who generated minute                revenues
only from incoming calls directed to their voice mail.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

---

---



|(9) | We
measure coverage using computerized models of our network, radio propagation
               characteristics and topographic information to predict signal levels at
two                meters above ground level in areas where we operate a cell site.
According to                these coverage results, we estimate the population serviced
by our network and                divide this by the estimated total population of
Israel. Estimates are published                by the Central Bureau of Statistics in
Israel.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | A
full-time employee is contracted to work a standard 186 hours per month.
               Part-time employees are converted to full-time equivalents by dividing
their                contracted hours per month by the full-time standard. The result is
added to the                number of full-time employees to determine the number of
employees on a                full-time equivalent basis.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

| |               | 2002 | 2003 | 2004 | 2005  | 2006
| | ------------- | ---- | ---- | ---- | ----- | ----
|
|
|
|
| | Average(1)    |      |      |      | 4.736 |     
| | High          |      |      |      | 4.994 |     
| | Low           |      |      |      | 4.437 |     
| | End of period |      |      |      | 4.737 |     

| | (1) | Calculated
based on the average of the exchange rates on the last day of each                month
during the relevant period.
| | --- | ------------------------------------------------------------------------------------------------------------------------------

| |      | December
2006 | January
2007 | February
2007 | March
2007 | April
2007 | May
2007
| | ---- | ------------- | ------------ | ------------- | ---------- | ---------- | --------
|
|
|
|
| | High |               |              |               | 4.234      |            |         
| | Low  |               |              |               | 4.176      |            |         

On June 8, 2007, the exchange rate
was NIS 4.1970 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.

# 3D. Risk Factors

We operate in a highly regulated
telecommunications market which limits our flexibility to manage our business. Regulatory
decisions may materially and adversely affect our results of operations.

Our
business is highly regulated. We are subject to government regulation regarding
telecommunications licenses, antitrust, frequency allocation and cost arrangements
pertaining to interconnection and leased lines customer relations, billing, data and
connect services or equipment. 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:

| | reducing
or limiting tariffs, including roaming, call and/or SMS termination tariffs;
|- | -------------------------------------------------------------------------------------

| | adopting
policies and imposing new regulations for the erection of antenna sites;
|- | ---------------------------------------------------------------------------------

| | lowering
the barriers of entry to new competitors, including Mobile Virtual Network Operators
(MVNOs);
|- | ------------------------------------------------------------------------------------------------------

| | changing
the method of calculating call duration;
|- | -------------------------------------------------

| | implementing
number portability in the cellular market in Israel;
|- | -----------------------------------------------------------------

| | increasing
the rate of royalties to be paid to the State of Israel;
|- | -------------------------------------------------------------------

| | broadening
the range of the types of revenues on which royalties are paid;
|- | --------------------------------------------------------------------------

8

---

---



| | setting
policies and imposing new regulations governing electronic trade and content services,
including          3G content services;
|- | --------------------------------------------------------------------------------------------------------------------------------------

| | changing
the regulation affecting our roaming business;
|- | -------------------------------------------------------

| | imposing
new safety and health requirements;
|- | --------------------------------------------

| | requiring
us to terminate customer contracts at the end of their term where the customer has not
requested          an extension;
|- | ---------------------------------------------------------------------------------------------------------------------------------

| | changing
frequency allocations;
|- | -------------------------------

| | limiting
our ability to offer subscribers tariff plans, including tariff plans that bundle
different types of services, plans linking airtime rebates or benefits with the purchase
of handsets;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | otherwise
limiting the prices that we may charge our customers; and
|- | -------------------------------------------------------------------

| | further
regulate access to adult services.
|- | ------------------------------------------

Further
risks and uncertainties result from the fact that changes in such laws, regulations or
government policy may not be adopted or implemented in the manner that we expect and may
be further amended, interpreted or enforced in an unexpected manner or in a manner adverse
to us.

We may be adversely affected by
regulatory developments relating to number portability.

As a result of an amendment to the Telecommunications Law in March 2005, we and the other
mobile and fixed-line telephone operators were required to implement number portability by
September 1, 2006. Number portability permits a mobile telephone subscriber to switch
to another mobile operator while retaining the same telephone number. Despite efforts to
introduce the requisite technology and coordinate the transition to number portability by
September 1, 2006, currently none of the cellular or fixed-line operators has
implemented number portability. We, Cellcom, and Pelephone have filed a petition with the
Israeli High Court of Justice for the issuance of an order to the Government of Israel and
the Ministry of Communications to show cause for their failure to act immediately in order
to initiate an amendment to the Telecommunications Law postponing the deadline for the
implementation of number portability. Due to this delay a purported class action law suit
has been filed against us, see Note 7 in Item 18 Financial Statements. In May
2007, the Ministry of Communications announced that the final implementation date for
number portability is December 1, 2007. However, the Ministry is considering imposing
monetary sanctions on relevant telecommunication license holders, including us, in
accordance with the Telecommunications Law for alleged violation of the obligation to
implement number portability by September 2006. As a result, we may be exposed to
substantial monetary sanctions and further legal claims.

We
cannot predict with certainty the consequences of number portability, including the
response of mobile telephone subscribers following the implementation of number
portability. We expect, however, that number portability will increase churn rates and may
increase subscriber acquisition and retention costs. In addition, we cannot be sure how
implementation of number portability will affect the overall functioning of our network
and billing systems. These developments may have a material adverse effect on our business
and on the overall functioning of our network system.

We may be adversely affected by
regulatory developments relating to interconnect tariffs, roaming charges, and SMS
tariffs.

In
recent years, the Ministry of Communications has reduced the call termination tariffs from
NIS 0.50 per minute in the beginning of 2003 to NIS 0.26 per minute as of the date of this
Annual Report, and SMS termination tariffs from NIS 0.38 in May 2004 to NIS 0.025 as of
the date of this Annual Report. Call termination tariffs are scheduled to be reduced again
in March 2008 from NIS 0.26 to NIS 0.22 per minute. The tariffs described above, which
exclude VAT, are adjusted each March to reflect changes in the Israeli Consumer Price
Index, or CPI. In response to these tariff reductions, we have implemented cost-cutting
measures as well as price increases and repackaging of our tariff plans. These regulatory
changes negatively impact our revenues and profits.

The
Ministry of Communications has also indicated that it intends to start implementing a
process to unify rates for calls terminating both on and off an operators network.
Preliminary hearings with the cellular operators in Israel on this matter commenced in
August 2005, but have been suspended and are expected to be resumed in 2008. This change,
if implemented, could also adversely affect our revenues and profits.

The
Ministry of Communications has declared its intention to evaluate roaming charges. As a
result of this evaluation new regulations may be implemented that would limit fees charged
by Israeli cellular companies for calls made by foreign network operators
subscribers while in Israel using our network as well as for calls made by our own
subscribers using their handsets abroad. Because we consider roaming charges to be a
significant source of revenue, such regulatory limits could affect our revenues.

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In
2005, our license was amended to regulate charging for SMS messages sent outside our
network, which, under one interpretation of the amendment, may lead to claims of our SMS
charges not being in compliance with our license. To date, we have fulfilled the license
requirements, even under this potential interpretation, with respect to SMS messages sent
to subscribers of one other cellular operator. However, due to technological difficulties
which we and our competitors face that have not yet been resolved, we may face claims, if
such interpretation of the amendment prevails, of not having implemented the amendment
with respect to SMS messages sent to subscribers of two other operators. We have notified
the Ministry of Communications of our technological inability to fully implement the
amendment, if it is so interpreted. The Ministry of Communications has proposed an
amendment to our license to resolve this problem, which we believe is unsatisfactory
because it does not change the charging criteria but mainly proposes certain customer
notification requirements. Until such time as the cellular operators develop the necessary
interfaces or our license is amended, we may be exposed, if such an interpretation
prevails, to substantial sanctions and legal claims.

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 and may result
in criminal or civil liability to us or to our officers and directors.

Our
ability to maintain and improve the extent quality and capacity of our network coverage
depends in part on our ability to obtain appropriate sites and approvals to install our
network infrastructure, including antenna sites. 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:

| | erection
and operating permits from the Ministry of the Environment;
|- | --------------------------------------------------------------------

| | permits
from the Civil Aviation Authority, in certain cases; and
|- | ----------------------------------------------------------------

| | permits
from the Israeli Defense Forces.
|- | ----------------------------------------

In addition, as part of our 3G
network build out, we are erecting additional antenna sites and making modifications to
our existing antenna sites, for which we may be required to obtain new consents and
approvals.

Like
our competitors, we have experienced difficulties in obtaining some consents and permits,
especially those from local building authorities. As of December 31, 2006, approximately
20% of our antenna sites were operating without local building permits or applicable
exemptions. A substantial portion of these antenna sites 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 1965. In addition, some of the
building permits we have received are not compatible with the antenna sites for which they
were obtained. If we continue to experience difficulty in obtaining approvals for the
erection of antenna sites, this could adversely affect our existing network and delay the
erection of additional antenna sites to our network. 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.

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. We have received an approval to connect the repeaters to our
communications network, however, from the Ministry of Communications. 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 levels of emission comparable to those of Fixed Cellular
Terminals. If the local planning and building authorities determine that permits are
necessary for the installation of these devices, or any other receptors that we believe do
not require a building permit, it could have a negative impact on our ability to obtain
permits for our repeaters. Recently, the Non-Ionizing Radiation Law, 2006 was enacted
which defines the various powers of the Ministry of the Environment as they relate,
inter alia, to the grant of permits for antenna sites and which sets standards for
permitted levels of non-ionizing radiation emissions and reporting procedures. Pursuant to
this law, which entered into effect on January 1, 2007, the Ministry of Environment will
grant an operating permit for a site only if a building permit has been properly obtained
for such site. If we continue to face difficulties in obtaining building permits from the
local planning and building committee, we may also be unable to obtain operation permits
from the Ministry of Environment. Operation of an antenna site without a permit from the
Ministry of Environment could result in criminal and civil liability to us or to our
officers and directors.

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. In the future, we may face additional demolition orders,
monetary penalties and criminal charges, including against our officers and directors.

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In connection with certain
building permits, we may also be required to indemnify certain planning committees in
respect of claims against them relating to the depreciation of property values that result
from the granting of permits for antenna sites, which may have a material adverse effect
on our financial condition and results of operations.

The
extent of our potential liability in connection with alleged depreciation in the value of
nearby properties as a result of the building of antenna sites may be increased as a
result of various developments

Under
the Planning and Building Law, 1965, local planning committees may be held liable for the
depreciation of the value of nearby properties as a result of approving a building plan.
Under the Non-Ionizing Radiation Law, which became effective as of January 2006, the
National Council for Planning and Building requires indemnification undertakings from
cellular companies as a precondition for obtaining a building permit for new or existing
antenna sites. The National Council has decided that until National Building Plan 36 is
amended to reflect a different indemnification amount, cellular companies will be required
to undertake to indemnify the committees in full against all losses resulting from claims
against a committee for reduction in property values. Thus, at present, in order to obtain
a building permit for a new or existing antenna site, we must undertake to provide full
indemnification for the reduction of property value. We cannot predict whether the legal
requirement to provide full indemnification will be adopted in the amended National
Building Plan 36, nor can we predict when the National Building Plan 36 will be amended.
To date, we have provided local authorities with more than 100 indemnification
undertakings. These indemnifications expose us to risks which are difficult to quantify or
mitigate and which may have a material adverse effect on our financial conditions and
results of operations if we are required to make substantial payments in connection
therewith. In addition, the requirement to provide indemnification in connection with new
building permits may impede our ability to obtain building permits for existing antenna
sites or to expand our network with the erection of new antenna sites. In addition, the
requirement to provide indemnifications in connection with new building permits may cause
us to change the location of our antenna sites to different, less suitable locations or to
dismantle existing antenna sites which may have an adverse effect on the extent, quality
and capacity of our network coverage.

Further,
there have been a number of attempts by local planning committees to include mobile phone
operators in claims against such committees for the depreciation in value of nearby
properties as a result of the erection of antenna sites. If the local planning committees
succeed in including mobile phone operators in these actions, it may expose us to
significant liability and have a material adverse effect on our financial condition and
results of operation. In two such actions, we were included as defendants, although we do
not believe that these actions expose us to significant liability. For more information,
see Item 8. Financial Information  Legal and Administrative Proceedings.
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 thereby 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 and may result in criminal or civil liability to us or to our
officers and directors.

There are alleged health risks
related to antenna sites and the use of mobile telecommunications devices, including
handsets. The actual or perceived health risks of mobile telephone communications devices
could have a material adverse effect on our business, operations and financial condition.

A
number of studies have been conducted to examine the health effects of wireless phone use
and antenna sites, and some of these studies have been construed as indicating that
wireless phone use causes adverse health effects. Media reports have suggested that radio
frequency emissions from antenna sites, wireless handsets and other mobile
telecommunication devices may raise various health concerns and may interfere with various
electronic medical devices, including hearing aids and pacemakers. While, to the best of
our knowledge, the handsets that we market comply with the applicable laws that relate to
acceptable Specific Absorption Rate (SAR) levels, we rely on the SAR levels
published by the manufacturers of these handsets and do not perform independent
inspections of the SAR levels of these handsets. As the manufacturers approvals
refer to a prototype handset, we have no information as to the actual level of SAR of the
handsets along the lifecycle of the handsets, including in the case of handset repair.

Several
lawsuits have been filed outside of Israel against operators and other participants in the
wireless industry alleging adverse health effects and other claims relating to radio
frequency transmissions to and from handsets and other mobile telecommunications devices.
We may be subject to potential future litigation relating to these health concerns.

Furthermore,
we do not expect to be able to obtain insurance with respect to such liability. The
perception of increased health risks related to antenna sites may cause us increased
difficulty in obtaining leases for new antenna site locations or renewing leases for
existing locations. If it is ever determined that health risks existed or that there was a
deviation from SAR standards which would result in a health risk from sites or handsets,
this would have a material adverse effect on our business, operations and financial
condition, including through exposure to potential liability, a reduction in subscribers
and reduced usage per subscriber.

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

We
compete primarily with Cellcom, Pelephone and MIRS, the other mobile telephone network
operators in Israel. In 2006, Cellcom expanded its UMTS/HSDPA service, and Pelephone,
which currently uses CDMA-1x technology as well as EVDO, announced its intention to roll
out a GSM network and to offer UMTS/HSDPA (High Speed Uplink Packet Technology). Cellcom
is an Israeli corporation that is part of the IDB group, a large Israeli conglomerate with
holdings in companies that operate in many different markets in Israel. Due to the IDB
groups strong position in Israel, we believe that in some cases we have experienced
and may further experience the loss of business subscribers who are affiliates of the IDB
group or do business with the IDB group, and who transfer their cellular business to
Cellcom.

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Because
of the ease of switching between cellular 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. In addition, the planned introduction of mobile number
portability in 2007 will further facilitate the switching of subscribers between cellular
operators and is expected to increase our churn rate and customer retention costs. These
developments may adversely affect our market share, financial condition and results of
operations.

To
the extent that fixed-line telephones are used instead of mobile telephones, we also
compete with Bezeq, the incumbent fixed-line operator in Israel. In 2004, Bezeq completed
its acquisition of 100% of the shares of Pelephone, which may enable Pelephone to offer
combined packages of fixed-line, mobile telephone and other telecommunication services,
subject to regulatory approval. We also compete with HOT, the cable television operator in
Israel that also offers fixed-line telephone service. We may in the future compete with
other holders of licenses to provide fixed-line telephone service.

In
January 2007, we received a license for the provision of domestic fixed-line services
which enables us to offer fixed-line services to subscribers. We may, however, be at a
competitive disadvantage relative to operators who may be able to offer combined packages
of fixed-line, mobile telephone and other communications services, using their wholly
owned infrastructure. We may also face competition from additional fixed-line operators,
if additional fixed-line licenses are granted. As part of our fixed-line telephony
license, the Ministry of Communications granted us the right to offer Voice Over Broadband
(VOB) services using the infrastructure of Bezeq and HOT to access customers
and to provide them with fixed-line telephony service without any payment to the
infrastructure owner.

In
March 2007, the Ministry of Communications engaged NERA, an international consulting firm,
to review the level of competition in Israels mobile market and to review whether to
allow the entry of new operators including MVNO operators in the Israeli
telecommunications market. Based on the findings of their review, the Ministry of
Communications may opt to grant licenses to MVNOs, who may use Partners
infrastructure or other cellular operators infrastructure to offer mobile telephone
services.

Increased
competition may require us to increase our subscriber acquisition and customer retention
costs. Competition may also limit our ability in the future to increase tariffs, or cause
us to reduce tariffs. In 2006, our churn rate was higher than in 2005. Competition,
including increased competition resulting from the introduction of number portability, may
further increase our level of churn.

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, such as MVNOs,
and adversely affect our financial results and condition and our ability to provide
services to our subscribers. These operators could also gain market share at our expense
by offering lower prices to our customers.

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. Similarly, our license
also requires us, upon demand by the Minister of Communications, to permit other operators
to provide telecom services using our network. We believe such access to our network would
require additional statutory and regulatory action. Were such action to be taken, however,
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 or we may be required to invest
additional capital in order to enable additional use of our network. 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 set those tariffs. If the
Ministry of Communications sets those tariffs too low, this may adversely affect our
financial condition. In addition, operators, such as MVNOs, could offer mobile
telecommunication services to our current customers at prices that are lower than our
prices, thereby reducing our market share and/or causing price erosion and adversely
affect our financial results and condition.

Possible changes in the law could
result in increased anti-trust regulation on the mobile telephone industry in Israel,
which could have a material adverse effect on our revenues and financial results.

In
the past, the former Israeli Commissioner of Restrictive Trade Practices expressed his
view that the mobile telephone industry in Israel operates as an oligopoly and that the
Israeli government should intervene to regulate prices and tariffs. In part, the
Commissioner based his statements on the increase in prices by the mobile telephone
operators as a result of the Ministry of Communications decision to lower call
termination tariffs. The chairman of the Knessets Economic Committee announced that
the committee would act to declare the mobile telephone operators as an oligopoly. Such a
finding could result in increased regulatory intervention (including with regard to
tariffs and tariffing practices), the application of certain limitations on our conduct
and increased litigation, including class action lawsuits. Additional regulation,
including as a result of our being declared, together with the other mobile telephone
operators in Israel, as part of an oligopoly, could materially and adversely affect our
revenues and our financial results.

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Our subscriber growth rate, and
consequently our revenue growth rate, has begun 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 and retain existing subscribers.

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 the growth of
the overall Israeli market and of our own subscriber base has been slower than in the
past. According to data from the Central Bureau of Statistics, the population of Israel at
the end of December 2006 was approximately 7.1 million. According to a recent report
issued by a research company, at December 31, 2006, Israels mobile telephone market
penetration is estimated to be approximately 118%. This may include dormant subscribers as
well as subscribers who are not included in the Israeli population figures, such as
Palestinians, visitors, and foreign workers. Because the Israeli market for mobile
telephones is highly penetrated, it is not growing at the same rate as in the past, and
our own subscriber growth is not developing 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
as well as on our ability to generate higher revenues from existing subscribers.

High handset prices, delays in the
development of handsets, services and network compatibility and components, and supplier
interoperability may hinder the deployment of 3G technology and may increase the costs
related to both subscriber acquisition and subscriber retention. If we are unable to
successfully develop attractive 3G services for our subscribers our results of operations
will be adversely affected.

Establishing
a 3G network or upgrading its technology and developing services requires investing
substantial capital resources. There is no assurance that subscribers will adopt 3G
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 3G networks. If we are unable to develop attractive 3G services for our
subscribers, we may be required to write off all or a portion of our investment and our
results of operations would be adversely affected.

High
handset prices, high handset maintenance costs and high service costs may make our 3G
offering less attractive to potential subscribers or increase costs related to SAC as well
as costs related to retaining subscribers (SRC), as the costs of providing handsets and
upgrades to customers will increase. We also rely on application developers to develop
services that will stimulate demand for our 3G network. We cannot predict whether customer
demand will develop as expected. If application developers fail to develop such services,
or experience delays in their development of such services, our ability to generate
revenues from our 3G network will be adversely affected.

We
have selected both Nortel Networks and Ericsson to supply the infrastructure necessary to
build-out our 3G network. Recently, the Nortel UMTS access business was sold to Alcatel
Lucent and we are now negotiating the terms of the assignment of our agreement with
Nortel. We cannot assure that Alcatel Lucent will be able to successfully deliver all of
the requirements of our network, including interoperability with our existing system
(including equipment of Nortel and Ericsson).

We are exposed to, and currently
engaged in, a variety of legal proceedings, including claims for infringement of third
party intellectual property rights and class action lawsuits.

We
are subject to the risk of intellectual property rights claims against us, including in
relation to innovations we develop ourselves. These claims may require us to initiate or
defend protracted and costly litigation, regardless of the merits of these claims. If any
of these claims succeed, we may be forced to pay damages or may be required to obtain
licenses for the infringing product or service. If we cannot obtain all necessary licenses
on commercially reasonable terms, we may be forced to stop using or selling the products
and services, which could adversely affect our ability to provide certain services and
products.

Due
to the scope and magnitude of our operations, we are subject to the risk of a large number
of lawsuits, including class action suits by consumers which may be costly to defend and
which may result in significant judgments against us. The Israeli Class Actions Law,
2006 and the 2005 amendment to the Israeli Consumer Protection Law, 1981 include
provisions that expand the causes of action for which a class of litigants may bring suit,
including with regard to any damages allegedly incurred prior to the effective date of
these laws. These laws have reduced the requirements for certification of a class action
lawsuit and the qualifications required to be a lead plaintiff in a class action lawsuit.
These laws may increase the number of requests for approval of class actions and the
number of class action suits against us, our legal exposure and our legal costs in
defending against such suits, which as a result may materially and adversely affect our
financial results. Currently, we are engaged in a number of purported class action suits
as a defendant, some of which are for substantial amounts. For a summary of certain
material legal proceedings, see Item 8. Financial Information  Legal and
Administrative Proceedings.

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We may be subject to increased
regulation in respect of handset sales.

The
Ministry of Communications is considering adopting changes to the licenses of the cellular
operators that would prohibit cellular operators from offering tariff plans that include
handset subsidies to subscribers who purchase their handsets from the operators, unless
the same tariff plans are also offered to subscribers who purchase their handsets
elsewhere. If such proposed changes are adopted, we may not be able to offer handsets to
our subscribers at subsidized prices or in conjunction with exclusive tariff plans. This
may lead to difficulties in selling advanced handsets that have the potential to generate
high content-related revenues, which in turn may reduce our potential revenues or require
higher subscriber acquisition costs and adversely affect our results of operations.

Following a possible rearrangement
of spectrum, we may lose some of our frequencies or we may be allocated spectrum of
inferior quality.

A
recent press report alleges that the Israeli State Comptroller is investigating the
possibility that the Ministry of Communications improperly allocated to us a portion of
our spectrum which was intended for the use of the Palestinian authorities. We have not
been formally informed of this investigation, however we were asked by the Ministry of
Communications to present our position regarding the use of this spectrum. We believe that
we are entitled to use all of the spectrum we are currently using and that we are paying
the required consideration for the use of this spectrum. In addition, following a possible
rearrangement of spectrum, the Ministry of Communications may reallocate the spectrum that
was allocated to us and may allocate new spectrum to us which may be of inferior quality.
If we were to be prevented from using a portion of our existing spectrum, or alternative
equivalent spectrum would not be allocated to us, or if we were to be required to pay
additional significant amounts for use of our existing spectrum, this could have a
material adverse effect on our operations and our profitability.

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, voice over Internet Protocol
services, wireless fidelity, or Wi-Fi, technologies,WIMAX, and other
communications services that have the technical capability to handle mobile telephone
calls and to interconnect with the fixed-line telephone network and with internet
networks. The effect of emerging and future technological changes, including the
convergence of technologies and the introduction of new competitors with the ability to
provide mobile telecommunication services to customers while mobile, or the viability or
competitiveness of our network cannot be accurately predicted. We cannot assure you that
the technologies we employ or intend to employ, including 3G technologies, will not become
obsolete or subject to competition from new technologies in the future, nor can we predict
the effect of competition from new technologies in the future on our financial condition
or results of operations.

# Our company is
controlled by a single shareholder.

As
of April 15, 2007, our controlling shareholder, Hutchison Telecommunications International
Limited, or Hutchison Telecom, held approximately 50.52% of our shares. Hutchison Telecom
has the ability to influence our business through its ability to control all actions that
require shareholder approval and through its representatives on our board of directors.
Hutchison Telecom is not obligated, however, to provide us with financial support or to
exercise its rights as a shareholder in our best interests or in the best interests of our
minority shareholders and noteholders, and it may engage in activities that conflict with
such interests. If the interests of our controlling shareholder conflict with the
interests of our other shareholders and noteholders, those shareholders and noteholders
could be disadvantaged by the actions that this controlling shareholder chooses to pursue.
In addition, our controlling shareholder may cause our business to pursue strategic
objectives that may conflict with the interests of our other shareholders and noteholders.

We benefit from our relationship
with Hutchison Telecom and Hutchison Whampoa, who are global leaders in the mobile
telecommunications market. We cannot assure you that we will continue to enjoy the
benefits of this relationship.

Hutchison
Telecom and its largest shareholder, Hutchison Whampoa Limited, or HWL, are global leaders
in the mobile telecommunications market, and we rely on and benefit from the assistance,
knowledge and experience of Hutchison Telecom and HWL, for example, in connection with our
ability to access a supply of 3G handsets on favorable pricing terms. We cannot
assure you that Hutchison Telecom will continue to be our controlling shareholder or that
HWL will continue to be the largest shareholder of Hutchison Telecom. Nor can we assure
you that if Hutchison Telecom ceases to be our controlling shareholder, or HWL ceases to
be the largest shareholder of Hutchison Telecom, that we will continue to enjoy the
benefits of our relationship with Hutchison Telecom and HWL that we currently do.

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 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 from
these activities in the past, and we may suffer from them in the future. The financial
impact of fraudulent activities that have occurred in the past has not been material.
However, we cannot assure you that should fraudulent activities occur in the future, they
will not materially affect our financial condition and results of operations.

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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 interconnect agreements with
Pelephone, Cellcom and MIRS, the other mobile telephone network operators in Israel, and
with the Israeli international operators Bezeq International, Barak, Netvision, Internet
Gold and Exfone. We have an operating arrangement with Golden Lines. We are currently
operating without any formal interconnect agreements with Bezeq. Our day-to-day
arrangements with Bezeq substantially conform to a draft interconnect agreement negotiated
with Bezeq. 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. Although we intend to use the
transmission network that we recently acquired from Med I.C.-1 (1999) Ltd., this
transmission network will not entirely replace our leased capacity. 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. 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.

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

We
conduct our operations primarily pursuant to a general mobile telephone 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.

Furthermore,
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 US$10 million
to guarantee our performance under our license. If we are found to be in material breach
of our license, the guarantee may be forfeited and our license may be revoked. In
addition, the Ministry of Communications is authorized to levy significant fines on us for
breaches of our licenses which could have a material adverse effect on our financial
condition or results of operations.

Our mobile telephone 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 a certain minimum of the economic and voting interest, and certain other
defined means of control, of our company be owned by Israeli citizens and residents or
entities in their control. If this requirement were not complied with, we could be found
to be in breach of our license and our license could be revoked. The Ministry of
Communications amended our license effective April 14, 2005, reducing the required
holdings by Israeli citizens and residents from 20% to 5%, which shall be held by our
founding shareholders who are Israeli entities or their approved substitutes, and
requiring that these shareholders appoint at least 10% of our board of directors. In 2006,
our founding Israeli shareholders sold substantially all of their shares in the Company to
Israeli institutional investors. See Item 7A Major Shareholders  Significant
Changes in Holdings of Major Shareholders During the Past Three Years. In addition,
according to the amendment, among other things (i) we are required to appoint a Committee
for Security Matters consisting only of members who have security clearance and security
compatibility to be determined by the General Security Service and (ii) the Minister of
Communications shall be entitled to appoint an observer to our board of directors and its
committees subject to certain qualifications and confidentiality undertakings. See
Item 4B. Business Overview  Regulation. 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 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 relating to transfers or acquisitions of means of control or
control of Partner could face 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 until such time as the consent of the Ministry of Communications has
been obtained. Second, the breach of the limits could be the basis for revoking our
license.

15

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Our marketing strategy is, in
part, 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. Our right to use the Orange brand is
royalty-free until 2013, after which the parties will negotiate the amount of royalty
payments. If the parties do not agree on the amount of royalty payments, the determination
of royalty payments will be referred to an arbitrator. 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.

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 Alcatel (which acquired the Nortel 3G
business in 2006), 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 our suppliers fail 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 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, 2006, a substantial amount of our operating expenses,
including a substantial majority of our equipment purchases, were linked to the US Dollar
and other 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 3G
networks) are incurred in, or linked to, non-shekel currencies. 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 a portion of our foreign currency commitments. As of December 31, 2006, the notional
amounts of our foreign currency derivatives were approximately US$83 million. Our
derivative transactions are mainly designed to hedge short term cash flows related to
anticipated payments in respect of purchases of handsets and capital expenditures in
foreign currency.

Our
bank credit facility borrowings and Notes due 2012 are currently in shekels, most of which
are linked to the 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 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. We enter into
derivative transactions in order to protect ourselves from an increase in the CPI. As of
December 31, 2006, the notional amounts of our CPI derivatives were approximately NIS
1,100 million (or approximately 50% of our CPI exposure).

Our inability to successfully
integrate new businesses or technologies could have a material adverse effect on our
business.

In
order to expand and improve our offering of services to our subscribers, attract new
subscribers and secure new sources of revenue, we may acquire complementary businesses and
technologies. The identification, acquisition and integration of new businesses or
technologies may require substantial management attention, cause us to incur unforeseen
costs and disrupt our ongoing business. Until now we have not engaged in significant
acquisitions. Our inability to successfully integrate any such acquisitions quickly and
efficiently with our existing business could have a material adverse effect on our
business, results of operations, financial condition or cash flows.

16

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We may fail to maintain effective
internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, which
may have a material adverse effect on our operating results and our share price.

Our
efforts to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002
relating to the evaluation of our internal control over financial reporting, which started
in connection with this Annual Report, have resulted in increased general and
administrative expenses and a diversion of management time and attention. We expect these
efforts to require the continued commitment of resources. If we fail to maintain the
adequacy of our internal controls, we may not be able to conclude on an ongoing basis that
we have effective internal control over financial reporting. Although our management has
concluded that our internal control over financial reporting was effective as of December
31, 2006, we may identify material weaknesses or other disclosable conditions in our
future control over financial reporting. Failure to maintain effective internal control
over financial reporting could result in investigation or sanctions by regulatory
authorities and significant effort and expense, and could have a material adverse effect
on our operating results and on the market price of our ordinary shares.

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. The establishment in 2006 of a government in the Palestinian Authority
by representatives of the Hamas militant group has created additional unrest and
uncertainty in the region. Further, Israel was recently engaged in an armed conflict with
Hezbollah, a Lebanese Islamist Shiite militia group, which involved thousands of missile
strikes and disrupted most day-to-day civilian activity in northern Israel. 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.

# Our leverage could
adversely affect our financial health.

On
December 31, 2006, our total long-term indebtedness was approximately NIS 2,289 million
($542 million) net of current maturities. This debt represented approximately 65% of our
total capitalization (bank loans plus notes payable plus shareholders equity) on
December 31, 2006. Our credit facility and the indenture governing the Notes due 2012
currently permit us to incur additional indebtedness, subject to some limitations.

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

| | increasing
our vulnerability to adverse economic, industry or business conditions or increases in
prevailing interest rates, particularly because a substantial portion of our borrowings
is linked to the CPI;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | limiting
our flexibility in planning for, or reacting to, changes in our industry and business as
well as          the economy generally;
|- | -----------------------------------------------------------------------------------------------------------------------------------------

| | requiring
us to dedicate a substantial portion of our cash flow from operations to service our
debt, which reduces the funds available for operations and future business development;
and
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | limiting
our ability to obtain the additional finance we need to operate, develop and expand our
business.
|- | ----------------------------------------------------------------------------------------------------------

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

Our
credit facility contains a number of restrictive covenants that may limit our operating
and financial flexibility, and may restrict our ability to pledge or dispose of our
assets, incur certain types of borrowing, make certain acquisitions, or make substantial
changes to the nature of our business. Our credit facility also contains covenants
regarding achieving certain levels of financial ratios during the term of the facility.
Depending on the future performance of our business, these covenants could materially and
adversely affect our ability to finance our future operations or the manner in which we
operate our business.

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We cannot assure that we will
distribute dividends in the future, nor the amounts of any such dividends.

In
2005, our board of directors and shareholders approved the distribution of our first cash
dividend, and in the second quarter of 2006, we adopted a dividend policy targeting a
payout ratio of 60% of net income. In 2006, we distributed cash dividends in the aggregate
amount of NIS 307.4 million, or NIS 2.0 per share. In 2007, we approved the distribution
of an additional cash dividend in the amount of NIS 1.28 per share. Under Israeli law, the
payment of dividends may be made only from accumulated retained earnings or retained
earnings accrued over a period of eight quarters (after deducting prior dividends to the
extent not already deducted from retained earnings), and in either case, provided there is
no reasonable concern that a dividend will prevent the company from satisfying current or
foreseeable obligations as they come due. In addition, our credit facility also limits the
amount of dividends we may pay. Accordingly, there is no assurance that we will be able to
continue paying dividends or increase our payment of dividends in the future, nor is there
any assurance that our board of directors will not change our dividend policy in the
future.

A
recent decision of the Israeli Supreme Court has limited, subject to several exceptions,
the ability of a company to deduct for tax purposes interest expense incurred on debt in
circumstances where the proceeds from the debt are determined to have been used to pay
dividends. If this decision were found to be applicable to us, we could lose the ability
to recognize, for tax purposes, interest expenses on borrowing used for distributing
dividends or share buyback. As a result, we could suffer a reduction in our retained
earnings and, in turn, a decrease in the amount available to us in the future for
distribution of dividends.

# 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: 972-54-7814-888). 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:

| | In
April 1998, we received our license to establish and operate a mobile telephone network
in Israel.
|- | -----------------------------------------------------------------------------------------------------

| | In
January 1999, we launched full commercial operations with approximately 88% population
coverage and established a nationwide distribution.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | In
October 1999, we completed our initial public offering of ordinary shares in the form of
American Depositary Shares, and received net proceeds of approximately NIS 2,092 million,
with the listing of our American Depositary Shares on NASDAQ and the London Stock
Exchange. We used part of these net proceeds to repay approximately NIS 1,494 million in
indebtedness to our principal shareholders, and the remainder to finance the continued
development of our business.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
August 2000, we completed an offering, registered under the US Securities Act of 1933, as
amended, of $175 million (approximately $170.5 million after deducting commissions and
offering expenses) in 13% unsecured senior subordinated notes due 2010.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 31, 2001, we had over 1,000,000 subscribers.
|- | -----------------------------------------------------

| | In
July 2001, we registered our ordinary shares for trading on the Tel Aviv Stock Exchange.
|- | -------------------------------------------------------------------------------------------

| | In
December 2001, the Ministry of Communications awarded us two bands of spectrum: one band
of GSM 1800 spectrum and one band of UMTS third generation spectrum.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2002, our license was extended until February 2022.
|- | -----------------------------------------------------------

| | In
August 2003, we had over 2,000,000 subscribers.
|- | --------------------------------------------------

| | In
December 2004, we commercially launched our 3G network, having implemented our soft
launch in June 2004.
|- | -------------------------------------------------------------------------------------------------------------

| | In
March 2005, we completed a debt offering, raising NIS 2.0 billion in a public offering in
Israel of notes due 2012.
|- | ----------------------------------------------------------------------------------------------------------------------

| | In
April 2005, we repurchased approximately 33.3 million shares from our Israeli founding
shareholders, representing approximately 18.1% of our outstanding shares immediately
before the repurchase.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
August 2005, we redeemed our outstanding $175 million 13% unsecured senior subordinated
notes.
|- | -------------------------------------------------------------------------------------------------

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| | In
the third quarter of 2005, our board of directors and shareholders approved the
distribution of our first cash dividend, in the amount of NIS 0.57 per share, totaling
approximately NIS 86.4 million.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 2006, we purchased Med I.C.1 (1999) Ltd.s fiber-optic transmission
business for approximately NIS 71 million (US$16.8 million) in order to enable us to
reduce our transmission costs as well as to provide our business customers with bundled
services of transmission of data and voice.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the second quarter of 2006, we adopted a dividend policy targeting a payout ratio of 60%
of net income over 2006.
|- | --------------------------------------------------------------------------------------------------------------------

For information on our capital
expenditures for the last three financial years, see Item 5B. Liquidity and Capital
Resources.

# 4B. Business Overview

We
were the first GSM mobile telephone network operator in Israel and on December 1, 2004, we
commercially launched our UMTS third generation, or 3G, service. We received our mobile
telephone license in April 1998 and commenced full commercial operations of our digital
GSM mobile telephone network in January 1999. Since then, we have expanded rapidly, and on
December 31, 2006, we had approximately 2.67 million subscribers, representing an
estimated 32% of total Israeli mobile telephone subscribers at that date. During the
twelve months ended December 31, 2006, we increased our customer base by approximately
5.5%. At December 31, 2006, approximately 48% of our subscribers had private post-paid
tariff plan contracts with us, approximately 29% of our subscribers were in pre-paid
subscriber plans, and approximately 23% of our total subscribers were business
subscribers. As of December 31, 2006, we also had more than 276,000 3G customers, all of
whom are post-paid subscribers.

We
market our services by capitalizing on the strong international Orange brand and the
experience of our largest shareholder, Hutchison Telecom. 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
have also received awards recognizing our high standards of customer service. In 2006, we
were named by Globes, a leading Israeli business daily newspaper, as the number-one
provider of customer service in Israel in the telecommunications market as well as the
number one communications brand in Israel.

We
currently operate our GSM network in the 900 MHz and 1800 MHz bands. Our GSM services
include standard and enhanced GSM services, as well as value-added services and products
such as roaming, voice mail, voice messaging, color picture messaging, ringtone and game
downloads, information services, General Packet Radio Services, or GPRS, which enables the
packet transfer of data.

Our
3G network, which as of the end of 2006 covered approximately 97% of the Israeli
population, offers a wide range of new services, such as video calls, a new portal of
content services including a rich selection of video-based services under the obox
live brand, and the transmission of data at speeds of up to 384 Kbps.

In
March 2006, we launched services based on the High Speed Downlink Packet Access (HSDPA)
technology to the business sector. HSDPA is a technological enhancement to our 3G services
that offers subscribers the ability to access our 3G services at higher speeds. We also
launched HSDPA with limited coverage in the center of Israel and plan to expand the
coverage area gradually.

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, 2002, 2003, 2004, 2005 and
2006:

|Market Share* | 2002 | 2003 | 2004 | 2005 | 2006
|------------- | ---- | ---- | ---- | ---- | ----
|
|
|
|
|Partner       |      |      |      | 29   | %   
|Cellcom       |      |      |      | 39   | %   
|Pelephone     |      |      |      | 28   | %   
|MIRS          |      |      |      | 4    | %   

|* | Based
on information contained in published reports issued by, and public statements made by,
Pelephone and Cellcom or by their respective shareholders and from Partner subscriber
data. The figures for MIRS are our estimates.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
operate primarily in one business segment, 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 wholly owned by Bezeq, the primary fixed-line operator in Israel
that is controlled by S.C.G. Group (Haim Saban), the Apax Fund, and Arkin Communications
(Mori Arkin). Pelephone, which currently uses CDMA-1x technology, announced its intention
to roll out a GSM network and to offer UMTS/HSDPA technology. Cellcom is an Israeli
corporation whose major beneficial shareholders are Discount Investment Corporation Ltd,
DIC Communications Ltd., and PEC Israel Economic Corporation. Cellcom operates nationwide
mobile telephone networks based on GMS 1800 MHz and D-AMPS technologies and also provides
commercial service over the UMTS/HSDPA spectrum. MIRS is an Israeli corporation whose
major shareholder is Motorola Communications (Israel) Ltd. MIRS operates using an Enhanced
Specialized Mobile Radio, or trunking, iDEN network.

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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.

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

| | High
Mobile Phone Usage.Israeli usage of mobile phones is relatively high compared to Western
Europe.
|- | -----------------------------------------------------------------------------------------------------

| | Calling
Party Pays. In Israel, only the party originating a telephone call pays for the
airtime (except for 1-800 numbers). Mobile telephone network operators do not charge
subscribers to receive calls on their handsets, except while roaming. This encourages
higher rates of mobile telephone usage.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | High
Mobile Telephone Penetration. Since Cellcoms launch in 1994, the market has
sustained a rapid annual rate of growth from a 2.6% penetration rate at year-end 1994 to
an estimated penetration rate in Israel at December 31, 2006 of 118% representing
approximately 8.4 million subscribers. This may include dormant subscribers and
subscribers to multiple networks as well as other subscribers who are not included in the
Israeli population figures, such as Palestinians, visitors, and foreign workers.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Multiple
Different Mobile Telephone Technologies. The four mobile telephone licensees in
Israel have systems based on multiple technologies. Pelephone uses the N-AMPS analog, the
CDMA and CDMA1x digital systems, and the EVDO system and has announced its intention to
roll out a GSM network and to offer UMTS/ HSDPA. Cellcom uses the D-AMPS, GSM/GPRS, EDGE,
and UMTS HSDPA systems. MIRS uses an iDEN system. We are currently one of two network
operators using a GSM digital system and a UMTS system. GSM is an advanced,
internationally accepted technology, and according to an industry source, was used by
approximately two billion people worldwide as of December 31, 2006.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Favorable
Geography. Israel covers an area of approximately 8,000 square miles (20,700 square
kilometers) and its population tends to be centered in a small number of densely
populated areas. In addition, the terrain of Israel is relatively flat. These factors
facilitate the roll out of a cellular network in a cost effective manner.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Strong
Potential For Value-Added Services. Published market data shows that the relatively
young Israeli population has a propensity to accept and use high technology products. We
believe that this characteristic of the Israeli population will facilitate further growth
in the Israeli mobile telecommunications market as well as the acceptance of new
value-added services as they become available on our network.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Strategy

We
intend to continue enhance revenues and profitability, and to continue to create value for
our shareholders, customers and employees. In order to accomplish this, we intend to:

| | Broaden
3G Service Use and Subscriber Base. We believe that a major source of growth for us
is additional revenues from our 3G subscribers consuming more data and content services.
We are leveraging our brand and our outstanding reputation for network quality,
innovation, and customer service to develop our 3G business in order to benefit from that
growth. We aim to offer desirable content and to make our 3G services widely accessible
and affordable.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Broaden
the Portfolio of our Services.We believe that a growth opportunity exists by
broadening the portfolio of our services beyond the cellular service to include
fixed-line telephony, transmission services, ISP services and other accompanying telecom
services. In order to reach customers, we will use our own fiber optic transmission
network, leased transmission lines, or, with respect to VOB services, the existing
infrastructure of Bezeq and HOT. Our licenses enable us to provide a wide range of
services that will be used to create a bundle of telecom and other adjacent services
which we believe will favorably affect our ability to control cellular churn rates,
enhance customer loyalty, and generate additional streams of revenues. In the near
future, we believe that revenues from these services will not be significant compared to
our total cellular revenues.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Retain
the Strength of our Brand. We believe that a focused marketing strategy based upon
the strong international Orange brand is critical to our subscriber growth and loyalty.
In light of the benefits that our strong brand gives us, we intend to continue to promote
our brand, including in connection with our 3G services, in order to maximize these
advantages. We also intend to support our brand by continuing to focus on customer
service, innovation and the quality of our network.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | Be
First in Technology. We believe that we have benefited historically from being a
first-mover in technology, and aim to retain this first-mover advantage in order to drive
our future subscriber growth. We believe that we will have an advantage in our ability to
gain subscribers by continuing to capitalize on technological innovation in this manner
in the future.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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:

| | Strong
Brand Identity. Since the launch of full commercial operations, we have made a
substantial investment in promoting the Orange brand in Israel to represent quality,
innovation and customer service. Our marketing activities have resulted in wide-scale
recognition of the Orange brand in Israel.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3G
Services.As of December 31, 2006, we had an Israeli nationwide UMTS network, which
offers high speed data, advanced video content and video telephony, and in most populated
areas also offers the features of HSDPA. We believe we are positioned as leaders in our
3G offering, both in terms of network quality as well as in terms of available content.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Focus
on Customer Service. We believe we provide outstanding customer service through
quick, simple and reliable handling of customer needs and interactions, which we have
achieved through investments in technology and training of customer service skills. In
2006, we were named by Globes, a leading Israeli business daily newspaper, as the number
one provider of customer service in Israel in the telecommunications market.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | High
Quality Network and Technology Leadership. We believe that we set high standards for
network quality and that our use of sophisticated network planning and optimization tools
and techniques and our investment in dense base station coverage have produced a high
quality network. Additionally, we believe that we are a recognized leader in the
development and provision of mobile services in Israel and worldwide.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Beneficial
Relationship with Hutchison Telecom. Our largest shareholder, Hutchison Telecom and
its largest shareholder, HWL, are global leaders in the 2G and 3G mobile
telecommunications market. Hutchison Telecom has a substantial interest in 3G operating
companies in Hong Kong, Macau (under development) and Indonesia and HWL has a substantial
interest in 3G operating companies in Austria, Australia, Denmark, Ireland, Italy, Norway
(under development), Sweden and the United Kingdom. We derive benefits from the knowledge
and experience of Hutchison Telecom and HWL and from a cost sharing agreement with
certain members of the HWL group of companies for the joint acquisition and development
of information technology platforms and software solutions, hardware, content and other
services in connection with our 3G business. In particular, our relationship with
Hutchison Telecom and HWL enhances our competitive position in the provision of 3G
services by giving us access to supply of 3G handsets on favorable terms.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Strong
Financial Performance and Financial Position. Our net cash provided by operating
activities less net cash used in investing activities has improved significantly and has
grown from negative NIS 1,163.0 million in the year ended December 31, 2000 to positive
NIS 774.8 million in the year ended December 31, 2006.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Strong
and Motivated Management Team. We have been able to attract a number of Israeli
senior managers from the telecommunications, high-tech and consumer products industries.
Our management team is experienced and highly respected and, we believe, well-positioned
to manage the Company. We believe that our performance-based incentive package aligns the
interests of senior management with those of our investors.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, simplicity, innovation,
customer service and customer retention. 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 competitive tariffs, technologies and services that we believe are advanced,
including our 3G services as well as our GPRS services. During 2006, the primary objective
of our marketing strategy was to increase our 3G subscriber base and 3G usage by our
customers as well as to enhance our long-term relationship with our customers through
innovative retention activities.

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We
commercially launched our 3G network on December 1, 2004, having implemented our
soft launch in June 2004, when we distributed 3G handsets to selected
customers for the purpose of evaluating the quality of our 3G network and services. As of
December 31, 2004, we had approximately 8,000 3G subscribers, and as of December 31, 2006
we had more than 276,000 3G subscribers. As of the end of 2006, our 3G network covered
approximately 97% of the population of Israel. During 2007 we plan to further expand our
3G population coverage. Our 3G network offers a wide range of new services, such as video
calls; a new portal of content services including a rich selection of video-based and MP3
based services under the obox live brand, and the transmission of data at
speeds of up to 384 Kbps. We have concluded content agreements with a variety of content
providers and suppliers in the Israeli television and entertainment industry. As a result
of our relationship with Hutchison Telecom and HWL, we have a supply of 3G handsets on
favorable pricing terms.

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. During 2006, our main advertising
activities focused on promoting the subscribership and usage of the 3G services. Our
marketing strategy focuses on promoting our services to various segments of the Israeli
population, and we have extended this to our 3G services. We advertise our services in
several languages. In addition to traditional media, we promote our brand and services by
sponsoring and initiating cultural and community programs, such as a special events
program on the Passover holiday, a three-day international music festival held in the
Haifa harbor, a lecture by the conductor and author, Benjamin Zander, for our business
customers and the International Film Festival, a major cultural event in Israel that takes
place every year in Jerusalem and attracts international attention. We usually focus our
sponsorship activities on events which are of an international nature to support our
brand. We use the distinctive Orange Brand logo in all our promotional activities and
advertising. See Item 4B. Information on the CompanyBusiness
OverviewIntellectual Property.

At
December 31, 2006, approximately 23% of our subscribers were business subscribers. We are
continually developing tailored value-added services to meet the special needs of business
subscribers and to enhance our long-term relationship with our business subscribers.

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. Our most basic service is telephony service  provided
on both our GSM/GPRS network and our UMTS/HSDPA network. Our basic offer includes
international dialing, roaming, 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, GPRS, UMTS and HSDPA technologies enables high speed data
transmission. All our content services are unified under the obox brand: our 2G and 2.5G
content services are all branded as obox and our 3G services are branded as obox live. Our
orange obox services enable the downloading of rich applications and content and WAP
browsing, while our obox live services are enhanced by the video and audio capabilities of
our 3G network. Our MMS services enable subscribers to send photos, multimedia and
animation from handset to handset and from handset to web. We also offer 24-hour,
seven-day a week customer service, as well as handset repair and replacement services, to
subscribers who acquire these services.

We
received and maintain the accreditation of the ISO 9001:2000 Standard from the Institute
of Quality and Control, a quality system certification and registration body authorized by
Bureau Veritas Quality International. ISO 9001:2000 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 have introduced tariff plans aimed at
bringing innovation to the Israeli mobile communications market. Our tariff plans offer
features attractive to business users such as: the charging of fees based on airtime usage
without adding the interconnect charges imposed by other mobile and fixed-line providers
for calls made by our subscribers that terminate on third party networks, and the
provision of discounts for calls to designated numbers within a subscribers calling
circle. In addition, we usually offer handset subsidies to customers joining these tariff
plans. Our tariff plans for private customers feature a certain number of free minutes for
calls made between family members and offer limited handset subsidies. The elements of our
tariff plans for private customers are packaged and marketed in various ways to create
tariff packages attractive to target markets, including families, soldiers, Orthodox Jews,
Arab and Russian communities, teens and students. Some of the tariff plans include minimum
subscription periods of up to 36 months.

We
also offer a pre-paid plan. Upon purchase of a phone card or prepayment 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. Our pre-paid plans enable us to
compete in the growing pre-paid mobile services market.

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International Roaming

Israelis
are frequent travelers. According to the Israel Central Bureau of Statistics, in 2006,
more than 3.7 million overseas departures of Israelis were recorded, and almost 1.8
million people visited Israel during 2006. 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 or her home network. 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. The Ministry of Communications may introduce new
regulations that would limit our revenues from roaming services. See Item 4.
Information on the Company  4B. Business Overview  Regulation.

At
December 31, 2006, we had open commercial roaming relationships with 358 operators in 168
countries or jurisdictions. We also have agreements with satellite operators, providing
global coverage, requiring the use of unique handsets. 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.

On
December 31, 2006, we had 3G roaming agreements with operators in 32 countries, enabling
our 3G roamers to experience video calls, high speed data and video and audio content
while abroad. Since we operate our GSM services 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
cellular 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 countries that deploy GSM 1900 frequency with networks using GSM 1900. Other
subscribers who advise us of their intention to visit those countries are either loaned
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, or are given the option to
rent such handsets at their destination upon their arrival. Since the launch of our 3G
network, UMTS networks around the world are becoming gradually available to our 3G
subscribers.

The
Ministry of Communications and regulatory bodies in other countries are considering
regulations that will change the tariffs that we can charge from our roaming customers.
Such changes could adversely affect our revenues.

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.

Our
main focus throughout 2006 was to continue to expand our 3G business in Israel and to
enhance our relationship with our customers through active retention activities. In order
to meet these goals, we have expanded our 3G handset portfolio so as to cater to several
market segments, we have enhanced our content portal offering and we have launched several
innovative retention activities. The main value-added services we currently offer include
the following:

| | Blackberry. This
service offers customers one of the most advanced mail solutions. We offer the Blackberry
handset along with the Blackberry service, with Hebrew support for emails and SMS
messages.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Call
back. While roaming, this service allows subscribers to return calls to Israel at
discounted rates from most countries.
|- | ----------------------------------------------------------------------------------------------------------------------------

| | Content
Download. This service enables the downloading of rich applications and content,
including games, interactive screensavers and polyphonic ringtones. Our 3G users can also
download specially edited video clips, MP3 songs, MP3 ringtones and other content items.
A small portion of our 2.5G customers can also download several video and MP3 items over
our GPRS network. In order to use these download services, the users have to own specific
handsets.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fun
Tone. Personal ring back tone which is subject to the customer preference, from a
wide international library of music tracks or other types of audio elements (e.g. sound
effects) which is heard when dialing to this customer.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | High
Speed Data. We offer high speed data access through either Packet-Switched or Circuit
Switched technology. Packet-Switched services are through GPRS and HSPDA. We also support
traditional Circuit-Switched based HSCSD service.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | MMS
Services. These services enable subscribers to send photos, multimedia and animation
from handset to handset and from handset to e-mail, from handset to web album and from a
web album to handsets, based on Multimedia Message Services (MMS) platform and on a web
MMS storage album.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Orange
Hotspots.The service enables Wi-Fi access from laptops to wireless networks, in more
than a few thousand hotspots in Israel and around the world, in hotels, airports,
restaurants, etc.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | Orange
mail. Mobile e-mail services that enable access to e-mail accounts (private or
business accounts) through our WAP portal.
|- | --------------------------------------------------------------------------------------------------------------------------------

| | Organizational
Voice Recognition.A service that allows for voice recognition of the names listed in
a customers global contact list. The customer is able to dial a number and ask for
the contact person and the system connects the customer to that person.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PC
to Mobile Video Calling. This service allows 3G subscribers to speak with any other
party using an internet camera. This service expands the video telephony available to
customers who do not have a 3G handset or are not within the 3G coverage area.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SIM
Backup. This service allows customers to backup their phonebook entries on the SIM
card on a network server. If the SIM card or phone is lost, the subscriber does not lose
his contact list.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Speed
Detectors. This service allows subscribers to receive a notice about speed detectors
in their vicinity.
|- | -------------------------------------------------------------------------------------------------------------

| | Vehicle
Fleet Management. This service provides a comprehensive system for businesses to
manage their vehicle fleet. It allows tracking the position, speed and direction of
vehicles, which helps speed up delivery times, cut running costs and improve customer
service. It provides the ability to assess at a glance which driver is best placed to
respond to the next call, optimizing driver time, cutting fuel costs and improving
efficiency. In addition, it provides the option to communicate with drivers via text
messages.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Video
and Audio Streaming. We provide our 3G customers (and a small portion of our 2.5G
customers) the ability to watch video clips and to listen to full music tracks without
downloading them to their handset. These services offer a wide range of information and
entertainment clips to view and listen to, and enable the customer to watch live
television broadcasts.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Video
Calls. This service enables our 3G users (while in our 3G coverage area and with a 3G
handset) to speak with each other through video conferences  to hear and to see the
other party simultaneously.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Video
Mail. This service enables our 3G subscribers to send and receive video messages if
the receiver is not available.
|- | ------------------------------------------------------------------------------------------------------------------------

| | Virtual
Private Network. User groups can be formed in multiple layers, and the members can
then reach each other through short dialing codes, like extension numbers. This service
is mostly used among business customers.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | WAP
Services. We have WAP technology that enables WAP-related services. WAP services
create a significant incremental demand for content services and increase usage of our
network.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Orange
Shop.Website offering new and existing customers an online shop-for handsets and plans.
|- | ----------------------------------------------------------------------------------------------

Handsets

We
provide handsets to our 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.

We
currently offer a range of different handset models supplied by a number of manufacturers.
We offer handsets to satisfy our subscribers roaming needs in the 900 MHz, 1800 MHz
and 1900 MHz bands and in 2100 MHz (UMTS) as well. Not all handsets support all band
ranges. 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. We have begun
selling some innovative handsets with enhanced applications, including multicolor, large
screens with high resolution displays, high quality music performance, MMS capabilities,
Bluetooth support, high quality cameras and video capabilities. Pursuant to the launch of
our 3G network, we sell 3G handsets that enable customers to make video calls, consume
video and MP3 audio-based content services and use laptops with high-speed rates of data
transmission.

Customer Division

Our
Customer Division incorporates all service, sales and distribution channels, and on
December 31, 2006, had approximately 2,680 full-time employees, including managers, sales
representatives and service representatives.

Customer Service

Our
customer support and service provides several channels for our customers: call centers,
walk-in centers and self-services, such as IVR, web-based services and via SMS.

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Call
Centers.Guided by our aim to provide high quality service, our call-center services
are divided into several sub-centers as follows: customer segment (business, private and
pre-paid) and specialized support and services (finance, network, international roaming
and data transfer related issues). The call center services are provided in four
languages: Hebrew, Arabic, English and Russian.

Walk-in
Centers.We currently operate 36 Partner owned service and sales centers across
Israel. These centers provide a face-to-face, uniformly designed, contact channel and
offer all services that we provide to customers: sales, handset upgrade, handset
maintenance and other services (finance, rate-plan changes, subscription to new services
etc.). Several of these centers are focused on sales to both private and small business
customers. These stores are located in central locations, such as shopping malls in Tel
Aviv and its periphery, Jerusalem, Haifa and Beer-Sheba. 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 agreements for different periods of up to twenty years including the
initial lease period . The average size of our retail stores and service centers is
approximately 230 square meters. See also Note 7a(3) to our consolidated financial
statements.

Self-Service.
          We provide our customers with various self-service channels, such as IVR,
          web-based services, services via SMS and services via WAP. These channels
          provide general and specific information, including tariff plans, account
          balance, billing related information and roaming tariffs. They also provide
          customers information regarding trouble shooting and handset-operation, and
          enable customers to activate and de-activate services and to download content.

All
of our service channels are monitored and analyzed regularly in order to assure the
quality of our services and to detect areas that require improvement.

Sales and Distribution

We
apply a multi-channel approach to target various market segments and to coordinate our
sales strategy.

We
distribute our services and products primarily through:

| |  | Direct
sales channels, which consist of Partner-owned sales centers and business sales
representatives; and
| | - | -----------------------------------------------------------------------------------------------------------

| |  | Indirect
sales channels, which consist of traditional networks of specialized dealers and
non-traditional networks of retail chains and stores.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

Direct
Sales Channels

Orange
Sales and Service Centers: All of our walk-in centers serve as sales centers. The
face-to-face contact enables customers to get a feel and a touch of new
handsets and services demonstrated by our representatives. The feel and touch
approach enables us also to promote in particular our 3G products and services.

Direct
Sales Force: Our sales force is comprised of sales representatives, account managers
and area managers, targeting business customers.

| |  | A
team of regional representatives and customer account managers, located in five regional
offices, supports small to medium-sized businesses. This team primarily focuses on small
and medium-sized enterprises, which tend to use more airtime and yield higher margins.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
team of corporate representatives and customer account managers services large corporate
customers.
| | - | -----------------------------------------------------------------------------------------------------

| |  | Specialized
VIP representatives provide service to opinion leaders and prominent individuals.
| | - | ---------------------------------------------------------------------------------------------

| |  | A
door to doorsales-force focuses on individual and small business customers.
| | - | -------------------------------------------------------------------------------

| |  | A
telemarketing department conducts direct sales by phone (to private and business
customers), initiates contacts to prospective customers and coordinates appointments for
the sales representatives.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
sales force undergoes regular training to improve their skills 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.

Indirect
Sales Channels

Traditional
Dealer Networks. On December 31, 2006, we had agreements with 31 traditional dealers
providing 48 points of sale, 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. Most of our dealers
specialize in sales for post-paid customers, and others specialize on sales for pre-paid
customers and distribution of pre-paid handsets to sub-dealers. Our dealers are highly
professional and some of them have previous experience selling cellular services in
Israel. 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. Our
dealer managers visit dealers on a regular basis to provide information and training,
answer questions and solve any problems that may arise. We pay our dealers competitive
commissions and provide handset subsidies. However, dealers are not entitled to
commissions for any customers that terminate their service within 60 days of activation.

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Non-Traditional
Dealer Networks. Non-traditional dealers consist of generalist retailers or
specialized 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 contracted with Super-Pharm, the largest drugstore chain in Israel, to
sell our network services. At December 31, 2006 our services were sold in 81 Super-Pharm
stores nationwide in a variety of formats, including Partner shop-in-shops, kiosks,
wall-unit displays and at front counters. In 2006, approximately 15% of our new
subscribers were recruited through sales by Super-Pharm. Super-Pharm sells our network
services in their stores, and we cooperated with them in establishing a chain of stores
called Super-Link that is dedicated to selling communications services and
equipment. The parties are currently negotiating an extension to their agreement.

In
addition, we continue to develop our distribution network with other non-traditional
dealers, such as the Cellular Center for Vehicles, which has approximately 34
locations for the sale, installation and maintenance of car kits, and Auto
Depot, which has nine such locations. 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.

All
indirect sales channels are supported by a specialized dealer support call
center providing information, support and coordination of appointments of car-set
installations.

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 who have purchased their handset from our
dealers or from us can be charged 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.

Most
of our subscribers pay for the handsets in 36 installments, which is charged directly to
their credit card or to their monthly bill. If the customer opts to pay for the
installment via his monthly bill, the outstanding installment payments are not secured.
Subscribers are billed monthly for airtime charges and charges per services. Most of our
business customers have signed 36-month contracts.

Most
of our individual subscribers 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 card issuer does not grant the approval, 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 eight
handsets (or four in certain circumstances) 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.

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, 2006, we have made net capital expenditures of NIS 3,791 million ($897
million) in our network infrastructure and other related fixed assets.

Overview

The
first generation of wireless communication, based on analog technology,
provides simple voice telephony. The second generation of wireless
communication, 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 services
at speed rates that are higher than the rates offered through second
generation technology. 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.

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Third
generation wireless communication, which offers full interactive multimedia capabilities
at data rates of up to 384 Kbps, are bringing wire-free networks significantly closer to
the capabilities of fixed-line networks. 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 wireless
telecommunications capable of data rates of 3.6 MB and is the 3G technology we use. HSDPA
is a technological enhancement to our 3G services that offers subscribers the ability to
access our 3G services at higher speeds.

Infrastructure

As
of December 31, 2006, our GSM network consisted of 1,659 macrobase transceiver stations
and 309 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 4,530 transmission links. Ericsson and Nokia supply our base station
controller and base transceiver station sites for our GSM and GPRS network.

As
of December 31, 2006, our UMTS network consisted of 1,430 macrobase transceiver base
stations and 137 microbase and indoor transceiver stations, all linked to ten radio
network controllers. The base station subsystem is controlled by one mobile switching
center and two media gateways. The base transceiver stations, the mobile switching center
and the radio network controllers are interconnected by approximately 1,450 transmission
links. Nortel Networks and Ericsson supply our 3G UTRAN and Ericsson supplies our core
network equipment.

In
addition, our network is interconnected with two public switched telephone companies:
Bezeq and HOT, in several locations across Israel. Our network is also directly connected
to the mobile networks of Pelephone, Cellcom, Mirs and the six Israeli international
operators, Bezeq International, Barak, Golden Lines, Internet Gold, Netvision and Exfone,
and indirectly to the fixed-line and mobile telephone networks of Paltel.

Our
transmission network is made up of leased lines from Bezeq and Cellcom and our own
microwave links. Currently most of our transmission network consists of leased lines. In
July 2006, we purchased from Med I.C.1 (1999) Ltd, its fiber-optic transmission
business in order to enable us to reduce our transmission costs as well as to provide our
business customers with bundled services of transmission of data and voice.

Our
UMTS network covers approximately 97% of the populated areas of Israel. We are continuing
to expand and improve the coverage, capacity and quality of our UMTS network.

Network Design

Our
primary design objective is to build a UMTS mobile telephone network engineered to provide
high voice, video and packet quality, call reliability, high capacity and high coverage
quality and to maintain technological advantages over our competitors. In formulating our
network design objectives, we have been guided by our business strategy to build the
highest quality network. The quality parameters that we seek to satisfy are those that we
believe are important to mobile phone users: voice quality, high data rate packet
sessions, low blocked call rate, low dropped call rate and deep
indoor penetration, especially in densely populated areas or areas of special commercial
interest. The two main examined parameters used to measure network performance for voice
and packet data are the setup call success rate and the drop calls rate.

With
these quality parameters in mind, we have rolled out our UMTS/HSDPA network, which shares
locations with the GSM sites. We use monitoring probes and counters to ensure network
quality.

Our
transmission network design confers the following benefits: (i) necessary bandwidth for
GSM and UMTS/HSDPA 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.

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 which operates 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.

We
were also allocated two additional bands of spectrum: 2 x 10 MHz of GSM 1800 spectrum and
2 x 10 MHz and 1 x 5 MHz of UMTS/ HSDPA third generation spectrum. During 2002, we have
been 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.

27

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Other Systems

On
December 1, 2004 we commercially launched our UMTS network with advanced applications and
services including, among others, a 3G content portal offering a variety of services such
as live TV channels, JAVA games, maps and directions application, wide range of music
(MP3) services and an e-commerce movie ticketing application. We have installed a video
gateway and a streaming server, enabling us to offer our customers a range of video
services on their 2.5G and 3G handsets.

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:

| | erection
and operating permits from the Ministry of the Environment;
|- | --------------------------------------------------------------------

| | permits
from the Civil Aviation Authority, in certain cases; and
|- | ----------------------------------------------------------------

| | permits
from the Israeli Defense Forces.
|- | ----------------------------------------

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 and the requirement to provide indemnification undertakings to local committees.

Suppliers

Our
network utilizes standard equipment, which is available from a limited number of
suppliers. In November 2003, we entered into a framework agreement with Nortel Networks to
supply us with our UMTS wireless network. Under the agreement, Nortel supplies us with
mobile switching centers, radio network controllers, Node Bs and other UMTS
equipment. In 2006, the Nortel UMTS access business was sold to Alcatel Lucent, and we are
now negotiating with Nortel and Alcatel Lucent Israel the terms of the assignment of our
agreement with Nortel.

Ericsson,
together with its affiliates, is a major supplier of GSM equipment and 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, as a second vendor for UMTS infrastructure
equipment,. Nokia
also supplies us base station controllers, base transceiver stations and network
management system equipment. 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. 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.

Seasonality

Our
revenues and profitability show some seasonal trends over the year, but the overall impact
is not considered to be material. Generally, airtime minutes and consequently airtime
revenues are affected by the number of daylight hours in the day, which varies throughout
the year. In addition, airtime revenues are lower in February which is a shorter than
average month and during the Jewish holiday period, but are higher in the summer months as
a result of roaming charges from increased travel abroad by subscribers and from foreign
roamers using our network. There is no assurance that these trends will continue in the
future.

|              | Three months ended
|------------- | ------------------
|
|
|
|
|Revenues, net |                   
|2005          |                   
|2006          |                   

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Interconnection

All
telecommunications providers with general licenses in Israel have provisions in their
licenses requiring them to connect their networks with all other telecommunications
networks in Israel. Currently, our network is connected directly or indirectly through
Bezeq with all other telecommunications networks operating in Israel.

We
are currently operating without any formal interconnect agreements 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. We currently pay Bezeq an interconnection fee based on a tariff structure set
forth in the Interconnection Regulations (Telecommunications and Broadcasts) (Fees for
Interconnection) (2000).

We
have formal interconnect agreements with Cellcom, Pelephone and MIRS. The interconnection
tariffs charged by Cellcom, Pelephone and MIRS are set forth in the Interconnection
Regulations (Telecommunications and Broadcasts) (Fees for Interconnections) 2000 that,
coupled with a change to the mobile telephone operators licenses, imposes a uniform
call termination tariff for all mobile telephone operators. We also have direct and
indirect interconnect arrangements with other telecommunications services providers in
Israel.

In
recent years, the Ministry of Communications has reduced the call termination tariffs from
NIS 0.50 per minute in the beginning of 2003 to NIS 0.26 per minute as of the date of this
Annual Report, and SMS termination tariffs from NIS 0.38 in May 2004 to NIS 0.025 as of
the date of this Annual Report. Call termination tariffs are scheduled to be reduced again
in March 2008 from NIS 0.26 to NIS 0.22 per minute. A recent regulatory change linked call
termination tariffs and SMS termination tariffs to the CPI, such that the call termination
tariffs were adjusted to NIS 0.2659 per minute and the SMS termination tariffs were
adjusted to NIS 0.0256. The tariffs described above will be adjusted each March to conform
to changes in the CPI. In response to the tariff reductions described above, we
implemented cost-cutting measures as well as price increases and repackaging of our tariff
plans. Depending on the effectiveness of such steps, and other factors such as general
market conditions, these regulatory changes may negatively impact our revenues and
profits. See - Regulation  Telecommunications Law below.

We
have written interconnect agreements with Bezeq International, Barak, Netvision, Internet
Gold and Exfone. We currently have an operating arrangement with Golden Lines. The
Ministry of Communications regulation and the change to the mobile telephone
operators licenses also impose a uniform call termination tariff for incoming
international calls of NIS 0.2557 per minute. This rate will be reduced to NIS 0.22 per
minute, in line with the reduction in termination tariffs for incoming domestic calls,
effective March 1, 2008 (adjusted to conform to changes in the CPI).

In
January 2007, our subsidiary received a domestic fixed line license. Our subsidiary is
connected, directly and indirectly through Bezeq, with all other telecommunication
networks operating in Israel.

Competition

There
are currently four mobile telephone network operators in Israel: Partner, Cellcom,
Pelephone and MIRS. Cellcom operates nationwide mobile telephone networks based on GSM
1800 MHz, EDGE and D-AMPS, technologies. Cellcom commercially launched its UMTS service
and handsets in July 2006. Pelephone currently operates nationwide mobile telephone
networks in Israel using both the N-AMPS analog and the CDMA and CDMA1 xRTT, as well as
the EV-DO technology. Pelephone has announced its intention to roll out a GSM network and
to offer UMTS/HSDPA. MIRS, an Enhanced Specialized Mobile Radio, or trunking,
network, was granted a general license to operate as a mobile telephone operator in 2001.

According
to our estimations, at December 31, 2006, Cellcom had approximately 2,884,000 subscribers,
representing approximately 34% of the Israeli mobile telecommunications market; Pelephone
had approximately 2,401,000 subscribers as of the end of the third quarter, representing
approximately 29% of the Israeli mobile telecommunications market and MIRS had over
430,000 subscribers, representing approximately 5% 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.

For
more information, see Item 3D. Risk FactorsCompetition from existing
competitors may require us to increase our subscriber acquisition costs and customer
retention costs and increase our churn rate.

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.

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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
systems to support data packet switching services for 2.5 and third generation. Our
Vantive CRM system is becoming obsolete and we contracted with IBM to
implement a new CRM system based upon Siebel software. The migration to the
new CRM system may require significant management time and could adversely impact the
functioning of our network systems.

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. If the parties do not agree on the amount of royalty payments, the determination
of royalty payments is referred to an arbitrator. 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.
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.

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 and other telecommunication services in Israel, and sets the terms by which such
services are provided. The regulatory framework under which we operate consists also of
the Planning and Building Law, 1965, the Consumer Protection Law, 1981, and the
Non-Ionizing Radiation Law, 2006. Additional areas of Israeli law may be relevant to our
operations, including antitrust law, specifically the Restrictive Trade Practices Law,
1988, the Class Actions Law, 2006, 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 after the government-owned
monopolies have been 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 HOT, to the four mobile telephone operators, Pelephone, Cellcom,
Partner and MIRS, and to the six international operators, Barak, Bezeq International,
Golden Lines, Netvision, Internet Gold and Exfone. In addition, the Ministry of
Communications may issue additional mobile telephone operator and other licenses in the
future.

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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 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
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.

In
January 2007, the Telecommunications Law was amended to provide that the Ministry of
Communications is authorized to impose significant monetary sanctions on a license holder
that breaches a provision of its license, which breach causes, or may cause, significant
harm to the public or to competition.

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 a rate of 3.5% in 2004 and 2005. In November
          2004, the Ministry of Communications announced that from January 2006 the rate
          of royalties payments will be reduced annually by 0.5% to a level of 1%.

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 failed to
challenge successfully. For more information see Item 3D. Risk FactorsWe operate in a highly regulated telecommunications market which limits our
flexibility to manage our business. Regulatory decisions may materially and adversely
affect our results of operations.

Furthermore,
in recent statements, the Israeli Commissioner of Restrictive Trade Practices has
expressed his view that the mobile telephone industry in Israel operates as an oligopoly
and that the Israeli government should intervene to regulate prices. In part, the
Commissioner based his statements on the increase in prices by the mobile telephone
operators as a result of the Ministry of Communications decision to lower call
termination tariffs. The chairman of the Knessets Economic Committee announced that
the committee would act to declare the mobile telephone operators as an oligopoly. Such a
finding could result in increased regulatory intervention (including with regard to
tariffs and tariffing practices), the application of certain limitations on our conduct
and increased litigation. Recent tariff increases by the mobile telephone operators
prompted the Ministry of Communications to express its intention to intervene in the
market by,inter alia, introducing new operators.

Regulatory Developments

In
2003, the Ministry of Communications decided to open the international call market to new
competitors. However, the Ministry announced that it will not allow mobile operators to
enter the international call market, at this stage.

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In
2004, the Ministry of Communications began authorizing the issuance of licenses to provide
domestic fixed-line (wireline and wireless) services to customers, competing with Bezeq,
on a non-universal service basis. Services provided under such license must be precisely
defined by the provider, must be provided to customers in a region, or regions, defined by
the provider and must be provided to a defined type of customer. Under the terms of such
license, the provider must demonstrate aggregate revenues of no less than NIS 50 million
within 3 years from the launching of the services. The license term is 20 years. We and
Cellcom, Golden Lines and GlobeCall, have been granted this license.

The
Ministry of Communications has promulgated regulations that, coupled with a change
effected in the mobile telephone operators licenses, impose a uniform call and SMS
termination tariff. In November 2004, the Ministry of Communications announced regulatory
changes significantly reducing call termination tariffs and SMS termination tariffs,
effective March 1, 2005, with additional reductions mandated for the coming years. In
addition, the Ministry of Communications further announced that billing units will be
reduced from the present intervals of up to 12 seconds to 1 second, effective December 31,
2008. Furthermore, the Ministry of Communications also indicated that it intends to start
implementing a process to bring about unification of rates for calls terminating both on
and off an operators network, and disallow charging the customer with a separate
interconnect tariffs. Preliminary hearings with the cellular operators in Israel on this
matter commenced in August 2005, but have been suspended and are expected to be resumed in
2008. See Item 4B. Information on the CompanyBusiness
OverviewInterconnection.

In
November 2006, our license was amended in a manner that obligates us as of January 2007 to
provide, in all calls made to our subscribers and directed to voicemail, an announcement
that the call is being directed to voicemail. We are not allowed to charge for a call
terminated up to one second after the announcement is made. Such regulation has adversely
affected our financial results.

In
January 2007, the Ministry of Communications published a policy regarding VOB services.
The policy, among other things, allows licensed third parties to access the infrastructure
of Bezeq and HOT in order to provide VOB services to customers, charging customers
directly, with no need to pay to the access owner any usage fees. Our domestic fixed-line
license was amended in February 2007 in accordance with this policy.

The
Ministry of Communications is evaluating the cost of roaming and may introduce new
regulations that would limit fees charged by Israeli cellular companies for calls made by
foreign network operators customers while in Israel using our network as well for
calls made by our own customers using their handsets abroad. Because we consider roaming
charges to be a significant source of revenue, such regulatory limits could adversely
affect our revenues.

In
January 2007, the Ministry of Communications appointed a public committee, headed by Prof.
Grunau, a professor of economics at Hebrew University, to formulate recommendations
regarding the policy and the principles of competition in the Israeli telecommunications
market. The issues to be examined by the committee include the structural separation of
activities, such as transmission and content, including the structural separation of
Bezeq; the requirement that licensed telecommunication companies provide access to their
infrastructure to other companies; and the principle of convergence arrangements between
mobile and fixed-line operators, as well as between voice service providers and video and
data service providers. We have submitted our position and recommendations to the
committee.

In
April 2007, the Ministry of Communication initiated a hearing process to consider limiting
mobile operators ability to offer tariff plans that are based on one-minute billing
units and other billing units longer than twelve seconds. We believe that limiting our
ability to offer a variety of tariff plans, including those based on different billing
units, may adversely affect our business.

Entry of MVNO Operators

In
March 2007, the Ministry of Communications engaged NERA, an international consulting firm,
to review the level of competition in the Israel mobile market and to review whether to
allow the entry of MVNO operators in the Israeli telecommunications market. Based on the
findings of their review, the Ministry of Communications may opt to grant licenses to
MVNOs, who may use Partners infrastructure or other cellular operators to offer
mobile telephone services.

Number Portability

InMarch 2005, the Telecommunications Law was amended to require the Minister of
Communications to implement a mobile number portability plan and, separately, a fixed
number portability plan by September 2006. The number portability plan would permit
subscribers in Israel to change their service provider to another network operator while
retaining the same telephone number. Once implemented, we anticipate that number
portability will provide us with the opportunity to transfer new subscribers to our
network.

Despite
efforts to introduce the requisite technology and to coordinate the transition to number
portability by September 2006, at present, none of the cellular or fixed-line operators
has implemented number portability. We, Cellcom and Pelephone have filed a petition with
the Israeli High Court of Justice requesting that the court order the Government of Israel
and the Ministry of Communications to show cause for failing to amend the
Telecommunications Law in order to postpone the number portability implementation
deadline. The justifications for our petition includes our inability to comply with the
implementation timeline due to the unique technological environment of the Israeli
cellular market, the complex requirements of the Israeli regulator and the absence of a
detailed plan as was originally contemplated by the law. Consequently, since September
2006, all relevant telecommunications license holders, including us, face the risk of
claims for violating the Telecommunications Law and the terms of the general license
without having the ability to comply with the law or the license. Individual subscribers
have sought to intervene in the petition and have also filed a purported class action
against us and other mobile and fixed-line operators based on the alleged failure to
comply with the number portability requirements. See Item 8 Financial Information-
Legal and Administrative Proceedings. At this preliminary stage, we are unable to
assess the lawsuits chance of success.

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In
May 2007 the Ministry of Communications announced that the last implementation date for
number portability is December 1, 2007. However, the Ministry is considering imposing
monetary sanctions on relevant telecommunication license holders, including us, in
accordance with the Telecommunications Law for alleged violation of the obligation to
implement number portability by September 2006. We can submit our position to the Ministry
of Communications until June 24, 2007.

WIMAX Bandwidth

The
Ministry of Communications is in the process of conducting hearings regarding the
allocation of bandwidth in the Worldwide Interoperability for Microwave Access (WIMAX)
spectrum. WIMAX is a technology that aims to provide wireless data over long distances, in
a variety of different methods, from point to point links to full mobile cellular type
access. Following the hearings, the Ministry of Communications may elect to adopt
regulations that prohibit Partner from receiving an allocation of bandwidth from the WIMAX
spectrum. If the Ministry of Communications elects to adopt such regulations, it could
harm our ability to compete with telecommunications providers using the WIMAX spectrum.

Our Mobile Telephone
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 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, which ruled in our favor. The Ministry of Communications is appealing the decision.

We
were also allocated two additional bands of spectrum: 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. Under the
terms of our license, the Ministry of Communications may reallocate the spectrum bands
that were previously allocated to us. Following the award of this spectrum, the Minister
of Communications amended and extended our mobile telephone license through 2022.

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. Liquidity and Capital Resources.

In
2004, our license was amended to regulate access to adult voice services through all
cellular media including voice, picture, chat and dating services. The access to adult
voice services is through a domestic dialing code by a plan set by the Ministry of
Communications and a service number that we allocate to the provider of the adult voice
services. Access to the adult voice services is automatically barred as a default for all
our subscribers unless they specifically request the service and verify that they are over
18 years of age. This amendment has been applied to all cellular operators, to Bezeq and
recently to the international operators. The Ministry of Communications will hold the
operators liable and accountable for any infractions of this amendment. Additional
amendments during 2006 extended the regulation of access for adult voice services
described above to 3G technologies as well, including non-voice and internet services
provided (directly and indirectly) either through phone calls to numbers allocated by us
or through our internet portal.

On
March 9, 2005, our license was further amended. The principal elements of this amendment
are as follows:

| | Our
founding shareholders and their approved substitutes must hold, in the aggregate, at
least 26% of each of our means of control. Furthermore, the maintenance of at least 26%
of our means of control by our founding shareholders and their approved substitutes
allows Partner to be protected from a license breach that results from a transfer of
shares for which the authorization of the Ministry of Communications was required, but
not obtained.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Israeli
entities from among our founding shareholders and their approved substitutes must hold at
least 5% of our issued share capital and of each of our means of control. Israeli
entities are defined as individuals who are citizens and residents of Israel and
entities formed in Israel and controlled, directly or indirectly, by citizens and
residents of Israel, provided that indirect control is only through entities formed in
Israel, unless otherwise approved by the Israeli Prime Minister or Minister of
Communications.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | At
least 10% of our board of directors must be appointed by Israeli entities, as defined
above, among our founding shareholders or their approved substitutes, provided that if
the board of directors is comprised of up to 14 members, only one such director must be
so appointed, and if the board of directors is comprised of between 15 and 24 members,
only two such directors must be so appointed.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
new board of directors committee shall be formed to deal with security matters. Only
directors with the required clearance and those deemed appropriate by Israels
General Security Service may be members of this committee.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Minister of Communications shall be entitled to appoint an observer to the board of
directors and its committees, subject to certain qualifications and confidentiality
undertakings.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
November 2006, our license was again amended. The principal elements of this amendment
were as follows:

| | We
are required to operate a telephone information service which provides telephone listings
for our subscribers. We are also obligated to share our telephone subscriber listing
information with other operators to be used in their telephone information systems.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
telephone calls transferred to our subscribers voicemail, we are required to allow
the calling party an opportunity to disconnect the call within the first few seconds
without incurring a charge.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
March 2007, our license was further amended. Among the changes was a requirement not to
provide access to services, whether from Partner or a content supplier, if the subscriber
has not specifically requested access to such service and for which there is a significant
charge to the subscriber. We must also inform subscribers that they have the ability to
block access to such services.

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),
          but has been extended 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:

| | observing
the provisions of the Telecommunications Law, the Wireless Telegraphy Ordinance, the
regulations          and the provisions of our license;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | acting
to continuously improve our mobile telephone services, their scope, availability, quality
and technology, and that there has been no act or omission by us harming or limiting
competition in the mobile telephone sector;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | having
the ability to continue to provide mobile telephone services of a high standard and to
implement the required investments in the technological updating of our system in order
to improve the scope of such services, as well as their availability and quality; and
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | using
the spectrum allocated to us efficiently, compared to alternative applications.
|- | -------------------------------------------------------------------------------------

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 the Ministry of Communications approval. We have submitted our standard
agreement to the Ministry of Communications for approval pursuant to our license. To date,
we have not received any comments from the Ministry of Communications regarding this
agreement.

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 and any other service
          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 some 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 and other domestic fixed line
          operators, the other mobile telephone operators and the international operators.

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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.

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 as well as offer roaming services outside the State of Israel. In May
2000, we were also granted a license from the Israeli Civil Administration, to provide
cellular services to the Israeli populated areas in the West Bank. The license is
effective until April 7, 2008. The provisions of the general license described above,
including as to its extension, generally apply to this license, subject to certain
modifications. We believe that we will be able to receive an extension to this license
upon request.

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:

| | voting
rights in Partner;
|- | -------------------------

| | the
right to appoint a director or managing director of Partner;
|- | ----------------------------------------------------------------

| | the
right to participate in Partner's profits; or
|- | -------------------------------------------------

| | the
right to share in Partner's remaining assets after payment of debts when Partner is wound
up.
|- | -------------------------------------------------------------------------------------------------

Each
of our ordinary shares and ADSs is considered a means of control in Partner.

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.

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
founding shareholders or their approved substitutes of Partner continue to hold in the
aggregate at          least 26% of the means of control of Partner;
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | our
Articles of Association include the provisions described in this paragraph;
|- | -------------------------------------------------------------------------------

| | we
act in accordance with such provisions;
|- | ------------------------------------------

| | our
Articles of Association provide that an ordinary majority of the voting power at the
general meeting of Partner is entitled to appoint all the directors of Partner other than
external directors.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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.

| | Founding
shareholders or their approved substitutes must hold at least 26% of the means of control
of Partner.
|- | --------------------------------------------------------------------------------------------------------------

| | Israeli
entities from among our founding shareholders and their approved substitutes must hold at
least 5% of our issued share capital and of each of our means of control.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
Foreign Mobile Radio and Telephone operator (as defined below) (or a controlling
corporation thereof) must hold directly or indirectly at least 25% of the means of
control of Partner.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
majority of our directors, and our general manager, must be citizens and residents of
Israel.
|- | -------------------------------------------------------------------------------------------------

| | Neither
the general manager of Partner nor a director of Partner may continue to serve in office
if he has been convicted of certain legal offenses.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | No
trust fund, insurance company, investment company or pension fund that is an Interested
Party in Partner may: (a) hold, either directly or indirectly, more than 5% of any means
of control in a competing mobile radio telephone operator without having obtained a
permit to do so from the Ministry of Communications, or (b) hold, either directly or
indirectly, more than 5% of any means of control in a competing mobile radio telephone
operator in accordance with a permit from the Minister, and in addition have a
representative or appointee who is an Office Holder in a competing mobile radio telephone
operator, unless it has been legally required to do so, or (c) hold, either directly or
indirectly, more than 10% of any means of control in a competing mobile radio telephone
operator, even if it received a permit to hold up to 10% of such means of control.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | No
trust fund, insurance company, investment company or a pension fund that is an Interested
Party in a competing mobile radio telephone operator may: (a) hold, either directly or
indirectly, more than 5% of any means of control in Partner, without having obtained a
permit to do so from the Ministry of Communications; or (b) hold, directly or indirectly,
more than 5% of any means of control in Partner in accordance with a permit from the
Ministry of Communications, and in addition have a representative or appointee who is an
Office Holder in Partner, unless it has been legally required to do so; or (c) hold,
either directly or indirectly, more than 10% of any means of control in Partner, even if
it received a permit to hold up to 10% of such means of control.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Partner,
an Office Holder or Interested Party in Partner, or an Office Holder in an Interested
Party in Partner does not control a competing mobile radio telephone operator, is not
controlled by a competing mobile radio telephone operator, by an Office Holder or an
Interested Party in a competing mobile radio telephone operator, by an Office Holder in
an Interested Party in a competing mobile radio telephone operator, or by a person or
corporation that controls a competing mobile radio telephone operator.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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:

| | We
have illegally ceased, limited or delayed any one of our services;
|- | ---------------------------------------------------------------------

| | Any
means of control in Partner or control of Partner has been transferred in contravention
of our          license;
|- | --------------------------------------------------------------------------------------------------------------------

| | We
fail to invest the required amounts in the establishment and operation of the mobile
radio telephone system in accordance with our undertakings to the Ministry of
Communications;
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
have harmed or limited competition in the area of mobile radio telephone services;
|- | -------------------------------------------------------------------------------------

| | A
receiver or temporary liquidator is appointed for us, an order is issued for our winding
up or we have          decided to voluntarily wind up; or
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | Partner,
an Office Holder in Partner or an Interested Party in Partner or an Office Holder in an
Interested Party of Partner is an Interested Party in a competing mobile radio telephone
operator or is an Office Holder in a competing mobile radio telephone operator or in an
interested party in a competing mobile radio telephone operator without first obtaining a
permit from the Ministry of Communications to do so or has not fulfilled one of the
conditions included in such permit. See Item 4B. Information on the CompanyBusiness
OverviewRegulationOur Permit Regarding Cross Ownership.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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:

| | A
change has occurred in the suitability of Partner to implement the actions and services
that are the subject of our license.
|- | ------------------------------------------------------------------------------------------------------------------------------

| | A
change in our license is required in order to ensure effective and fair competition in
the telecommunications sector.
|- | -----------------------------------------------------------------------------------------------------------------------

| | A
change in our license is required in order to ensure the standards of availability and
grade of service required of Partner.
|- | ------------------------------------------------------------------------------------------------------------------------------

| | A
change in telecommunications technology justifies a modification of our license.
|- | ----------------------------------------------------------------------------------

| | A
change in the electromagnetic spectrum needs justifies, in the opinion of the Ministry of
Communications, changes in our license.
|- | -----------------------------------------------------------------------------------------------------------------------------------

| | Considerations
of public interest justify modifying our license.
|- | ----------------------------------------------------------------

| | A
change in government policy in the telecommunications sector justifies a modification of
our license.
|- | -------------------------------------------------------------------------------------------------------

| | A
change in our license is required due to its breach by Partner.
|- | -----------------------------------------------------------------

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:

| | Office
Holder means a director, manager, company secretary or any other senior officer
that is directly subordinate to the general manager.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | Control means
the ability to, directly or indirectly, direct the activity of a corporation, either
alone or jointly with others, whether derived from the governing documents of the
corporation, from an agreement, oral or written, from holding any of the means of control
in the corporation or in another corporation, or which derives from any other source, and
excluding the ability derived solely from holding the office of director or any other
office in the corporation. Any person controlling a subsidiary or a corporation held
directly by him will be deemed to control any corporation controlled by such subsidiary
or by such controlled corporation. It is presumed that a person or corporation controls a
corporation if one of the following conditions exist: (1) such person holds, either
directly or indirectly, fifty percent (50%) or more of any means of control in the
corporation; (2) such person holds, either directly or indirectly, a percentage of any
means of control in the corporation which is the largest part in relation to the holdings
of the other Interested Parties in the corporation; or (3) such person has the ability to
prevent the taking of business decisions in the corporation, with the exception of
decisions in the matters of sale or liquidation of most businesses of the corporation, or
fundamental changes of these businesses.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | Controlling
Corporation means a company that has control, as defined above, of a foreign
mobile radio telephone operator.
|- | ---------------------------------------------------------------------------------------------------------------------------

| | Foreign
Mobile Radio Telephone Operator means an operator of a mobile telephone system
abroad, through which mobile telephone services are provided to at least 500,000
subscribers.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interested
Party means a person who either directly or indirectly holds 5% or more of any
type of means of control, including holding as an agent.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------

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.

Other Licenses

Domestic
Fixed-Line License. In January, 2007, the Ministry of Communications granted us a
license for the provision of domestic fixed-line telecommunications services. The license
expires in twenty years but may be extended by the Ministry of Communications for
successive periods of ten years provided that we have complied with the terms of the
license and have acted consistently for the enhancement of telecom services and their
enhancement. We deposited a bank guarantee in the amount of NIS 10 million with the
Ministry of Communications upon receiving the license which shall be used to secure the
licensees obligations under the License. The general conditions of the mobile
telephone license described above, generally apply to this license, subject to certain
modifications. In addition to any 10% share transfer requiring the prior approval of the
Ministry of Communications, the license additionally requires approval prior to a third
party acquiring the ability to exercise significant influence over us. In this context,
holding 25% of our means of control is presumed to confer significant influence. The
license was amended in February 2007 to grant us the right to offer Voice Over Broadband
(VOB) services using the infrastructure of Bezeq and HOT to access customers
and to provide them with fixed-line telephony service without any payment to the
infrastructure owner.

Transmission
License. In August 2006, the Ministry of Communications granted us a special license
for the provision of transmission and data communications services. This special license
allows us to provide digital transmission services over fixed lines to enable our
customers to create a data-link between customer sites and between the site of one
customer and that of another. The special license also allows us to enter into agreements
to charge our customers for this service and to lay, install, and connect cable to support
the digital transmission services. The special license is valid through July 2007, or
until such date as we will be granted an exclusive general license, the later of the two.
Regardless of the aforesaid, the Minister of Communications may determine that the
validity of the license will not expire upon termination of the aforesaid license period
and the Minister will have the right to issue special instructions in this respect.

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

NTP
License. In February 2007 we received a special license granted by the Ministry of
Communications allowing us to provide certain telecom services, including providing and
installing equipment and cabling, representing the subscriber with local fixed operators,
and establishing and operating control facilities within a subscribers premises. The
license is valid until February 2012.

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.

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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.

On
January 1, 2006, the Non-Ionizing Radiation Law (5766-2006) was enacted, which defines the
various powers of the Ministry of the Environment as they relate, inter alia, to
the grant of permits for antenna sites and sets standards for permitted levels of
non-ionizing radiation emissions and reporting procedures. Pursuant to this law, which
entered into effect on January 1, 2007, a request for an operating permit from the
Ministry of Environment with respect to either new sites or existing sites would require a
building permit for such site(s). If we will continue to face difficulties in obtaining
building permits from the local planning and building committee, we may fail to obtain
also operation permits from the Ministry of Environment. Operation of an antenna site
without a permit from the Ministry of Environment may result in criminal and civil
liability to us or to our officers and directors.

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.

On
January 3, 2006, the National Council for Planning and Building added a new requirement
for obtaining a building permit for antenna sites: the submission of an undertaking to
indemnify the local committee for claims relating to the depreciation of the surrounding
property value as a result of the construction or existence of the antenna.

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.

Under
the Non-Ionizing Radiation Law, which imposes criminal sanctions for non-compliance with
its dictates, the National Council for Planning and Building was granted the power to
determine the level of indemnification for reduction of property value to be undertaken as
a precondition for a cellular company to obtain a building permit for a new or existing
antenna site. As a result, the National Council for Planning and Building has decided that
until National Building Plan 36 is amended to reflect a different indemnification amount,
cellular companies will be required to undertake to indemnify the building and planning
committee for 100% of all losses resulting from claims against the committee. Thus, at
present, in order to obtain a building permit for a new or existing antenna site, we must
provide full indemnification for the reduction of property value.

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We
cannot predict whether the legal requirement to provide full indemnification will be
adopted in the amended National Building Plan 36, nor can we predict when the National
Building Plan 36 will be amended. These recent developments may have a material adverse
effect on our financial condition and results of operations, as well as plans to expand
and enhance network coverage. For more information, see Item 3D. Risk Factors 
In connection with certain building permits, we may also be required to indemnify certain
planning committees in respect of claims against them relating to the depreciation of
property values that result from the granting of permits for antenna sites, which may have
a material adverse effect on our financial condition and results of operations.

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. 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.

We
have received approval from the Ministry of Communications for selling and distributing
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, and under the new
Non-Ionizing Radiation Law, certain types of devices, which are radiation sources,
including cellular handsets, have been exempted from requiring an approval from the
Ministry of Environment so long as the radiation level emitted during the use of such
handsets does not exceed the radiation level permitted under the Non-Ionizing Radiation
Law. 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 under the Consumer Protection
Law. While, to the best of our knowledge, the handsets that we market comply with the
applicable laws that relate to acceptable SAR levels, we rely on the SAR published by the
manufacturer of these handsets and do not perform independent inspections of the SAR
levels of these handsets.

In
November 2005, a new procedure was adopted by the Ministry of Communications with regard
to the importation, marketing, and approval for 2G and 2.5G handsets. Prior to the
implementation of the new procedure, suppliers of 2G and 2.5G handsets in Israel were
required to obtain an interim, non-binding approval of the handset type from the relevant
mobile telephone operators before receiving final approval from the Ministry of
Communications to supply such handsets in Israel to such operators. Under the new
procedure, handsets that have already received the internationally recognized Global
Certification Forum approval prior to their importation into Israel are now exempt from
the requirement of receiving an interim, non-binding approval from the relevant mobile
telephone operators in Israel. This could expose us to the risk that handsets not reviewed
and approved by us may interfere with the operation of our network. The new procedures
described above do not apply to 3G handsets, which still require mobile telephone
operators to grant an interim, non-binding approval to the Ministry of Communications
before the Ministry grants its final approval in all circumstances.

In
addition, this procedure also called for repaired handsets to comply with all applicable
standards required for obtaining handset type approval, including standards relating to
the safety, electromagnetic levels, and SAR levels. Under a December 2005 amendment to
this procedure, in the event that the SAR level is not measured after the repair of a
handset, the repairing entity is required to notify the customer by means of a label
affixed to the handset that the SAR may have been altered following the repair, in
accordance with the provisions relating to the form of such label set forth in the
procedure. At present, a consultant has been retained by the Ministry of Communications to
formulate a recommendation regarding the appropriate manner to implement the procedure for
repairing handsets. In the course of the consultants work, he has met with mobile
telephone operators, including Partner. We intend to comply with the decision of the
Ministry of Communications on this matter once a decision is published.

In
April 2007, the Minister of Communications granted us the rights to use public grounds for
the purpose of deploying and maintaining our transmission network, subject to the consent
of the relevant local planning committees pursuant to an expedited approval process. As a
result of these rights, we are exempt from applying for a building permit under the
Planning and Building Law in connection with the deployment and maintenance of our
transmission network in public grounds.

Liberalization
of Handset Market

The
Ministry of Communication announced in October 2005 its plans to increase competition in
the cellular handset market by opening the market to competitors. We are unable at this
point to assess how the market liberalization in the handset market would affect us,
although we believe that such competition will not have a material affect on our business.

40

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# 4C. Organizational
Structure

We
currently have three subsidiaries, Partner Future Communications 2000 Ltd., an Israeli
corporation, Partner Land-Line Communications Solutions LLP, an Israeli limited
partnership, and Partner Business Communications Solutions, LLP, an Israeli limited
partnership (of which Partner Future Communications 2000 Ltd. serves as the general
partner and the Company serves as the limited partner of each subsidiary), which are
wholly-owned by us. We are an indirect subsidiary of Hutchison Telecom which as of April
15, 2007, held approximately 50.52% of our shares. Hutchison Telecom is a leading
international provider of mobile and fixed-line telecommunications services with
operations in eight markets.

# 4D. Property, Plants and
Equipment

Headquarters

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

|(1) | Main
office at 8 Amal St.  a building of 10,532 square meters plus 6,345
               square meters mainly for parking. The lease agreement is for a 20 year
period                commencing on June 1998. We have an option to shorten the lease
period by 3.5 to                8.5 years.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Main
office at 6 Amal St.  a building of 9,172 square meters plus 14,877
               square meters of parking and service areas. In 2003, we increased our
lease to                18,151 square meters and 14,877 square meters for parking and
service areas. In                2004, we increased our lease to 19,000 square meters
plus 14,877 square meters                for parking and service areas. The lease
agreement is for a 16 year period                commencing in November 2002. We have an
option to terminate the lease on May 31,                2012 or May 31, 2018.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Main
office at 10 Amal St.  2,468 square meters plus 500 square meters of
               parking and service areas. The lease agreement is for an initial period of
24                months commencing in December 2002. We have an option to continue the
lease                period for seven additional periods of 24 months each. The lease for
the main                office at 10 Amal St. renews automatically at the end of each
term.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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, 2006, we had 2,283 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 up to ten years
(including the original lease period).

The
operation of most of these antenna sites requires building permits from local or regional
zoning authorities, as well as a number of additional permits from governmental and
regulatory authorities, and we have had difficulties in obtaining some of these permits.
Difficulties obtaining required permits could continue and therefore affect our ability to
maintain antenna sites. See Item 3. Key Information  3D. Risk Factors
 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 and may result in criminal or civil liability to us or to
our officers and directors.

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 agreements for different periods of up 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 7a(3) to our
consolidated financial statements.

# ITEM 4A. UNRESOLVED
STAFF COMMENTS

Not
applicable.

# 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.

41

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# 5A. Operating Results

# 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 commercially launched our 3G network in December 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, 2006, 2005, 2004, 2003 and 2002:

|                                                     | 2002 | 2003 | 2004 | 2005  | 2006
|---------------------------------------------------- | ---- | ---- | ---- | ----- | ----
|
|
|
|
|Revenues (NIS million)                               |      |      |      | 4,055 |     
|Operating profit (NIS million)                       |      |      |      | 533   |     
|Income before taxes (NIS million)                    |      |      |      | 84    |     
|Net income (NIS million)                             |      |      |      | 84    |     
|Capital expenditures, net (NIS million)              |      |      |      | 556   |     
|Cash flow provided by (used in) operating activities |      |     
|net of investment activities (NIS million)           |      |      |      | (134  | )   
|Subscribers (thousands)                              |      |      |      | 1,837 |     
|Annual churn rate (%)                                |      |      |      | 10.9  | %   
|Average monthly usage per subscriber (in minutes)    |      |      |      | 280   |     
|Average monthly revenue per subscriber (NIS)         |      |      |      | 183   |     

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 2006, as in each of 2005
and 2004, 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:

| |  | interconnect
 fees paid to the  fixed-line  and other  telecommunication  network  operators  in
Israel and                    charges paid to foreign GSM network operators;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | handset
and car-kit costs;
| | - | --------------------------

| |  | depreciation
of our network and amortization of our license;
| | - | ------------------------------------------------------------

| |  | salaries
and related expenses, including compensation related to employee stock option plans;
| | - | ---------------------------------------------------------------------------------------------

| |  | leases;
| | - | -------

| |  | network
maintenance;
| | - | --------------------

| |  | royalties
paid to the Israeli Government under our license; and
| | - | ---------------------------------------------------------------

| |  | costs
of replacing or repairing damaged handsets.
| | - | -------------------------------------------------

42

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Selling and Marketing
Expenses

Our
principal components of selling and marketing expenses are:

| |  | advertising
and promotion;
| | - | --------------------------

| |  | commissions
to dealers; and
| | - | ---------------------------

| |  | salaries
and related expenses, including compensation related to employee stock option plans.
| | - | ---------------------------------------------------------------------------------------------

General and
Administrative Expenses

Our
principal components of general and administrative expenses are:

| |  | salaries
and related expenses, including compensation related to employee stock option plans;
| | - | ---------------------------------------------------------------------------------------------

| |  | professional
fees and consultancy fees;
| | - | ---------------------------------------

| |  | insurance;
| | - | ----------

| |  | depreciation
and amortization; and
| | - | ----------------------------------

| |  | provision
for bad debts.
| | - | ------------------------

Financial Expenses

Our principal
components of financial expenses are:

| |  | interest
on notes and bank loans;
| | - | ---------------------------------

| |  | net
hedging costs on foreign currency and CPI exposure; and
| | - | -----------------------------------------------------------

| |  | exchange
rate and linkage differences.
| | - | --------------------------------------

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:

| |  | number
of subscribers;
| | - | ----------------------

| |  | average
monthly revenue per subscriber (ARPU);
| | - | ----------------------------------------------

| |  | average
monthly minutes of usage per subscriber (MOU); and
| | - | ----------------------------------------------------------

| |  | churn
rate.
| | - | -----------

2006 Developments

In
2006, our revenues increased by approximately 9.4% over our revenues in 2005, despite
continued reductions in interconnect tariffs during the year. To mitigate the effects of
these reductions, we have continued our efforts to implement cost-cutting measures,
including reducing distribution and advertising costs, to implement price increases and to
repackage our tariff plans. We are not able to predict with certainty the effect of future
regulatory changes, including the effect of the implementation of number portability, the
possible reduction in roaming charges and how we will address these changes.

During
2006, the number of our 3G subscribers grew to approximately 276,000, more than doubling
the number of our 3G subscribers at the end of 2005. As a result, we are seeing an
increase in data and content revenues. In addition, our business subscribers increased
from approximately 20% to almost 23% of our subscriber base while business customers
accounted for 71% of the added net new active subscribers of 2006.

In
July 2006, we acquired the transmission business of Med I.C.1 (1999) Ltd., including
its fiber-optic cable infrastructure comprising of a network of approximately 900
kilometers of submerged and terrestrial transmission fiber for approximately NIS 71
million (US $16.8 million). The acquisition will enable us to reduce our transmission
costs as well as to provide some of our business customers with bundled services of
transmission of data and voice. As of July 2006, the transmission activity has been
included in the financial results.

43

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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
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. In certain
cases, cellular handsets are sold to subscribers within the context of airtime packages,
in order to divide the revenues into separate units of accounting, we are required to
estimate the fair value of each deliverable. These estimates are based upon the price of
each deliverable when it is sold on a stand alone basis. The amount allocable to the
delivered item (the handset) is limited to the amount that is not contingent upon the
delivery of any additional services under the contract (airtime services).

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.

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). For instance, had the percentage of
depreciation been decreased by 5%, our operating profit would increase by approximately
NIS 124 million and had the percentage of depreciation increased by 5%, our operating
profit would decrease by approximately NIS 114 million. We amortize our license by the
straight-line method over the utilization period of the license, which is based upon the
license period. 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
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 age 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 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 82%. If we
decreased our percentage of the allowance for all aging debts by 15%, our operating profit
would increase by NIS 18 million. If we increased such percentage by 15%, our operating
profit would decrease by NIS 12 million. 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 0.4%,
0.6% and 0.5% for the years ended December 31, 2004, 2005 and 2006, respectively.

Results of Operations for
the Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005

Revenues
in 2006 were NIS 5,606.7 million (US $1,327 million), increasing by 9.4% from NIS 5,122.9
million in 2005.

Revenues
in 2006 from services were NIS 5,027.3 million (US $1,189.9 million) in 2006, representing
an increase of 8.8% from 2005 service revenues of NIS 4,619.9 million.Compared
with 2005, total network minutes increased in 2006 by 13.2%, partially offset by a 5.5%
dilution in the average tariff per minute including incoming calls. The increase in total
network minutes was driven primarily by an expanding subscriber base which grew by 5.5% in
2006. The dilution in the average tariff per minute compared with 2005 was driven
primarily by the reduction in interconnection tariffs which went into effect in March
2006, as well as by increased competition and the increased weight of business subscribers
in our customer base. The average business subscriber generates substantially more minutes
of use than post-paid private and prepaid subscribers, whilst their average tariff per
minute is lower.

44

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Revenues
in 2006 from equipment were NIS 579.4 million (US $137.1 million), an increase of 15.2%
from NIS 503 million in 2005. This increase was caused by an increase
in the average revenue per sale, reflecting a higher proportion of 3G handset
sales to new and upgrading subscribers, as well as an increase in the number of
handsets sold to new and upgrading subscribers.

Data
and content revenues, including SMS messages, totaled NIS 526.7 million (US $124.7
million) for 2006 as a whole, accounting for 9.4% of total revenues or 10.5% of service
revenues, up from NIS 404.2 million, 7.9% of total revenues, or 8.7% of service revenues,
in 2005, despite the mandated 49% reduction in SMS interconnection tariffs which went into
effect in March 2006. The increase compared with 2005 was driven by data and content
non-SMS service revenues, which increased by 36.1%. Revenues from SMS services in 2006
increased by 21.7% compared with 2005, despite the reduction in SMS interconnect tariffs
from March 2006, as mandated by the Ministry of Communications. SMS messages accounted for
approximately 38% of data and content revenues in 2006, compared with approximately 42% in
2005.

Cost
of revenues in 2006 increased by 3.5% to NIS 3,897.3 million (US $922.4 million) from NIS
3,766.4 million in 2005.

Cost
of revenues  services in 2006 increased by 2.1% to NIS 3,085.5 million (US $730.3
million), from NIS 3,022.5 million in 2005. The increase was primarily driven by higher
variable airtime costs resulting from the growth in airtime usage, offset by lower
depreciation, lower royalties, and efficiency measures taken by the Company.

Cost
of revenues  equipment in 2006 increased by 9.1% to NIS 811.8 million (US $192.1
million) from NIS 743.9 million in 2005. The increase was driven primarily by the selling
of more advanced and higher cost 3G handsets and an approximate 7% growth in sales
transactions to new and upgrading subscribers.

Gross
profit for 2006 was NIS 1,709.4 million (US$ 404.6 million), the equivalent of
30.4% of revenues, up by 26.0% from NIS 1,356.6 million, or 26.5% of revenues, in 2005.

Selling
and marketing expenses in 2006 were NIS 307.6 million (US$ 72.8 million), an increase of
12.7% from NIS 272.9 million in 2005. The increase was primarily due to an increase in the
sales force, which contributed to growth in sales transactions, as well as increases in
distribution and advertising costs.

General
and administrative expenses in 2006 were NIS 183.5 million (US$ 43.4 million), up by 1.5%
from NIS 180.8 million in 2005, the increase primarily due to fees related to ensuring
Sarbanes-Oxley Act compliance.

Operating
profit for 2006 was NIS 1,218.4 million (US$ 288.4 million), an increase of 34.9% from NIS
902.9 million in 2005. As a percentage of revenues, operating profit increased from 17.6%
in 2005 to 21.7% in 2006.

Financial
expenses in 2006 were NIS 166.4 million (US$39.4 million), a decrease of 51.8% from NIS
345.4 million in 2005. The decrease is primarily attributed to one-off charges in 2005
including a NIS 63 million charge related to the redemption of the US$ 175 million
13% Senior Subordinated Notes in August 2005. The decrease also reflects lower interest
expenses resulting from the refinancing of the Companys long term debt with lower
cost CPI linked shekel-denominated debt, as well as lower expenses resulting from the
lower average CPI level in 2006 of -0.1% compared with 2.4% in 2005.

Income
before taxes for 2006 was NIS 1,052 million (US$ 249 million) up 88.7%- compared to NIS
557.5 million in 2005.

Following
the ruling of the Supreme Court in November 2006 in the matter of Paz Gas Marketing
Company Ltd. and Others vs. the Assessing Officer and Others, which overturned the rules
regarding the recognition of financing expenses, the Company included in its financial
statements an additional provision of taxes in the amount of NIS 35 million. This
provision is an estimate of the additional tax expense relating to the possibility that
part of the financing expenses accrued in the years 2005 and 2006 in respect of a
financial debt, which is attributable, inter alia, to the financing of a repurchase of
Company shares, will not be recognized as an expense for tax purposes. The Company
believes that it has justifications for the recognition of these expenses for tax
purposes, or part of them. The Company is examining the possible effects of the ruling, if
any, on its policies in the future.

Net
income in 2006 was NIS 682.3 million (US$ 161.5 million) or earnings of NIS 4.44 (US$
1.05) per basic ADS or share (NIS 4.41 per diluted ADS or share), representing a 92.4%
increase from NIS 354.6 million, or earnings of NIS 2.19 per basic ADS or share (NIS 2.17
per diluted ADS or share), in 2005.

During
2006, our net active subscribers increased by 139,000, or 5.5%. The Companys
subscriber base at the end of December 2006 was approximately 2,668,000, accounting for an
approximate market share of 32%, including approximately 605,000 business subscribers or
23% of the base, approximately 1,282,000 postpaid private subscribers, or 48% of the base,
and approximately 781,000 prepaid subscribers, or 29% of the base. Of the Companys
subscriber base, approximately 276,000 were 3G subscribers. Net new active subscribers in
the business sector accounted for approximately 71% of net new active subscribers in the
year.

The
annual churn rate in 2006 increased to 15.6% up from 13.6% in 2005. The increase was
primarily related to the prepaid sector.

45

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Average
monthly usage per subscriber (MOU) for 2006 was 311 minutes, an increase of 5.8% compared
with 294 minutes in 2005. Average monthly revenue per subscriber (ARPU) in 2006 was NIS
158 (US$ 37.4), an increase of 1.3% compared with NIS 156 in 2005, despite the reduction
in interconnection charges mandated by the Ministry of Communications in March 2006.

Results of Operations for
the Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004

Revenues
in 2005 were NIS 5,122.9 million, down 0.3% from NIS 5,140.7 million in 2004.

Revenues in
2005 from services were NIS 4,619.9 million, approximately equal to the revenues from
services in 2004 of NIS 4,615.8 million.Compared with 2004, total network minutes
in 2005 increased by 12.8%, offset by a 12.9% dilution in the average tariff per minute
including incoming calls. The increase in total network minutes was driven primarily by an
expanding subscriber base which grew by 8.1% from the end of 2004 to the end of 2005. The
dilution in the average tariff per minute compared with 2004 was driven primarily by the
reduction in interconnection tariffs which went into effect in March 2005, as well as
increased competition and the increased weight of business subscribers in our customer
base. The average business subscriber generates substantially more minutes of use than
post-paid private and prepaid subscribers, whilst their average tariff per minute is
materially lower.

Revenues
in 2005 from equipment were NIS 503.0 million, a decrease of 4.2% from NIS 525.0 million
in 2004. The decrease in 2005, compared with 2004, was driven by a decrease in the average
revenue per sale.

Data
and content revenues, including SMS messages, in 2005 were NIS 404.2 million, accounting
for 7.9% of total revenues or 8.7% of service revenues, up from NIS 351.1 million, or 6.8%
of total revenues, 7.6% of service revenues, in 2004, despite the reduction in SMS
interconnection tariffs. The increase in 2005, compared with 2004, was driven by data and
content non-SMS service revenues which increased by 34.5%. Revenues from SMS services in
2005 decreased by 4.0% compared with 2004, reflecting the reduction in SMS interconnect
tariffs from March 2005, as mandated by the Ministry of Communications. In 2005, SMS
messages accounted for approximately 42% of data and content revenues, compared with
approximately 50% in 2004.

Cost
of revenues in 2005 increased by 4.2% to NIS 3,766.4 million from NIS 3,615.0 million in
2004.

Cost
of revenues  services in 2005 increased by 4.8% to NIS 3,022.5 million, from NIS
2,885.1 million in 2004. The increase was primarily driven by the increased depreciation
and amortization of over NIS 100 million which was recorded following the launch of the 3G
network towards the end of 2004 together with the additional network expenses associated
with the 3G network.

Cost
of revenues  equipment in 2005 increased by 1.9% to NIS 743.9 million from NIS 729.9
million in 2004. The increase was driven primarily by the marketing of more advanced and
higher cost handsets and approximately 5% growth in sales transactions to new and
upgrading subscribers.

Gross
profit for 2005 was NIS 1,356.6 million, the equivalent of 26.5% of revenues, down 11.1%
from NIS 1,525.7 million, or 29.7% of revenues, in 2004. The decrease can be primarily
attributed to the increased depreciation, amortization and network expenses related to the
Companys 3G network.

Selling
and marketing expenses in 2005 were NIS 272.9 million, a decrease of 16.1% from NIS 325.2
million in 2004. The decrease was principally due to reductions in distribution and
advertising costs.

General
and administrative expenses in 2005 were NIS 180.8 million, a decrease of 0.2% from NIS
181.1 million in 2004.The decreases in general and administrative expenses, as with the
decreases in selling and marketing expenses, reflect cost-cutting measures the Company put
in place as part of its plan to mitigate the effects of the inter-carrier termination rate
reductions that were mandated by the Ministry of Communications.

Operating
profit for 2005 was NIS 902.9 million, a decrease of 11.4% from
NIS 1,019.3 million in 2004. As a percentage of revenues, operating profit
decreased from 19.8% in 2004 to 17.6% in 2005. The decrease can be primarily attributed to
the impact of the inter-carrier termination rate reductions that were mandated by the
Ministry of Communications, as well as the increased depreciation, amortization and
network expenses related to the Companys 3G network.

Financial
expenses in 2005 were NIS 345.4 million , an increase of 32.6% from NIS 260.5 million in
2004. The increase was primarily driven by a one-off charge in the amount of NIS 63
million related to the redemption of the US$ 175 million 13% Senior Subordinated Notes on
August 15, 2005, interest charges related to both the redeemed Notes and the new
CPI-linked shekel-denominated Notes and a one-off amortization of capitalized expenses
related to the Companys previous bank facility.

Income
before taxes for 2005 was NIS 557.5 million down 26.5% compared to NIS 758.8 million in
2004.

Net
income in 2005 was NIS 354.6 million or earnings of NIS 2.19 per basic ADS or share (NIS
2.17 per diluted ADS or share), representing a 24.8% decrease from NIS 471.6 million, or
earnings of NIS 2.57 per basic ADS or share (NIS 2.56 per diluted ADS or share), in 2004.
The decrease in 2005 net income compared with 2004 resulted primarily from the financial
expenses related to the restructuring of the Companys debt, the impact of the
inter-carrier termination rate reductions that were mandated by the Ministry of
Communications, and the increased depreciation, amortization and network expenses related
to the Companys 3G network.

46

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During
2005, our net active subscribers increased by 189,000, or 8.1%.

As
of December 31, 2005 our net active subscriber base was 2,529,000, accounting for an
approximate market share of 32%. The Companys subscriber base at the end of December
2005 included approximately 507,000 business subscribers (20% of the base), approximately
1,268,000 postpaid private subscribers, (50% of the base), and approximately 754,000
prepaid subscribers, (30% of the base). Of the Companys subscriber base,
approximately 103,000 were 3G subscribers. Net new active subscribers in the business
sector accounted for approximately 39% of net new active subscribers in the year.

The
annual churn rate in 2005 increased to 13.6% from 12.0% in 2004. The increase was
primarily related to the prepaid sector.

Average
monthly usage per subscriber (MOU) for 2005 was 294 minutes, an increase of 2.8% compared
with 286 minutes in 2004. In 2005, average monthly revenue per subscriber (ARPU) was NIS
156 (US$ 33.9), a decrease of 8.2% compared with approximately NIS 170 in 2004. The
decrease in ARPU is attributed primarily to the reduction in interconnection charges
mandated by the Ministry of Communications, despite the increase in MOU.

Trends

In
2007, we expect to continue to grow our subscriber base compared with 2006, despite the
highly penetrated telephone mobile market in Israel. We will continue to focus on
retention efforts and on growing our 3G subscriber base. We expect strong growth in our 3G
subscriber base to bring about growth in our data and content revenues. Despite the
further decline in interconnect tariff rates as of March 2007, and despite the decline in
revenues resulting from the new regulation regarding short calls to voicemail which went
into effect in January 2007, we expect our total revenues to grow in 2007. For more
information, see Regulatory Developments in Item 4B. Information on the
CompanyBusiness OverviewRegulation.

We
also expect that number portability, which is expected to be implemented during the year,
will lead to higher retention costs, and a rise in churn rates following its
implementation. However, barring any further adverse material regulatory decisions, we
expect an increase in annual EBITDA in 2007, though at a lower rate of increase than in
2006.

We
are acting to expand our offering of telecommunications services, including data
transmission and domestic fixed-line services. In order to expand our offerings, we may
consider acquiring businesses and technologies in areas complementary to our existing
business. We believe that the Israeli telecommunications market will be characterized
increasingly by service providers that can offer the bundling of telecommunications
services in packages that are designed to attract and retain subscribers by meeting a
wider range of their telecommunications needs.

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, 2006, 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 which are incurred in, or linked to, non-shekel
currencies were 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 impact
on our results, which may be material. We hedge a portion of our foreign currency
commitments.

Although
we have the ability to borrow under our bank credit facility in US dollars, our borrowings
are in shekels, and most of our shekel bank borrowings and our Notes due 2012 are linked
to the 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 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. We partly hedge the
principal amount of our Notes due 2012 against adverse movement in the CPI.

# 5B. Liquidity and
Capital Resources

The
mobile telephone business is highly capital intensive, requiring significant capital to
acquire a license and to, construct mobile telecommunications networks. 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.

47

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Currently,
our main sources of liquidity are:

| |  | our
cash on hand;
| | - | -----------------

| |  | our
operating cashflows; and
| | - | ----------------------------

| |  | our
senior credit facility.
| | - | ---------------------------

Our
senior credit facility currently consists of a $75 million term loan facility (in addition
to an advance of approximately $11 million carried over from our previous facility) and a
$75 million revolving loan facility, both maturing on September 1, 2009. Our credit
facility is unsecured. Bank Hapoalim B.M., Bank Leumi Le-Israel B.M., Israel Discount Bank
Ltd. and Mizrahi Tefahot Bank Ltd. are participating in the facility. At March 31,
2007, the balances available for drawing were approximately $19 million under
Facility A, and $75 million under Facility B.

In
March 2005, we completed the offering of our Notes due 2012, raising NIS 2.0 billion in a
public offering in Israel. Of these, notes having an aggregate principal amount of
approximately NIS 36.5 million were purchased by our wholly owned subsidiary Partner
Future Communications 2000 Ltd., or PFC. PFC also received an additional allocation of
notes having an aggregate principal amount of NIS 500 million. The notes that PFC received
pursuant to this additional allocation do not confer the right to receive any payment
whatsoever on account of principal or interest until they are sold by PFC to a third
party.To date, no such notes have been sold to third parties and we are uncertain
whether we will sell these notes to third parties at all.

The
Notes are due 2012 and principal and interest payments are linked to the CPI. The annual
interest on the notes is 4.25% payable quarterly. Quarterly principal repayments will
begin in June 2009. The notes were rated AA- by Maalot, and Aa2 by Midroog, two of
Israels rating agencies. We used the net proceeds from the offering to pay down some
of our existing credit facility, to repurchase up to 33.3 million shares from our founding
Israeli shareholders and to redeem our 13% Senior Subordinated Notes due 2010. These 13%
Senior Subordinated Notes due 2010 were originally issued in August 2000.

In
April 2005, we repurchased approximately 33.3 million of our shares pursuant to an offer
received from our founding Israeli Shareholders in February 2005. These shareholders held
together approximately 22.5% of the Companys outstanding shares at the time of the
offer. As a result of the repurchase, the collective shareholdings of the founding Israeli
shareholders were reduced to approximately 5.4% of our issued and outstanding share
capital. The price per share at which these shares were acquired was NIS 32.22 per share.
The total consideration paid for the shares was approximately NIS 1,074 million. We
cancelled the repurchased shares.

In
August 2005, we redeemed the outstanding US $175 million 13% Senior Subordinated Notes due
2010. According to the terms of the notes, the redemption price was 106.5% of the
principal amount, or $186.375 million. The redemption, which we financed from our new bank
facility and funds generated from current operations, concluded the refinancing of our
long term debt into lower cost CPI linked shekel-denominated debt.

In
the third quarter of 2005, our board of directors and shareholders approved the
distribution of our first cash dividend, in the amount of NIS 0.57 per share, totaling
approximately NIS 86.4 million.

During
2006, we distributed cash dividends to our shareholders in the amount of NIS 307 million.
In January 2007, the board of directors approved the distribution of a cash dividend in
the amount of NIS 1.28 per share (approximately NIS 200 million ($47 million)) to
shareholders of record as of February 20, 2007. Cash dividends are paid in Israeli
currency. For further information please see Item 8A Consolidated Financial
Statements and other Financial Information  Dividend Distribution Policy.

In
July 2006, we completed the acquisition of the transmission business of Med I.C.1
(1999) Ltd. including its fiber-optic cable infrastructure comprising of a network of
approximately 900 kilometers of submerged and terrestrial transmission fiber for
approximately NIS 71 million ($16.8 million).

Cash
flows generated from operating activities in 2006 (NIS 1,223.5 million or US $289.46
million), net of cash flows from investing activities (NIS 448.7 million or US $106.2
million), were NIS 774.8 million (US $183.4 million), an increase of 68.6%. Cash
flows generated from operating activities in 2005 (NIS 1,006.3 million), net of cash flows
from investing activities (546.7 million) totaled NIS 459.6 million. The increase was
primarily due to an increase in cash flows from operating activities, combined with a
decrease in the level of investment in fixed assets.

From
January 1, 2004 to December 31, 2006, we made cumulative net capital
expenditures of approximately NIS 1,575 million, of which NIS 488 million (US
$115 million) was incurred in 2006. 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 capital expenditures, in 2007 to be approximately the same as in
2006.

We
believe that funds from our operations, together with funds raised under our credit
facility and our cash on hand will provide us with enough liquidity and resources to fund
our expected capital expenditure needs, as well as our obligations under our financing
agreements, our license payments and our other material commitments, at least for the next
12 months. However, the actual amount and timing of our future requirements may differ
materially from our estimates.

48

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# 5C. 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.

# 5D. Trend Information

See
Trends in Item 5A. Results of Operations for the Year Ended December 31, 2006,
Compared to the Year Ended December 31, 2005 above.

# 5E. 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.

# 5F. Aggregate
Contractual Obligations

Set
forth below are our contractual obligations and other commercial commitments as of
December 31, 2006:

|                                    | Payments Due by Period (NIS in thousands)
|----------------------------------- | -----------------------------------------
|
|
|
|
|Long-Term Debt*                     |                                          
|Capital Lease Obligations           |                                          
|Operating Leases                    |                                          
|Contribution to funds in respect of |                                          
|Employee rights upon retirements    |                                          
|Handsets                            |                                          
|Fixed Assets                        |                                          
|Other Long-Term Obligations         |                                          
|Total Contractual Cash Obligations  |                                          

*     This table
does not include payments of interest on our Long-Term Debt. Interest on our Notes due
2012, which represents NIS 2,016,378 of our Long-Term Debt is at 4.25% per annum, linked
to changes in the CPI. Our remaining Long-Term Debt consists of NIS 181,208 with interest
of 5.8%, linked to the CPI, and NIS 126,500 with variable interest based on the Prime
Rate minus 0.5%, not linked to the CPI.

# ITEM 6. DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES

# 6A. Directors and Senior
Management

Below
is a list of the Directors of the Company as of May 1, 2007:

Directors

|Name of Director             | Age | Position
|---------------------------- | --- | --------
|
|
|
|
|Fok Kin-ning, Canning        |     |         
|Dr. Michael J. Anghel (2)(4) |     |         
|Chan Ting Yu (1)(3)          |     |         
|Chow Woo Mo Fong, Susan      |     |         
|Uzia Galil                   |     |         
|Erez Gissin (1)(2)           |     |         
|Dennis Pok Man, Lui (1)(3)   |     |         
|Pesach Shachar (1)           |     |         
|Amikam Shorer                |     |         
|Frank John Sixt              |     |         
|Moshe Vidman (1)(2)(3)(4)    |     |         

---

|(1) | Member
of the Executive Committee of the board of directors.
|--- | ------------------------------------------------------------

|(2) | Member
of the Audit Committee.
|--- | ------------------------------

|(3) | Member
of the Compensation Committee.
|--- | -------------------------------------

|(4) | External
Director under the Companies Law.
|--- | ------------------------------------------

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Fok
Kin-ning, Canning has been a director of Partner since May 1998 and the Chairman of
its board of directors since that time. Mr. Fok has been an Executive Director of
Hutchison Whampoa Limited since 1984 and its Group Managing Director since 1993. He also
serves as the Chairman of Hutchison Harbour Ring Limited, Hutchison Telecommunications
International Limited, Hutchison Telecommunications (Australia) Limited, and Hongkong
Electric Holdings Limited and Ommanney Holdings Limited (formerly Hutchison
Telecommunications Limited) (the holding company of the telecommunications interests of
Hutchison Whampoa Limited), In addition, Mr. Fok is the Co-Chairman of Husky Energy Inc.
and the Deputy Chairman of Cheung Kong Infrastructure Holdings Limited. He is also a
Director of Cheung Kong (Holdings) Limited. Mr. Fok holds a Bachelor of Arts degree from
St. Johns University in Minnesota, United States and a diploma in financial
administration from the University of New England in Australia. He is a member of the
Australian Institute of Chartered Accountants. Mr. Fok was nominated as a director, and as
the Chairman of the board of directors, by Advent Investments Pte Ltd.

Dr.
          Michael J. Anghelbecame a director of Partner in March 2006.  From
          1977 to 1999, he led the Discount Investment Corporation Ltd. (of the IDB
Group)           activities in the fields of technology and communications.  Dr.
Anghel was           instrumental in founding Tevel, one of the first Israeli cable
television           operators and later in founding Cellcom  the second Israeli
cellular           operator.   In 1999 he founded CAP Ventures, an advanced
technology           investment company.  From 2004 to 2005, Dr. Anghel served as
CEO of DCM,           the investment banking arm of the Israel Discount Bank.   He
has been           involved in various technology enterprises and has served on the
boards of           directors of various major Israeli corporations and financial
institutions           including Elron, Elbit, Nice, Gilat, American Israeli Paper Mills,
Maalot (the           Israeli affiliate of Standard and Poors) and Hapoalim Capital
          Markets.  He currently serves on the boards of directors of Syneron
Medical           Ltd., ECI Telecom Ltd. and Scopus Ltd.  Prior to launching his
business           career, Dr. Anghel served as a full-time member of the Recanati
Graduate School           of Business Administration of the Tel Aviv University, where he
taught finance           and corporate strategy.  He currently serves as Chairman of
the Tel Aviv           Universitys Executive Program.  Dr. Anghel holds a B.A.
(Economics)           from the Hebrew University in Jerusalem and an M.B.A. and Ph.D.
(Finance) from           Columbia University in New York.

Chan
Ting Yu was a director of Partner from October 1997 to March 2000 and became a
director again in May 2001. He is a member of the Executive Committee and the Compensation
Committee. Mr. Chan is an Alternate Director of Hutchison Telecommunications International
Limited. Since joining the Hutchison Whampoa group, he has been closely involved in the
management and development of Hutchisons telecommunications business
internationally. Mr. Chan holds a degree in Law and Arts (Maths), as well as a
Postgraduate Certificate in Laws. Mr. Chan was nominated as a director, and as a member of
the Executive Committee, by Advent Investments Pte Ltd.

Chow
Woo Mo Fong, Susan has been a director of Partner since August 1998. Mrs. Chow has
been an Executive Director of Hutchison Whampoa Limited since 1993 and its Deputy Group
Managing Director since 1998. Mrs. Chow is also an Executive Director of Cheung Kong
Infrastructure Holdings Limited, Hutchison Harbour Ring Limited and Hongkong Electric
Holdings Limited and a Director of Hutchison Telecommunications (Australia) Limited, and
TOM Group Limited and Ommaney Holdings Limited (formerly Hutchison Telecommunications
Limited). She is also an alternate director of Hutchison Telecommunications International
Limited and TOM Online Inc. She is a solicitor and holds a Bachelors degree in
Business Administration. Mrs. Chow was nominated as a director by Advent Investments Pte
Ltd.

Uzia
Galil has been a director of Partner since August 1999. Mr. Galil currently serves as
Chairman and Chief Executive Officer of Uzia Initiatives and Management Ltd., a company
specializing in the promotion and nurturing of new businesses associated with mobile
communication, electronic commerce and medical information media, which he founded in
November 1999. From 1962 until November 1999, Mr. Galil served as President and Chief
Executive Officer of Elron Electronics Industries Ltd., an Israeli high technology holding
company, which he founded and of which he also served as Chairman of the board of
directors. From January 1981 until leaving Elron, Mr. Galil also served as Chairman of the
board of directors of Elbit Ltd., an electronic communication affiliate of Elron, and as a
member of the boards of directors of Elbit Systems Ltd., a defense electronics affiliate
of Elron, and all other private companies held in the Elron portfolio. Mr. Galil currently
serves as a member of the boards of directors of Orbotech Ltd., NetManage Inc., and as
Chairman of Zoran Corporation. From 1980 to 1990, Mr. Galil served as Chairman of the
International Board of Governors of the Technion. Mr. Galil holds a M.S. in Electrical
Engineering from Purdue University and a B.S. from the Technion. Mr. Galil has also been
awarded an honorary doctorate in technical sciences by the Technion in recognition of his
contribution to the development of science-based industries in Israel, an honorary
doctorate in philosophy by the Weitzman Institute of Science, an honorary doctorate in
engineering by Polytechnic University, New York, and an honorary doctorate from the
Ben-Gurion University of the Negev in Israel and the Solomon Bublick prize laureate from
the Hebrew University of Jerusalem. In 1997 he was awarded the prestigious Israel Prize
for his contribution to the development of the Israeli hi-tech industry. Until April 20,
2005, Mr. Galil had been a director nominated by Elbit.COM. Since then, Mr. Galil serves
as a director on behalf of Advent Investments Pte Ltd.

Erez
Gissin has been a director of Partner since August 1998 and is currently a member of
the Executive Committee and the Audit Committee. Since April 2005, Mr. Gissin has been a
private investor through his management and investment company. For the prior five years,
Mr. Gissin has been the CEO of IP Planet Network Ltd., an Israeli telecommunication
company providing satellite broadband services. Previously, he was the Vice President of
Business Development of the Eurocom Group, an Israeli leader in telecom and internet
products and services. Mr. Gissin holds a Bachelor of Science in Industrial Engineering
from Tel Aviv University and an MBA degree from Stanford University, California. Until
April 20, 2005 Mr. Gissin had been a director nominated by Eurocom. Since then and until
September 12, 2005, Mr. Gissin served as a director and member of the Executive Committee,
on behalf of Advent Investments Pte Ltd. Since then, Mr. Gissin has been an independent
director and serves on the Executive Committee and the Audit Committee of the Company.

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Dennis
Pok Man Lui has been a director of Partner since April 2004 and is the Chairman of the
Executive Committee and the Chairman of the Compensation Committee. Mr. Lui is an
Executive Director and the Chief Executive Officer of Hutchison Telecommunications
International Limited. He first joined Hutchison Paging International Limited in 1986 and
became its managing director in 1993. He was the managing director of Hutchison
Telecommunications (Hong Kong) Limited in charge of the mobile telecommunications,
fixed-line, multi-media, internet and paging businesses in Hong Kong, China, Taiwan and
Macau from January 1996 to April 2000. Mr. Lui rejoined the Hutchison Whampoa group in May
2001 as group managing director of HTI (1993) Holdings Limited (HTI)
overseeing all the operations and new business development of the HTI group. He holds a
Bachelor of Science Degree from the University of Oregon. Mr. Lui was nominated as a
director, and as a member of the Executive Committee, by Advent Investments Pte Ltd.

Pesach
Shachar has been a director of Partner since May 1998 and is a member of the Executive
Committee. For 21 years he was the General Manager, founder, and a shareholder in Nogay
Ltd., a telecommunications consulting firm active in numerous high-tech projects in Israel
and overseas. In that capacity, he advised Hutchison on the prospects in the cellular
market in Israel, established the Partner shareholder consortium and advised Hutchison on
the bidding for the license and launch of operations. Mr. Shachar served 28 years in the
Israel Defense Forces Signal Corps and Air Force/Telecommunications, reaching the rank of
Colonel. Mr. Shachar was nominated as a director, and as a member of the Executive
Committee, by Advent Investments Pte Ltd.

Amikam
Shorerhas been a director of Partner since June 2005. He was nominated as director by
our Israeli founding shareholders. Mr. Shorer has served as executive Vice President of
Business Affairs and the General Counsel of Eurocom Group, an Israeli leader in telecom
and internet products and services, since 2000. Mr. Shorer also serves as a director in
several companies within the Eurocom Group. Mr. Shorer holds an LLB degree from Bar-Ilan
University.

Frank
John Sixt has been a director of Partner since May 1998. Mr. Sixt has been an
Executive Director of Hutchison Whampoa Limited since 1991 and its Group Finance Director
since 1998. He is the Chairman of TOM Group Limited and TOM Online Inc. He is also an
Executive Director of Cheung Kong Infrastructure Holdings Limited and Hongkong Electric
Holdings Limited and a Director of Cheung Kong (Holdings) Limited, Hutchison
Telecommunications International Limited, Hutchison Telecommunications (Australia)
Limited, and Husky Energy Inc., and Ommaney Holdings Limited (formerly Hutchison
Telecommunications Limited). He holds a Bachelor of Arts degree and a Master of Arts
degree from McGill University and a Bachelors degree in Civil Law from the
University of Montreal, and is a member of the Bar and of the Law Society of the Provinces
of Quebec and Ontario, Canada. Mr. Sixt was nominated as a director by Advent Investments
Pte Ltd.

Moshe
Vidman has been a director of Partner since October 2003. Mr. Vidman is the Revlon
representative in Israel and serves as a director of the following companies: Israel
Corporation Ltd., ICL  Israel Chemical Ltd., Rotem Amfert Negev Ltd., Dead Sea Works
Ltd., Jafora-Tabori Ltd., Rosebud Medical Ltd., Bank Leumi LeIsrael Ltd., Melisron
and Ofer Brothers Properties (1957) Ltd. Since 2000 Mr. Vidman is the Revlon
Representative in Israel. Mr. Vidman is also a member of the board of directors and a
member of Executive Committee of the Jerusalem Foundation. He also serves as a member of
the Board of Governors and the Chairman of the Endowment Fund Committee and Chairman of
the assets Company of the Hebrew University. Previously he held various positions at the
Ministry of Education and Culture. From 1978 until 1983 Mr. Vidman served as the Deputy
Accountant General in the Ministry of Finance. From 1983 until 1990 he served as the
President and Chief Financial Officer of Aryt Optronics Ltd., a hi-tech company which
developed optics and laser applications for military and medical use. From 1990 until 1999
Mr. Vidman was the Managing Director of Revlon Israel and until March 1999 he served as a
director of Koor Industries and Chairman of its Investment Committee. He also served as
Chairman of the Executive Committee of Africa-Israel Ltd. and as the Chairman of the board
of directors of Africa-Israel Hotels.

Senior Management

Below is a list of the Senior
Management of the Company as of May 1, 2007.

|Name of Officer | Age | Position
|--------------- | --- | --------
|
|
|
|
|David Avner     |     |         
|Emanuel Avner   |     |         
|Iris Beck       |     |         
|Chaim Beker     |     |         
|Alon Berman     |     |         
|Adi Biran       |     |         
|Michal Dana     |     |         
|Dan Eldar       |     |         
|Eli Glickman    |     |         
|Roly Klinger    |     |         
|Gil Rosenfeld   |     |         
|Edith Shih      |     |         

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David
Avner was appointed Chief Executive Officer on January 1, 2007, having served as
Deputy CEO since April 2005 and Chief Operating Officer since January 2006. Prior to
joining the Company, Mr. Avner served as Senior Vice President of Operations and Member of
the executive management at Amdocs Limited. Previously, he served at Amdocs as Group
President Europe and LATAM & Member of Management. Prior to that, Mr. Avner served at
Strauss Dairy Ltd. for 17 years, the last four as General Manager of the Dairy Division.
He was also the General Manager of Strauss Ice Creams Ltd., and Manager of Information
Systems at Strauss Dairy Ltd. Mr. Avner also served as Active Director of Yotvata Dairies
Subsidiary since 1998. He holds a Bachelor of Arts degree in Mathematics/Computer Sciences
and Philosophy from Haifa University in Israel and an MBA degree from the Technion, Israel
Institute of Technology. David Avner and Emanuel Avner are not related.

Emanuel
Avner was appointed Chief Financial Officer of Partner as of July 2006. Previously he
served as Vice President and Chief Financial Officer of Blue Square  Israel Ltd., an
Israeli food retailer traded on the New York Stock Exchange, since November 2003. Mr.
Avner served from 1999 until October 2003 as Chief Financial Officer of Ericsson Israel.
From 1993 to 1999, he served as Corporate Controller and Deputy CFO of Super Sol Ltd. Mr.
Avner is a CPA (member of the American and Israeli Institute of Certified Public
Accountants) and holds a Masters in Business Administration (1stClass Honors)
and a BA in Economics and Accounting from the Hebrew University of Jerusalem. David Avner
and Emanuel Avner are not related.

Iris
Beck was appointed Vice President, Marketing in December 2002. Prior to joining the
Company, she served as General Manager of Lever Israel (local subsidiary of Unilever). Ms.
Beck worked at Lever Israel from 1996 and held senior positions such as Marketing Director
and Technical Director before her appointment as General Manager. Ms. Beck worked as Brand
Manager at Strauss Ice Cream from 1993 to 1996, and as Project Controller at Kulick &
Soffa from 1991 to 1993. Ms. Beck holds a Bachelors degree in Economic Science (with
distinction) from Haifa University, and Master of Arts degree in Marketing (with
distinction) from Bar-Ilan University. Ms. Beck will conclude her service with the Company
at the beginning of 2008.

Chaim
Beker was appointed as Vice President Operations in January 2004. Since 1998, Mr.
Beker has served in a number of positions at Partner, such as: Administration and
Purchasing Manager and Deputy Vice President Operations. From 1974 to 1984 Mr. Beker
served as Vice President Administration of ARKIA. From 1984 he served as the CEO of
several companies such as: Europcar, HaMashbir Agencies and Clal Israel. Mr. Beker holds a
Bachelors degree in Economics from the Hebrew University.

Alon
Berman was appointed Vice President, Technologies in October 2004. Mr. Berman joined
Partner as Deputy VP of Engineering in the Technologies division at the end of 2002, after
serving 20 years in the Israeli Defense Forces, rising to the rank of Colonel and Head of
Technical Department in the Communications Corps. Mr. Berman holds a bachelor degree in
Electronic Engineering from the Technion  Israel Institute of Technology (1982), a
Master Degree in Electronic Engineering (1991) and MBA (1994) from Tel Aviv University.

Adi
Biran joined Partner in October 1997 and in April 1998 became Vice President,
Regulation and New Business Development. Mr. Biran came to Partner from Elbit Ltd., where,
since 1992, he headed their effort to enter the telecommunications market and in that
capacity, guided their participation and managed the bid preparation process that resulted
in Partners mobile radio telephone license. Prior to joining Elbit, he was Managing
Director of Efrat Future Technology Ltd., a subsidiary of Comverse Technology Inc. He
completed his 20-year career in the Israel Air Force as a colonel and as chief of research
and development. Mr. Biran holds a Bachelors degree in Aeronautical Engineering with
distinction from the Israel Institute of Technology (Technion), Haifa, Israel.

Michal
Danaserves as Vice President, Human Resources and Operations since May 2006. She
worked at Amdocs since 2002, where she served first as the Director of Human Resources for
Amdocs European and Latin American division, and from 2005 as the Vice President of
Human Resources, overseeing the worldwide customer business group for all human resource
activities in Europe, Asia Pacific, and Latin America. From 2000 to 2002, Ms. Dana served
as the Vice President of Human Resources for Bungee Communications, a start-up wireless
broadband telecommunications company. Before that, she served from 1999-2000 as the
Director of Human Resources for the Carmel Containers Systems Group, from 1996-1999 as the
Director of Human Resources for the Caesarea Development Corporation, and from 1980-1996
as the Senior Human Resource Consultant for Pilat international consulting group. She
holds a B.A. in Social Science from the Open University in Israel.

Dan
Eldar serves as Vice President, Carrier, International and Investor Relations for
Partner. He is also responsible for strategic planning. Dr. Eldar joined Partner in April
1998. Since 1989, Dr. Eldar has served as the managing director of an Israeli consulting
firm specializing in strategic planning, negotiation and project management. Dr. Eldar has
managed many large-scale projects in the telecommunications and semiconductor industries,
as well as in other areas. He holds PhD and M.A. degrees from Harvard University and M.A.
and B.A. degrees from the Hebrew University, Jerusalem. Dr. Eldar will conclude his
service as Vice President with the Company as of December 31, 2007.

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Eli
Glickman,Vice President, Customer and Private Sales Division,joined Partner
in 2005. He served as the CEO from 2003 to 2005 of Exel-Multi Purpose Logistics. From 1999
until 2002 Mr. Glickman served as a Naval Attache at the Embassy of Israel in Washington
D.C. US.Prior to that he served in the Israeli Navyincluding a position as
a commanding officer of the Israel Navy Commandos (SEALS) from 1997-1999, as well as other
positions from 1979 until 1999.From 2004 until 2006, Mr. Glickman served as a
director of Bank Haatzmaut.Mr. Glickman holds a Master of Science in
Financial Management from the US Naval Postgraduate School and also studied International
Executive Business Administration at Georgetown University in Washington, D.C.

Roly
Klinger, Vice President, Chief Legal Counsel and Joint Company Secretary, joined
Partner in August 1998. From 1993, she served as Legal Advisor and Corporate General
Secretary of Keshet Broadcasting Ltd., which holds an operating franchise for
Israels first commercial television channel. Previously, while practicing in the
private sector, she lectured on communications law at the College of
ManagementAcademic Studies, Tel-Aviv. Ms. Klinger received an LL.B degree from Tel
Aviv University and is admitted to the Israel Bar.

Gil
Rosenfeld, Vice President, Business Division, joined Partner in 2006. Previously, he
worked for HP Israel and HP Europe 1998-2006 during which he held the positions of Country
Managing Director, Personal Systems Sales Director, Personal Systems Group Country Manager
and Country Sales Manager. Before that he worked as the General Manager of Compaq Israel
from 1996-1998. Before that he held the position of the Enterprise Systems Organizer,
Enterprise District Sales Manager and Senior Sales Representative from 1990-1996 for CMS,
the HP distributor in Israel. Mr. Rosenfeld received an Honours Degree in Business
Information Systems and before that he received a Bachelor of Commerce degree from the
University of Witwatersand, South Africa.

Edith
Shih has been the Joint Company Secretary of Partner since July 1998. Ms. Shih has
been a senior manager of Hutchison Whampoa Limited since 1991, its Head Group General
Counsel since 1993 and its Company Secretary since 1998. She is currently an executive
director and the Company Secretary of Hutchison Harbour Ring Limited, an executive
director of Hutchison International Limited and director of various Hutchison Whampoa
group companies. She is also the Company Secretary of Hutchison Telecommunications
International Limited and the Joint Company Secretary of Hutchison Telecommunications
(Australia) Limited. She holds a Bachelor of Science and a Master of Arts degree from the
University of the Philippines, a Master of Arts and a Master of Education degree from
Columbia University, New York. She is qualified to practice law in Hong Kong, England and
Wales and Victoria, Australia, and is a fellow of both the Institute of Chartered
Secretaries and Administrators and the Hong Kong Institute of Chartered Secretaries.

Resignations During 2006

Amikam
Cohen, our Chief Executive Officer since the Companys commencement of operations,
resigned as of December 31, 2006, and was replaced by David Avner, our Deputy CEO and
Chief Operating Officer. Alan Gelman, the Companys Chief Financial Officer since
January 2001, resigned as of July 2006, and was replaced by Emanuel Avner. Amnon Gideon
resigned as Vice President, Human Resources and Operations and was replaced by Michal Dana
in May 2006. Zion Ginat resigned as Vice President, Customers as of April 2007 and was
replaced by Gil Rosenfeld, who was appointed as Vice President of the Business Division
and Eli Glickman, who was appointed as Vice President of the Customer and Private Sales
Division.

Dan
Eldar will conclude his service as Vice President with the Company as of December 31, 2007
and Iris Beck will conclude her service with the Company at the end of the first quarter
of 2008.

None
of the above directors or members of senior management has any family relationship with
any other director or senior manager of the Company. Senior managers are selected by the
CEO with the approval of the board of directors for an indefinite term of office and may
be removed by the board of directors at any time.

# 6B. Compensation

The
aggregate compensation paid, and benefits in kind granted to or accrued on behalf of all
our directors and senior managers for their services in all capacities during the year
ended December 31, 2006 was approximately NIS 28 million ($6.64 million). In 2006 options
were granted to our senior management under the 2004 Employee Stock Option Plan to
purchase up to 250,000 of our ordinary shares at exercise prices of NIS 32.73 and NIS
33.58 per share. These options will expire by July 2016. For more information, see
Item 6E. Directors, Senior Management and EmployeesShare Ownership2004
Employee Stock Option Plan. Included in the above, the total amount set aside or
accrued to provide pension, retirement or similar benefits on behalf of all our directors
and senior managers during the year ended December 31, 2006 was approximately NIS 2.1
million ($0.5 million).

53

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# 6C. Board Practices

References
in this annual report to external directors are to those directors who meet
the definition of external directors under the Companies Law, and references in this
annual report to independent directors are to those directors who meet the
definition of independence under applicable listing requirements of Nasdaq.

Terms of Directors

Directors
are elected at the annual shareholders meeting to serve for three years, in the case of
external directors under the Companies Law, or until the next annual meeting of the
shareholders, in the case of other directors; or until their respective successors are
elected and qualified, whichever occurs first, or in the case of Israeli directors, who
are appointed by the founding Israeli shareholders upon a written notice signed by at
least two of the founding Israeli shareholders who are the record holders of at least
50%of minimum Israeli holding shares, to the Company Secretary of his or her appointment,
until their respective successors are elected upon such notice. An extraordinary meeting
of the Company may elect any person as a director to fill an office which became vacant,
or to serve as an additional member to the then existing board of directors, provided that
the maximum number of seventeen directors is not exceeded, or to serve as an external
director or an independent director, or if the number of the members of the board of
directors is less than the minimum set in the Articles of Association. Any director
elected in such manner (excluding an external director) shall serve in office until the
coming annual meeting. The Articles of Association also provide that the board of
directors, with the approval of 75% of the directors, may appoint an additional director
to fill a vacancy or to serve as an additional member to the then existing board of
directors provided that the maximum number of seventeen directors is not exceeded. The
Companys Articles of Association provide that the board of directors may delegate
all of its powers to committees of the board of directors as it deems appropriate, subject
to the provisions of the Companies Law. No director has a service contract with the
company or its wholly-owned subsidiaries providing for benefits upon termination of
employment. Our officers serve at the discretion of the board of directors or until their
successors are appointed. See Item 4. Information on the Company  4B. Business
Overview  Regulation  Our Mobile Telephone License. for description of
additional requirements of the composition of our board of directors and the appointment
of its members.

Alternate Directors

Our
Articles of Association provide that a director may appoint any individual to serve as an
alternate director. An alternate director may not serve as such unless such person is
qualified to serve as a director. In addition, no person who already serves as a director
or alternate director of Partner may serve as the alternate director of another director
of Partner. Under the Companies Law, an alternate director shall have all of the rights
and obligations of the director appointing him or her, except the power to appoint an
alternate. The alternate director may not act at any meeting at which the director
appointing him or her is present. Unless the time period or scope of any such appointment
is limited by the appointing director, such appointment is effective for all purposes and
for an indefinite time, but will expire upon the expiration of the appointing
directors term.

External Directors under
the Companies Law

The
Companies Law requires that Partner have at least two external directors on its board of
directors. The election of an external director under the Companies Law must be approved
by a general meeting of shareholders provided that either: (a) the majority of shares
voted at the meeting, including at least one third of the shares of non-controlling
shareholders voted at the meeting, vote in favor of such arrangement or (b) the total
number of shares voted against such arrangement does not exceed one percent of the
aggregate voting rights in the company.

The
Companies Law further requires that at least one external director have financial and
accounting expertise, and that the other external director(s) have professional
competence, as determined by the companys board of directors. Under recently enacted
regulations, a director having financial and accounting expertise is a person who, due to
his or her education, experience and talents is highly skilled in respect of, and
understands, business-accounting matters and financial reports in a manner that enables
him or her to understand in depth the companys financial statements and to stimulate
discussion regarding the manner in which the financial data is presented. Under the
regulations, a director having professional competence is a person who has an academic
degree in either economics, business administration, accounting, law or public
administration or an academic degree or has other higher education, all in the main
business sector of the company or in a relevant area for the board of directors position,
or has at least five years experience in one or more of the following (or a combined five
years experience in at least two or more of the following): a senior position in the
business management of a corporation with a substantial scope of business, a senior public
officer or a senior position in the public service or a senior position in the field of
the companys business.

Dr.
Michael Anghel and Moshe Vidman are our external directors under the Companies
          Law.

Financial Experts under
the Companies Law

In
accordance with the Companies Law, Partner has determined that the minimum number of
directors with accounting and financial expertise that Partner believes is
appropriate, in light of the particulars of Partner and its activities, is three. Under
the Companies Law, only one of such experts is required to be an external
director. In accordance with its determination, Partner has three directors with
accounting and financial expertise.

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Nasdaq Rule Exemptions

Under
Nasdaq rules, companies that satisfy the definition of a Controlled Company
may be exempt from certain regulatory requirements. The regulatory requirements which a
Controlled Company is exempt from include (i) the requirement that a majority
of the board of directors members must be independent; (ii) the requirement that the
compensation committee must be comprised solely of independent directors, or that
compensation of our senior management must be determined by a majority of the independent
directors on the full board of directors; and (iii) the requirement that the nomination
committee must be comprised solely of independent directors or that nominations must be
made by a majority of the independent directors on the full board of directors.

A
Controlled Company is defined as a company of which more than 50% of the
voting power is held by an individual, group or another company. As Hutchison Telecom owns
more than 50% of our outstanding ordinary shares, we fall under the definition of a
Controlled Company and therefore we rely on the exemptions for a
Controlled Company as provided under the Nasdaq rules. However, our board of
directors may from time to time review this decision.

In
addition, in connection with our adoption of our 2004 Employee Share Option Plan, we
received an exemption from the Nasdaq requirement that issuers receive shareholder
approval when establishing a stock option plan, purchase plan or other equity compensation
arrangement pursuant to which stock may be acquired by officers, directors or consultants.
In accordance with Israeli law, board of directors approval was obtained in connection
with the adoption of the 2004 Employee Share Option Plan, and shareholder approval will be
obtained when required under Israeli law, such as when options would be issued under the
plan to directors or to office holders who hold a controlling interest in Partner.

In
order to comply with the conditions and restrictions imposed on us by the Ministry of
Communications, including in our License, in relation to ownership or control over us,
under certain events specified in our articles of association, the board of directors may
determine that certain ordinary shares are dormant shares. Consequently, we have received
an exemption from the requirement set out in Nasdaqs Marketplace Rule 4351 that
voting rights of existing shareholders of publicly traded common stock registered under
Section 12 of the US Securities Exchange Act cannot be disparately reduced or restricted
through any corporate action or issuance.

Executive Committee

Our
Executive Committee was nominated by the board of directors on July 15, 1998. Our
Executive Committee comprises members who are directors appointed by the board of
directors from time to time. Subject to the provisions of the Companies Law, the Executive
Committee is authorized to make all major decisions relating to the business affairs of
Partner. The Executive Committee is authorized by the board of directors to approve
contracts, commitments and other transactions up to a value determined by the board of
directors from time to time. Ting Chan, Erez Gissin, Dennis Lui, Pesach Shachar, and Moshe
Vidman are members of our Executive Committee.

Audit Committee

The
Companies Law requires public companies, including Partner, to appoint an audit committee
comprised of at least three board members, including all the companys external
directors. The chairman of the board of directors, any director employed by the company or
granting services to the company on a permanent basis, any controlling shareholder or any
relative of a controlling shareholder may not be a member of the audit committee. The
responsibilities of our audit committee under the Companies Law include identifying
irregularities in the management of the companys business and approving related
party transactions as required by law.

Pursuant
to the rules of the Securities and Exchange Commission, or SEC, and the listing
requirements of the Nasdaq Global Select Market, we are required to establish an audit
committee consisting only of members who are independent of management, as defined by SEC
rules and Nasdaq listing requirements. In accordance with the SEC and Nasdaq requirements,
our audit committee is directly responsible for the appointment, compensation and
oversight of our independent auditors.

The
board of directors has determined that Moshe Vidman Michael Anghel and are an audit
committee financial experts as defined by applicable SEC regulations. See Item
16A. Audit Committee Financial Expert below.

Our
audit committee consists of three board of directors members, Moshe Vidman, Erez Gissin,
and Dr. Michael Anghel, all of whom meet Nasdaqs definition of independent
directors, and two of whom (Moshe Vidman and Dr. Michael Anghel) meet the Companies
Laws definition of external directors. None of them is an affiliated person of
Partner or has received any consulting, advisory or other compensatory fee from Partner,
other than in their capacity as directors of Partner.

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Compensation Committee

Our
compensation committee consists of three board of directors members, of which one is an
external, independent director. Subject to the requirements of the Companies Law, the
compensation committee is responsible for evaluating and recommending to the board of
directors (and to the audit committee, if so required under any applicable law) the total
compensation package for the Companys Chief Executive Officer and all other
officers; reviewing the results and procedures for the evaluation of the performance of
other officers by the Companys Chief Executive Officer; making recommendations to
the board of directors regarding any long-term incentive compensation or equity plans; and
supervising the administration of the plans and periodically reviewing a comprehensive
statement of executive compensation policy. Dennis Lui and Moshe Vidman, and Ting Chan are
members of the compensation committee.

Security Committee

Pursuant
to an amendment to our license from April 2005, a new board committee has been formed to
deal with security matters. Only directors with the required clearance and those deemed
appropriate by Israels General Security Service may be members of this committee.
The committee must consist of at least four members, who are subject to the clearance
required from the Israeli General Security Service and at least one external director.
Where any matter requires a board of directors resolution and it is a security
matter, then the committee should be authorized to discuss and to resolve such security
matter and the resolution should bind the Company. However, in cases where the security
matter concerned is a transaction with a related party, the transaction should be
submitted for approval in accordance with the requirements of the applicable U.S law, the
Israeli Companies Law and any other applicable laws, provided that, in any case, only
directors with security clearance can participate in any forum which will deal with
security matters. On April 12, 2005, our board of directors approved the formation of the
Security Committee to consist of four Israeli directors, which are subject to Israeli
security clearance and security compatibility to be determined by the General Security
Service. Michael Anghel, Uzia Galil, Pesach Shachar, and Moshe Vidman are members of the
Security Committee, subject to clearance by the Israeli General Security Service.

Internal Auditor

The
Companies Law requires the board of directors of a public company to appoint an internal
auditor nominated by the audit committee. A person who does not satisfy certain
independence requirements may not be appointed as an internal auditor. The role of the
internal auditor is to examine, among other things, the compliance of the companys
conduct with applicable law and orderly business procedures. Our internal auditor is Mr.
Yehuda Motro, formerly the internal auditor of the Tel Aviv Stock Exchange.

Fiduciary Duties of an
Office Holder

The
Companies Law governs the duty of care and duty of loyalty which an Office Holder has to
the company. An Office Holder is defined in the Companies Law as a director,
general manager, chief executive officer, executive vice president, vice president, or any
other person assuming the responsibilities of any of the foregoing positions without
regard to such persons title and other managers directly subordinate to the general
manager.

The
duty of loyalty requires the Office Holder to avoid any conflict of interest between the
Office Holders position in the company and personal affairs, and proscribes any
competition with the company or the exploitation of any business opportunity of the
company in order to receive personal advantages for him or herself or others. This duty
also requires him or her to reveal to the company any information or documents relating to
the companys affairs that the Office Holder has received due to his or her position
as an Office Holder. The duty of care requires an Office Holder to act in a way that a
reasonable Office Holder would act in the same position and under the same circumstances.
This includes the duty to utilize reasonable means to obtain information regarding the
advisability of a given action submitted for his or her approval or performed by virtue of
his or her position and all other relevant information.

Approval of Related Party
Transactions

Generally,
under the Companies Law the compensation of an Office Holder who is a director, or the
compensation of an Office Holder who holds a controlling interest in the company, requires
the approval of the audit committee, the board of directors and the general meeting of the
shareholders of the company. The Companies Law also requires that a transaction between
the company and its Office Holder and also a transaction between the company and another
person in which an Office Holder has a personal interest, requires the approval of the
board of directors if such transactions are not extraordinary transactions, although, as
permitted by law and subject to any relevant stock exchange rule, our Articles of
Association allow the audit committee to approve, without the need for approval from the
board of directors. If such transactions are extraordinary transactions (that is, a
transaction other than in the ordinary course of business, otherwise than on market terms,
or is likely to have a material impact on the companys profitability, assets or
liabilities), in addition to audit committee approval, the transaction also must be
approved by our board of directors, and, in certain circumstances, the shareholders of the
company at a general meeting. Under the Companies Law, an extraordinary transaction
between a public company and a person having control of the company or an extraordinary
transaction between a public company and another person, in which a controlling member has
a personal interest (including a private placement), must be approved by the audit
committee, the board of directors and a meeting of the shareholders, provided that either:
(a) the majority of shares voted at the meeting, including at least one third of the
shares voted by shareholders who do not have a personal interest in the matter and who are
participating in the voting, are voted in favor of such arrangement (abstentions shall not
be included in the total of the votes) or (b) the total number of shares of the
shareholders referred to in clause (a) voting against such arrangement does not exceed one
percent of the aggregate voting rights of the company.

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The
Companies Law requires that an Office Holder promptly disclose any direct or indirect
personal interest that he or his affiliates may have, and all related material information
known to him, in connection with any existing or proposed transaction by the company. If
the Office Holder complies with such disclosure requirements, the company may approve the
transaction in accordance with the provisions of its articles of association and the
Companies Law. Under the Companies Law, if the Office Holder has a personal interest in
the transaction, the approval must confirm that the transaction is not adverse to the
companys interest.

In
most circumstances, the Companies Law restricts Office Holders who have a personal
interest in a matter which is considered at a meeting of the board of directors or the
audit committee from being present at such meeting, participating in the discussions or
voting on any such matter.

For
information concerning the direct and indirect personal interests of certain of our Office
Holders and principal shareholders in certain transactions, see Item 7. Major
Shareholders and Related Party Transactions.

Duty of a Shareholder

Under
the Companies Law, a shareholder has a general duty to act in good faith towards the
company and other shareholders and refrain from improperly exploiting his power in the
company, particularly when voting in the general meeting of shareholders on (a) any
amendment to the articles of association, (b) an increase of the companys authorized
share capital, (c) a merger or (d) approval of transactions with affiliates which require
shareholder approval. In addition, any controlling shareholder, any shareholder who knows
that it possesses power to determine the outcome of a shareholder vote and any shareholder
that, pursuant to the provisions of the articles of association, has the power to appoint
an office holder in the company, is under a duty to act in fairness towards the company.

Indemnification

Our
Articles of Association provide that Partner may indemnify an officer or director of
Partner to the fullest extent permitted by the law. Without derogating from the foregoing,
our Articles of Association specifically provide that Partner may indemnify an officer or
director of Partner for liability or expense he incurs or that is imposed upon him as a
result of an action or inaction by him (or together with other officers of Partner) in his
capacity as an officer or director of Partner as follows:

|(1) | any
financial liability incurred by, or imposed upon the officer or director in
               favor of a third party in accordance with a judgment, including a judgment
given                in a settlement or a judgment of an arbitrator, approved by the
court; or
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | reasonable
litigation expenses, including legal fees, incurred by the officer or
               director or which he was ordered to pay by the court:
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) | in
the context of proceedings filed against him by Partner or on Partners
          behalf or by a third party; or
| | --- | -------------------------------------------------------------------------------------------------------------------

| | (b) | in
a criminal proceeding in which he was acquitted; or
| | --- | ------------------------------------------------------

| | (c) | in
a criminal proceeding in which he was convicted of a felony which does not
          require a finding of criminal intent.
| | --- | -----------------------------------------------------------------------------------------------------------------------------

|(3) | reasonable
litigation expenses, including legal fees, incurred by the officer or
               director due to such investigation or proceeding conducted against him by
an                authority authorized to conduct an investigation or proceeding,
relating to an                offense which does not require criminal intent, within the
meaning of the                relevant terms in any law, and which:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) | ended
without filing of an indictment against him and without the imposition of           a
financial liability as a substitute for a criminal proceeding; or
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | ended
without filing of an indictment against him but for which he was subject           to a
financial liability as a substitute for a criminal proceeding; or
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | any
other liability or expense in respect of which it is permitted or will be
               permitted under applicable law to indemnify an officer of Partner.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
Articles of Association also permit us to undertake in advance to indemnify an officer or
director with respect for items (2) and (3) above, or any other matter permitted by law.
Our Articles of Association also permit us to undertake in advance to indemnify an officer
with respect to item (1) above, provided however, that the undertaking to indemnify is
restricted to events which in the opinion of the board of directors are anticipated in
light of Partners activities at the time of granting the obligation to indemnify,
and is limited to a sum or measurement determined by the board of directors to be
reasonable in the circumstances. The undertaking to indemnify must specify the events
that, in the opinion of the board of directors, are expected in light of the
Companys actual activity at the time of grant of the indemnification and the sum or
measurement that the board of directors determines to be reasonable in light of the
circumstances. Our Articles of Association also permit us to indemnify an officer or
director after the fact for all kinds of events, subject to applicable law.

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In
no event may we indemnify an officer or director for:

|(1) | a
breach of the duty of loyalty toward us, unless the officer or director acted
               in good faith and had reasonable grounds to assume that the action would
not                harm us;
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | a
breach of the duty of care if it was made intentionally or recklessly;
|--- | ------------------------------------------------------------------------

|(3) | an
intentional act which was done to unlawfully yield a personal profit; or
|--- | ---------------------------------------------------------------------------

|(4) | criminal
fine or penalty imposed on him.
|--- | ----------------------------------------

We
have undertaken to indemnify our directors and officers, subject to certain conditions for
(a) any financial obligation that is incurred by or imposed on such person in accordance
with a judgment, including a judgment given in a settlement or judgment of an arbitration
approved by the court, provided that such liability pertains to one or more events
specified in the letter of indemnification, which in the opinion of the board of directors
are anticipated in light of our activities at the time of granting the indemnification
undertaking; (b) reasonable litigation expenses, including legal fees, that were incurred
by such person or which the court obligates such person to pay in the context of a
proceeding against such person that has been filed by us, on our behalf or by a third
party, or in a criminal proceeding in which such person is acquitted or convicted, for an
offense that does not require a finding of criminal intent; and (c) reasonable litigation
expenses, including legal fees that were incurred by such person due to an investigation
or proceeding conducted against such person by an authority authorized to conduct such
investigation or proceeding and which has ended without the filing of an indictment and
without the imposition of a financial liability as a substitute for a criminal proceeding,
or which ended without the filing of an indictment but with the imposition of financial
liability as a substitute for a criminal proceeding relating to an offense that does not
require criminal intent. The aggregate indemnification amount payable by us to all of the
officers and directors pursuant to all letters of indemnification issued or that may be
issued in the future shall not exceed the higher of (i) 25% of shareholders equity and
(ii) 25% of market capitalization, each measured at the time of indemnification.

We
participate in a directors and officers liability insurance policy procured by
our controlling shareholder, Hutchison Telecom, insuring our directors and
officers liability and our undertaking to indemnify them, in respect of certain
matters permitted by the Companies Law. The policy provides for coverage in an aggregate
amount for Hutchison Telecom and its participating subsidiaries, including Partner, of up
to US $100 million. Our participation in the annual premium for the policy is US $876,960.

Hutchison
Telecom and its participating subsidiaries, including us, are also covered by further
excess directors and officers liability insurance policies of up to a limit of
US$100 million for any one claim and in the aggregate for the policy period. These
policies are shared with Cheung Kong (Holdings) Ltd, or Cheung Kong, HWL, CK Life Sciences
Intl. (Holdings), Inc. and Hongkong Electric Holdings Limited. and their respective
subsidiaries. In the event of the depletion of the insurance coverage underlying the first
layers of insurance as the result of payment of loss, these policies shall continue to
apply for subsequent losses as excess insurance over the amount of insurance remaining
under such first layers of insurances on follow form basis.

6D. Employees

At
December 31, 2006, we had 3,714 employees on full time equivalent basis, compared with
3,403 at December 31, 2005 and 3,164 at December 31, 2004. The number of employees for
2006, 2005, and 2004, divided by their activity, was as follows:

|                        | December 31
|----------------------- | -----------
|
|
|
|
|Customer service        |            
|Engineering             |            
|Sales and sales support |            
|Information technology  |            
|Marketing and Content   |            
|Finance                 |            
|Human resources         |            
|Remaining operations    |            
|TOTAL                   |            

Substantially all of our employees
have entered into employment contracts with us, terminable at will by either party.

Our
employees are not covered by any company-specific collective bargaining agreement.
However, we are subject to various Israeli labor laws and practices, as well as orders
extending certain provisions of collective bargaining agreements between the Histadrut,
currently the largest labor organization in Israel, and the Coordinating Bureau of
Economic Organizations, the federation of employers organizations. Such laws,
agreements and orders cover a wide range of areas and impose minimum employment standards
including, working hours, minimum wages, vacation and severance pay, and special issues,
such as equal pay for equal work, equal opportunity in employment, and employment of
women, youth, disabled persons and army veterans.

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We
generally contribute funds on behalf of our employees to a fund known as
Managers Insurance. This fund provides a combination of provident fund,
insurance and severance pay benefits to the employees, giving the employees a lump sum
payment upon retirement and securing most of the severance pay, if legally entitled, upon
termination of employment. The employers deposits are the property of the Company
until termination of employment. Most employees are entitled to participate in the plan
upon the start of employment or after an initial period. A participating employee
generally contributes an amount equal to 5% of his salary and we contribute between 5% and
15.8% of such employees salary.

We
also offer to most of our employees the opportunity to participate in a Continuing
Education Fund, which functions also as a savings plan. Each of the participating
employees contributes an amount equal to 2.5% of his salary and we contribute between 5%
and 7.5% of such employees salary.

According
to the National Insurance Law, Israeli employers and employees are required to pay
predetermined sums to the National Insurance Institute. These contributions entitle the
employees to health insurance and benefits in periods of unemployment, work injury,
maternity leave, disability, reserve military service, and bankruptcy or winding-up of the
employer. We have never experienced a strike or work stoppage and no material
labor-related claims are pending. We believe that our relations with our employees are
good.

Since
October 2001, most of our employees participate in a Health Insurance Program which
provides additional benefits and coverage which the public health system does not provide.
Eligibility to participate in the policy does not depend on seniority or position.

# 6E. Share Ownership

As
of May 1, 2007, our directors and senior managers owned an aggregate of 333,333 ordinary
shares, which constitutes less than 1% of our outstanding ordinary shares. Directors and
senior managers do not have different voting rights than other shareholders of the
Company.

As
of May 1, 2007, our senior managers held, in the aggregate, options to purchase up to
1,541,250 of our ordinary shares, of which 387,500 were vested and exercisable as
of that date or sixty days thereafter. Subsequent to May 1,
2007, 68,750 of these options have been exercised. No individual senior manager holds options to
purchase 1% or more of our outstanding ordinary shares. 18,750 of these options have an
exercise price of NIS 20.45 and the remaining 1,522,500 of these options have an exercise
price of between NIS 26.74 and NIS 42.10. No options have been granted to our directors.
The foregoing does not include shares or options held by senior managers who ended their
service during 2006.

Until
November 2003, we granted options to our senior managers and other employees pursuant to
our 1998 and 2000 Employee Stock Option Plans described below. In November 2003 we amended
our stock option plans to conform with recent changes in the Israeli Income Tax Ordinance
(New Version), 1961. As a result, any grants of options after November 2003 are subject to
the terms of our 2000 Employee Stock Option Plan as so amended, referred to as the 2003
Amended Plan. In addition, in 2004, 2005 and 2006 we granted options to our managers and
other employees pursuant to the 2004 Employee Stock Option Plan.

1998 Employee Stock
Option Plan

Our
board of directors adopted the 1998 Employee Stock Option Plan, or the 1998 Plan, to
promote the interests of Partner and its shareholders by providing our senior management
and other employees with appropriate incentives and rewards to encourage them to enter
into and continue in the employ of Partner and to acquire a proprietary interest in our
long-term success.

The
1998 Plan initially authorized the issuance of options to purchase 5,833,333
shares.
In 2000, options to purchase 729,166 shares were transferred to the 2000 Plan
which left options to purchase 5,104,167 shares remaining in the 1998 plan. As of December 31,
2006, options to purchase 4,886,524 ordinary shares had been exercised under the 1998
Plan, options to purchase 21,893 ordinary shares were outstanding, and options to purchase
195,750 ordinary shares were available for grant. The exercise price of the outstanding
options are $0.343 and NIS 20.45 per share. Options that had been forfeited or expired
unexercised may be regranted.

The
options granted under the 1998 Plan since April 2002 were granted subject to the same
terms and conditions as those of the 2000 Plan described below, including determination of
exercise price, vesting schedule and expiration period.

Under
the 1998 Plan, upon the occurrence of any merger, consolidation, reorganization,
recapitalization or similar event, or other substantially similar corporate transaction or
event, we are required to make such equitable changes or adjustments necessary to the
number of shares subject to each outstanding option in order to prevent dilution or
enlargement of the option holders rights.

The
1998 Plan is administered by an Employee Stock Option Committee of the board of directors.
Subject to the restrictions of the Companies Law, the Employee Stock Option Committee is
authorized, among other things, to exercise all the powers and authorities, either
specifically granted to it under the 1998 Plan or necessary or advisable in the
administration of the Plan.

In
accordance with Section 102 of the Israeli Income Tax Ordinance (New Version), 1961 and
regulations promulgated thereunder, the options and the shares to be issued upon the
exercise of options, which were granted prior to December 31, 2002, will be held for the
benefit of the option holders by a trustee who will hold the outstanding options and any
shares issued upon exercise of the options in trust on behalf of each participant for a
period of not less than two years from the date an option is issued to the Trustee on
behalf of such employee.

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An
option shall be exercised upon the instruction of an option holder to the Trustee. Twenty
percent of each option shall become vested on each of the first, second, third, fourth and
fifth anniversaries of the date the holder of that option has commenced his or her
employment with Partner, unless another date for the commencement of the vesting schedule
with respect to such option has been set by the Employee Stock Option Committee. The
option holder may exercise all or part of his options at any time after the date of
vesting but not later than the eighth anniversary date of commencement of the vesting
schedule with respect to the option.

If
an option holders employment with Partner is terminated because of his willful and
continued failure to perform his duties and obligations to Partner or his willful engaging
in misconduct injurious to Partner such that, in each case, the actions or omissions of
the participant are sufficient to deny the participant severance payment under the Israeli
Severance Payment Law, 1963, his options will expire upon termination of employment. If an
option holders employment with Partner is terminated by Partner for any other
reason, he may exercise his vested options during the remainder of their exercise period.
If an option holders employment is voluntarily terminated by the option holder, he
may exercise his vested options during the 90 day period following the later of the date
of termination and the date upon which the resulting shares may be freely sold. If an
option holders employment with Partner is terminated as a result of the retirement,
death or disability of the option holder, he may exercise his vested options and the pro
rata portion of options scheduled to vest in the year of termination during the remainder
of their exercise period.

The
board of directors may, at any time and from time to time, terminate or amend the Plan in
any respect, subject to any applicable approvals or consents that may be otherwise
required by law, regulation or agreement, and provided that no termination or amendment of
the Plan shall adversely affect the terms of any option which has already been granted.

2000 Employee Stock
Option Plan

Our
board of directors adopted a second employee stock option plan, the 2000 Employee Stock
Option Plan, or the 2000 Plan, to promote our interests and those of our shareholders by
providing our employees with appropriate incentives and rewards to encourage them to enter
into and continue in our employ and to acquire a proprietary interest in our long-term
success.

The
2000 Plan authorizes the issuance of options to purchase up to 4,472,222 ordinary shares.
In November 2003, 419,930 options under this plan were transferred to the 2003 Amended
Plan. As of December 31, 2006, options to purchase 3,219,866 ordinary shares had been
exercised, options to purchase 600,106 ordinary shares were outstanding, and options to
purchase 232,320 ordinary shares were available for grant. The exercise prices of the
outstanding options range from NIS 17.25  NIS 27.35. Options that had been forfeited
or expired unexercised may be regranted.

Upon
the occurrence of any merger, consolidation, reorganization or similar event, or other
substantially similar corporate transaction or event, we are required to make such
equitable changes or adjustments necessary to the number of shares subject to each
outstanding option in order to prevent dilution or enlargement of the option holders
rights.

The
2000 Plan is administered by an Employee Stock Option Committee of the board of directors.
Subject to the restrictions of the Companies Law, the Employee Stock Option Committee is
authorized, among other things, to exercise all the powers and authorities, either
specifically granted to it under the 2000 Plan or necessary or advisable for the
administration of the 2000 Plan.

In
accordance with Section 102 of the Israeli Income Tax Ordinance (New Version), 1961 and
the regulations promulgated thereunder, the options and the shares to be issued upon the
exercise of options, which were granted prior to December 31, 2002, will be held for the
benefit of the option holders by a trustee who will hold the outstanding options and any
shares issued upon exercise of the options in trust on behalf of each participant for a
period of not less than two years from the date an option is issued to the Trustee on
behalf of such employee.

An
option shall be exercised upon the instruction of an option holder to the Trustee. Twenty
five percent of each option shall become vested on each of the first, second, third and
fourth anniversaries of the date the holder of that option commenced his or her employment
with us, unless another date for the commencement of the vesting schedule with respect to
such option has been set by the Employee Stock Option Committee The option holder may
exercise all or part of his options at any time after the date of vesting but no later
than the expiration of the exercise period, which will be fixed by the Employee Stock
Option Committee and will not exceed ten years from the date of option grant.

If
an option holders employment with us is terminated because of his willful and
continued failure to perform his duties and obligations to us or his willful engaging in
misconduct injurious to us such that, in each case, the actions or omissions of the
participant are sufficient to deny the participant a severance payment under the Israeli
Severance Payment Law, 1963, his options will expire upon termination of employment. If an
option holders employment with us is terminated by us for any other reason, he may
exercise his vested options during the remainder of their exercise period. If an option
holders employment is voluntarily terminated by the option holder, he may exercise
his vested options during the 90 day period following the later of the date of termination
and the date upon which the resulting shares may be freely sold. If an option
holders employment with us is terminated as a result of the retirement, death or
disability of the option holder, he may exercise his vested options and the pro rata
portion of options scheduled to vest in the year of termination during the remainder of
their exercise period.

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The
board of directors may, at any time and from time to time, terminate or amend the 2000
Plan in any respect, subject to any applicable approvals or consents that may be otherwise
required by law, regulation or agreement, and provided that no termination or amendment of
the 2000 Plan shall adversely affect the terms of any option which has already been
granted.

2003 Amended Plan

In
November 2003 we amended our stock option plans to conform with recent changes in the
Israeli Income Tax Ordinance (New Version), 1961. The principal consequence of the
amendment was our election to adopt the capital gains track under the new section 102 of
the Income Tax Ordinance for all new options granted under the 2003 Amended Plan. This
provides capital gains treatment for taxable income of employees from exercise of options
and sale of ordinary shares, subject to certain conditions. The terms of the 2003 Amended
Plan remain substantially the same as in the 2000 Plan.

In
connection with the adoption of the 2003 Amended Plan, we received an exemption from the
requirement set out in Nasdaqs Marketplace Rule 4350(i)(1)(A) that listed companies
receive shareholder approval when certain stock option or purchase plans are to be
established or materially amended, or certain other equity compensation arrangement made
or materially amended. This exemption was granted based on the fact that the Nasdaq
requirement is inconsistent with applicable Israeli legal requirements, which require
approval from a companys board of directors upon the establishment or amendment of
such a plan unless directors or controlling shareholders participate in the plan in which
case approval of the shareholders meeting would be required upon the grant of options to
such directors or controlling shareholders.

In
November 2003, we offered to employees who had previously been granted options under our
stock option plans the right to exchange their unvested options for options with identical
terms under the 2003 Amended Plan. Employees holding options to purchase 962,104 ordinary
shares accepted this offer.

On
November 2003, 419,930 options under the 2000 Plan were transferred to the 2003 Amended
Plan. Of these options, options to purchase 132,500 ordinary shares have been exercised,
and options to purchase 62,500 ordinary shares at an exercise price of NIS 20.45 per share
were outstanding. Options to purchase 224,930 ordinary shares remain available for grant.
Options that had been forfeited or expired unexercised may be regranted.

In
December 2002, we entered into an agreement with the Israeli tax authorities reducing the
individual tax rate applicable to the taxable income of employees from the receipt and
exercise of their options. In exchange, we agreed to defer the deduction of the expense
corresponding to such taxable income for a period of four years from the date on which we
commence paying income taxes. The agreement applies to employees who received options
under the 1998 Plan and joined the agreement, and relates to (1) options that are
exercised by December 31, 2002 and (2) options that vest by December 31, 2003 and are
exercised by May 31, 2004. In each case, the trustee must have held the options for a
period of 24 months from the date on which they were granted. See Note 8(f) to our
consolidated financial statements.

In
December 2003, we entered into an agreement with the Israeli tax authorities under which
the terms of the above-mentioned agreement in December 2002 apply also to employees who
received options under the 2000 Plan.

2004 Employee Stock
Option Plan

Under
the 2004 Share Option Plan, as amended to date, 5,775,000 ordinary shares are reserved for
issuance upon the exercise of 5,775,000 options to be granted without consideration. The
options will be granted to employees under the provisions of the capital gains tax
route provided for in Section 102 of the Israeli Income Tax Ordinance. The options vest in
four equal annual batches, provided the employee is still in the Companys employ.
The option holder may exercise all or part of his options at any time after the date of
vesting but no later than the expiration of the exercise period, which will be fixed by
the Employee Stock Option Committee and will not exceed ten years from the date of option
grant.

In
connection with the adoption of the 2004 Share Option Plan, we received an exemption from
the requirement set out in Nasdaqs Marketplace Rule 4350(i)(1)(A) that listed
companies receive shareholder approval when certain stock option or purchase plans are to
be established or materially amended, or certain other equity compensation arrangement
made or materially amended. This exemption was granted based on the fact that the Nasdaq
requirement is inconsistent with applicable Israeli legal requirements, which require
approval from a companys board of directors upon the establishment or amendment of
such a plan unless directors or controlling partners participate in the plan in which case
approval of the shareholders meeting would be required upon the grant of options to such
directors or controlling partners.

Upon
the occurrence of any merger, consolidation, reorganization or similar event, or other
substantially similar corporate transaction or event, we are required to make such
equitable changes or adjustments necessary to the number of shares subject to each
outstanding option in order to prevent dilution or enlargement of the option holders
rights.

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The
2004 Plan is administered by the Compensation Committee of the board of directors. Subject
to the restrictions of the Companies Law, the Compensation Committee is authorized, among
other things, to exercise all the powers and authorities, either specifically granted to
it under the 2004 Plan or necessary or advisable for the administration of the 2004 Plan.

If
an option holders employment with us is terminated because of his willful and
continued failure to perform his duties and obligations to us or his willful engaging in
misconduct injurious to us such that, in each case, the actions or omissions of the
participant are sufficient to deny the participant a severance payment under the Israeli
Severance Payment Law, 1963, his options will expire upon termination of employment. If an
option holders employment with us is terminated by us for any other reason, he may
exercise his vested options during the remainder of their exercise period. If an option
holders employment is voluntarily terminated by the option holder (other than by
reason of retirement, death or disability), he may exercise his vested options during the
90-day period following the later of the date of termination and the date upon which the
resulting shares may be freely sold. If an option holders employment with us is
terminated as a result of the retirement, death or disability of the option holder, he may
exercise his vested options and the pro rata portion of options scheduled to vest in the
year of termination during the remainder of their exercise period.

The
board of directors may amend the 2004 Plan, subject to other sections of the Plan and the
rules and/or regulations of any stock exchange applicable from time to time to the
Company, by reason of their applicability to its shareholders or otherwise;provided, that the shareholders of the Company must approve (i) provisions of the
plan relating to the matters set out in Rule 17.03 of Chapter 17 of The Rules Governing
the Listing of Securities on The Stock Exchange of Hong Kong Ltd , as amended from time to
time, that are altered to the advantage of Participants, (ii) any alterations to the
terms and conditions of the Plan which are of a material nature or to the Options
granted (except where the alterations take effect automatically under the existing
terms of the Plan); and (iii) any change to the authority of the board of directors
of the Company or the Compensation Committee in relation to any alteration to the terms of
the Plan.

The
board of directors may, at any time and from time to time, terminate the 2004
Plan in any respect, subject to any applicable approvals or consents that may be otherwise
required by law, regulation or agreement, including by reason of their applicability to
the shareholders or otherwise, and provided that no termination of the 2004 Plan
shall adversely affect the terms of any option which has already been granted.

As
of December 31, 2006, options to purchase 706,375 ordinary shares had been exercised,
options to purchase 4,388,375 shares were outstanding and options to purchase 680,250
ordinary shares were available for grant under the 2004 Plan. The exercise prices of
outstanding options range from NIS 26.74 to NIS 42.1. Options that had been forfeited or
expired unexercised may be regranted.

# ITEM 7. MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

# 7A. Major Shareholders

The
following table sets forth certain information with respect to the beneficial ownership of
our ordinary shares as of May 1, 2007 with respect to each person who we believe to be the
beneficial owner of 5% or more of our ordinary shares. Except where otherwise indicated,
we believe, based on information furnished to us by the principal shareholders, that the
beneficial owners of the ordinary shares listed below have sole investment and voting
power with respect to such ordinary shares. None of our major shareholders has any
different voting rights than any other shareholder.

|Name and Address                   | Number of Ordinary Shares
Beneficially Owned | Percent of Outstanding
Ordinary Shares
Beneficially Owned
|---------------------------------- | -------------------------------------------- | ---------------------------------------------------------
|
|
|
|
|Hutchison Telecommunications       |                                              |                                                          
|International Limited (1)          |                                              |                                                          
|20/F Hutchison Telecom Tower       |                                              |                                                          
|99 Cheung Fai Rd.                  |                                              |                                                          
|Tsing Yi                           |                                              |                                                          
|Hong Kong                          |                                              |                                                          
|Hutchison Whampoa Limited(2)       |                                              |                                                          
|22/F Hutchison House               |                                              |                                                          
|10 Harcourt Road                   |                                              |                                                          
|Central Hong Kong                  |                                              |                                                          
|Cheung Kong (Holdings) Limited (3) |                                              |                                                          
|7/F Cheung Kong Center             |                                              |                                                          
|2 Queen's Road Central             |                                              |                                                          
|Hong Kong                          |                                              |                                                          

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|(1) | Based on publicly available SEC filings by Hutchison Telecom, Advent Investments
               Pte Ltd., or Advent, Hutchison Telecommunications International (Netherlands)
               B.V., or Hutchison (Netherlands), HWL and Cheung Kong . Hutchison Telecom, a
               company whose ordinary shares are listed on the Hong Kong Stock Exchange and
               ADSs are listed on the New York Stock Exchange, Inc. owns Partner shares through
               two indirect subsidiaries, Advent and Hutchison (Netherlands), which own
               62,621,184 and 16,318,920 ordinary shares of Partner, respectively. Advent,
               incorporated in Singapore, is an indirect wholly-owned subsidiary of Hutchison
               Telecom, owned through a chain of wholly-owned subsidiaries as follows: Advent
               is owned by Amber International Holdings Inc., which is owned by Hutchison
               Telecommunications International (Cayman) Holdings Limited, which is owned by
               Hutchison Telecom. Hutchison (Netherlands) is also an indirect wholly-owned
               subsidiary of Hutchison Telecom, owned through a chain of wholly-owned
               subsidiaries as follows: Hutchison (Netherlands) is owned by Hutchison
               Telecommunications (Cyprus) Limited, which is owned by Amber International
               Holdings Inc., which is owned by Hutchison Telecommunications International
               (Cayman) Holdings Limited, which is owned by Hutchison Telecom.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Based on publicly available SEC filings by Hutchison Telecom, Advent, Hutchison
               (Netherlands), HWL and Cheung Kong, HWL, a company listed and traded on the Hong
               Kong Stock Exchange, owns Partner shares through its direct wholly owned
               subsidiary Hutchison International Limited, which in turn directly holds 100% of
               Ommaney Holdings Limited (formerly Hutchison Telecommunications Limited), which
               in turn directly holds 100% of Hutchison Telecommunications Investment Holdings
               Limited, or HTIHL, which in turn directly holds approximately 45.63% and also
               through its wholly owned subsidiary, New Brilliant Holdings Limited., indirectly
               holds approximately 4.12% of the total outstanding ordinary shares of Hutchison
               Telecom, which indirectly owns 78,940,104 of the ordinary shares of Partner.
               Based on publicly available SEC filings by Orascom Telecom Holding S.A.E., an
               Egyptian company (Orascom Telecom) and through its direct wholly
               owned subsidiary, Orascom Telecom Eurasia Limited (Orascom Eurasia),
               a BVI company, holds approximately 19.22% of Hutchison Telecoms total
               outstanding share capital. HTIHL, HWL, Orascom Telecom, and Orascom Eurasia are
               parties to a shareholders agreement relating to, among other things, the
               nomination of certain members of the board of directors of Hutchison Telecom.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Based on publicly available SEC filings by Hutchison Telecom, Advent, Hutchison
               (Netherlands), and Cheung Kong, Cheung Kong, through its indirect ownership of
               approximately 49.97% of the issued shares of HWL and its indirect ownership of
               52,092,587 ordinary shares of Hutchison Telecom, may be deemed to have sole
               voting and dispositive power over the ordinary shares of Partner beneficially
               owned by HWL and Hutchison Telecom. However, as stated in its Schedule 13D,
               pursuant to Rule 13d-4 under the Exchange Act, Cheung Kong expressly disclaims
               beneficial ownership of such ordinary shares of Partner.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Controlling Shareholders

Partner
is controlled by Hutchison Telecom. For more information about the form of its holdings
and the main shareholder in Hutchison Telecom, see the shareholder ownership table above
and the corresponding footnotes. See also -Relationship Agreement below for a
description of the Restatement of the Relationship Agreement among Hutchison and the
founding Israeli shareholders.

Significant Changes in
Holdings of Major Shareholders During the Past Three Years

The
following is a description of the significant changes during the last three years in the
percentage ownership held by our major shareholders:

| |  | On
September 17, 2004, Hutchison Telecommunications (Amsterdam) BV transferred 16,318,920
shares of Partner to Advent, which transferred them to Hutchison (Netherlands).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On
April 20, 2005, we repurchased approximately 33.3 million shares from our Israeli
founding shareholders, as follows: 12,765,190 shares from Elbit, 9,359,915 shares from
Eurocom, 7,783,444 shares from Matav Investments and 3,409,384 shares from Polar
Communications Ltd. as described in Item 7B. Related Party Transactions Repurchase
of Shares from Founding Israeli Shareholders. As a result the shareholdings of
Hutchison Telecom increased to 52.15% at completion of the transactions.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
2006, our founding Israeli shareholders, Elron Electronics Industries Ltd., Elbit Ltd. and
Polar sold all of their shares in Partner and Eurocom sold approximately 50% of its shares
in Partner. Together the shares sold constituted approximately 3.3% of our outstanding
shares.

Other

On
May 1, 2007, 17,300,331 ADSs (equivalent to 17,300,331 ordinary shares or approximately
10.03%) of our total outstanding ordinary shares were outstanding and held of record by 29
registered holders in the United States. Additionally, on May 1, 2007, there were
approximately fifty holders of record of our ordinary shares. Of these holders, none had a
registered address in the United States, although certain accounts of record with
registered addresses other than in the United States may hold our ordinary shares, in
whole or in part, beneficially for United States persons. We are aware that many ADSs and
ordinary shares are held of record by brokers and other nominees and accordingly the above
numbers are not necessarily representative of the actual number of persons who are
beneficial holders of ADSs and ordinary shares, or the number of ADSs and ordinary shares
beneficially held by such persons.

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As
described above, we are controlled by Hutchison Telecom. As far as we know, there are no
arrangements that might result in a change in control of our Company.

# 7B. Related Party
Transactions

Relationship Agreement

Our
founding Israeli shareholders are parties to a Relationship Agreement with the Hutchison
Telecom subsidiaries which are direct shareholders in the Company, in relation to their
direct and indirect holdings of our shares and the rights associated with such holdings.

License/Required Israeli
and Founding Shareholder Percentages

The
parties to the Relationship Agreement have agreed that they shall at all times comply with
the terms of our license requiring that our founding shareholders or their approved
substitutes hold in aggregate at least 26% of our means of control, and that our Israeli
founding shareholders or their approved substitutes (from among the founding shareholders
and their approved substitutes) hold at least 5% of our means of control. See Item
4B. Information on the CompanyBusiness OverviewRegulationOur Mobile
Telephone LicenseLicense Conditions.

Foreign Mobile Radio
Telephone Operator

The
parties to the Relationship Agreement have agreed that a parent of Advent will continue to
be a controlling corporation of a foreign mobile radio telephone operator as required by
our license, for so long as this is required by our license. See also Item 4B.
Information on the CompanyBusiness OverviewRegulationOur Mobile
Telephone License.

Compulsory Transfer in
the Event of Default

If
a party to the Relationship Agreement commits certain events of default described in the
agreement, it may be required to offer its shares to the other parties on a pre-emptive
basis. Events of default for this purpose include a breach of the Relationship Agreement
which has a material adverse effect on Partner, and in the case of such breach, the
purchase price at which the shares are to be sold will be market value less a 17.5%
discount.

Term and Termination

The
Agreement continues in full force and effect until we are wound up or cease to exist
unless terminated earlier by the parties. The Agreement will terminate in relation to any
individual party after it ceases to hold any share beneficially if it is required to
comply with the minimum holding requirements for founding shareholders or Israeli founding
shareholders, as applicable, and the transfer of the shares was not made in breach of the
Relationship Agreement.

Transactions with
Affiliates

Agreements with
affiliates of Hutchison Telecom

We
have a strong relationship with Hutchison Telecom, previously one of our principal
shareholders and now our majority shareholder, and HWL, Hutchison Telecoms largest
shareholder, and are working with them in connection with the development of products and
services for UMTS third generation mobile communications. Hutchison Telecom and HWL are
global leaders in UMTS third generation mobile telecommunications and, in particular the
deployment and development of third generation cellular networks and products and services
worldwide.

We
are participating in a directors and officers liability insurance policy
procured by Hutchison Telecom, insuring our directors and officers liability
and our undertaking to indemnify them, in respect of certain matters permitted by the
Companies Law. The policy provides for coverage in an aggregate amount for Hutchison
Telecom and its participating subsidiaries, including Partner, of up to US$100 million. We
also participate in further excess directors and officers liability insurance
policies of up to $100 million together with Hutchison Telecom and its participating
subsidiaries, which provide coverage in the event of depletion of insurance coverage under
the first layers of insurance as the result of payment of loss. See Item 6C. Board
Practices  Indemnification.

In
August 2002, we signed a Cost-Sharing Agreement, or the CSA, with certain members of the
HWL group of companies for the joint acquisition and development of information technology
platforms and software solutions, hardware, content and other services, in connection with
the UMTS third generation business. The CSA allows us to participate in acquisition and
development projects with other UMTS third generation companies within the HWL and
Hutchison Telecom groups, and to benefit from the combined purchasing power and resources
of the groups which include companies in Austria, Australia, Denmark, Hong Kong, Ireland,
Italy, Sweden and the United Kingdom. As of December 31, 2006, we had given notice of our
participation in seven joint contracts. We expect that our share in these contracts in
financial terms (including our share of joint expenses and liabilities) is not material.
We believe that the CSA gives us an advantage unavailable to our competitors. The CSA
gives us an opportunity to maximize economies of scale and operational efficiencies for
development and procurement activities associated with our 3G business. See Note 13(c) to
our consolidated financial statements.

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We
have roaming agreements with certain members of the Hutchison Telecom and HWL group of
companies. The agreements which are with GSM, GPRS and 3GSM operators worldwide, enable
our subscribers to roam abroad and enable other operators subscribers to roam on our
network. These agreements are in the ordinary course of business and are on market terms.

In
2005 and 2006, we entered into agreements with H3G Procurement Services S.àr.l., a
subsidiary of HWL, or H3G, for the purchase of UMTS handsets.

In
March 2007 we entered into a supply agreement with H3G for the future purchase of UMTS
handsets. The supply agreement allows us to purchase handsets by delivering purchase
forecasts to H3G according to a set price list. We are not obligated to make any minimum
purchase amounts under the agreement.

Agreements with
affiliates of Eurocom

Eurocom
Communications Ltd., or Eurocom, one of our former principal shareholders, sells our
services or distributes handsets in connection with their sale of Nokia handsets to
private customers and small business customers. Eurocom receives a commission for the
activation of each handset that it sells to customers as one of our distributors and for
the logistical support related to the supply of handsets.

We
currently purchase a portion of our Nokia handsets from Eurocom. In the year ended
December 31, 2006, purchases from Eurocom constituted approximately 40% of all of our
handset purchases.

We
believe that our distribution arrangement and handset purchases from Eurocom are on
commercial, arms-length terms.

Other Agreements

On
September 1, 2003, we entered into a supply agreement with Elron Telesoft Ltd., a
wholly-owned subsidiary of Elron Electronics Industries Ltd., a former significant
shareholder of Partner, for the purchase of Agilents Signaling Monitoring System, as
well as for the purchase of support and maintenance services. The purpose of the system is
to monitor our network in order to improve network performance levels and maintenance
response times. In addition, in 2004, we entered into another agreement with Elron
Telesoft Ltd. for the purchase of a CDR Verification System.

In
March 2005, we entered into an agreement with Cellular Center for Vehicles Ltd., a company
wholly owned by Mr. Talmai Cohen, the brother of our former Chief Executive Officer,
Amikam Cohen, for the sale, installation and maintenance of car kits in approximately 35
locations.

In
April 2005, we entered into a new bank credit facility, replacing our previous bank
facility. Bank Hapoalim B.M., Bank Leumi Le-Israel B.M., Israel Discount Bank Ltd. and
United Mizrahi Bank Ltd. are participating in the facility, with Bank Hapoalim B.M.
serving as facility agent and Bank Leumi Le-Israel B.M. serving as coordinating agent.
During 2004, two of our directors served also as directors in banks that are parties to
the new credit facility  Mr. Mordechai Keret in Bank Hapoalim B.M. and Mr. Moshe
Vidman in Bank Leumi Le-Israel B.M. See Item 5. Operating and Financial Review and
ProspectsLiquidity and Capital Resources.

Registration Rights

We
have entered into a registration rights agreement with our principal founding shareholders
in which we granted our principal shareholders the right to require us to register
ordinary shares held by them under the US Securities Act. We have agreed that, upon
request from any of our principal shareholders, we will file a registration statement
under the US Securities Act to register ordinary shares held by them, subject to a maximum
of one request in any 6-month period. There is no limit to the number of registrations
that can be requested under the agreement. The minimum amount of shares that must be
included in any registration requested under this agreement is 2.65% of our outstanding
shares. We have also granted each of the principal shareholders the right to include their
ordinary shares in any registration statement covering offerings of ordinary shares by us.
The registration rights agreement will terminate with respect to each holder upon the
earlier of October 26, 2009 and such time as the holder can sell its ordinary shares into
the United States public market pursuant to an exemption from the registration
requirements of the Securities Act without regard to holding period, volume or
manner-of-sale limitations.

# 7C. Interests of Experts
and Counsel

Not
applicable.

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# ITEM 8. FINANCIAL
INFORMATION

# 8A. Consolidated
Financial Statements and Other Financial Information

Audited
financial statements for the three fiscal years ended December 31, 2006 are included
under "Item 18. Financial Statements."

Legal and Administrative Proceedings

In
addition to the legal proceedings discussed below, we are party to a number of legal and
administrative proceedings arising in the ordinary course of our business. We do not
expect the outcome of such matters in the aggregate to have a material adverse effect upon
our business and financial condition, results of operations and cash flows.

We
have experienced difficulties in obtaining building permits from local authorities for the
erection of antennas. As a result, we, like other mobile telephone operators in Israel,
have erected antenna sites without the issuance of a building permit from the relevant
local or regional authority. As of December 31, 2006, approximately 20% of our antenna
sites were operating without local building permits or applicable exemptions. A
substantial portion of these are microsites. We believe that a portion of the sites
operating without permits from local authorities do not require building permits under the
Planning and Building Law. The erection of an antenna site without a required local
building permit is a violation of the Planning and Building Law and, in some cases, has
resulted in a demolition order being imposed on us and in the filing of criminal charges
and civil proceedings by Israeli municipalities against us and our officers and directors.

During
2006, 17 criminal proceedings were brought against us concerning the erection of antenna
sites without building permits, of which eight were also brought against our officers and
directors. As of December 31, 2006, 20 criminal proceedings were pending against us
concerning the erection of antenna sites without building permits, of which eight were
also pending against our officers and directors. We are currently negotiating with the
relevant local authority to reach a settlement regarding the relocation of affected sites
or obtaining building permits for those sites. The total amount of fines paid in 2006 was
approximately NIS 0.5 million. Settlements of previous criminal proceedings brought
against us resulted in Partner, but not its officers or directors, admitting guilt and
paying a fine, and also resulted in the imposition of demolition orders for the relevant
sites, the execution of which have been stayed for a period of time to allow us to obtain
the necessary permits or to relocate the relevant antenna site.

There
can be no assurance that we will continue to be successful in settling legal proceedings
brought against us and our officers and directors or that we will not be faced with
demolition orders and criminal charges, including against our officers and directors. See
Item 3D. Key InformationRisk Factors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 and may result
in criminal or civil liability to us or to our officers and directors.

In
April 2002, a claim was filed against us, together with a motion requesting certification
as a class action, alleging a variety of consumer complaints. The amount of the claim
against us was estimated at approximately NIS 545 million plus additional significant
amounts related to other alleged damages. In March 2007, this claim was dismissed.

In
April 2003, a claim was filed against us and other cellular telecommunication companies,
together with a request for certification as a class action, for alleged violation of
antitrust law, alleging that no fee should have been collected for incoming SMS messages
or alternatively, that the fee collected is excessive and that it is a result of illegal
co-operation between the defendants. The amount of the claim against all the defendants is
estimated at approximately NIS 90 million (if the court rules that the fees are excessive)
or NIS 120 million (if the court rules that no fee should have been collected). A
preliminary hearing took place in April 2006. Unless and until the claim is recognized as
a class action, we and our legal counsel are unable to evaluate the probability of success
of such claim, or the range of a potential loss with any degree of certainty and therefore
no provision has been made. However, we deny any and all liability and intend to
vigorously defend against the claim. See Note 7b(2) to our consolidated financial
statements.

During
2006, two combined claims were filed against us and other cellular telecommunication
companies and in one of those claims, also against fixed-line telecommunications
companies, together with a request to recognize these claims as a class action for alleged
collection of undue payment from calls to the land line companies. The plaintiffs maintain
that we should stop charging our subscribers when the land line operator subscriber hangs
up, while in fact we continue to charge until the initiator of the call (our subscriber)
hangs up. The amount of the claims against all defendants is estimated, in one of the
claims, at approximately NIS 100 million for the seven year period leading up to the
filing of the claim, and in another claim approximately NIS 53 million. At this stage, and
until the claims are recognized as class actions, we and our legal counsel are unable to
evaluate the probability of success of such claims, or the range of a potential loss with
any degree of certainty and therefore no provision has been made for the claims in our
financial statements. However, we deny any and all liability and intend to vigorously
defend against the claim.

In
April 2006, a claim was filed against us, together with a motion requesting certification
as a class action, alleging a variety of customer complaints relating primarily to our
alleged breach of one of our tariff plans and the termination of such plan as well as the
amendment of the terms of other tariff plans. The amount of the claim against us, should
the claim be certified as a class action, is approximately NIS 18.9 million for all
customers subscribed to six tariff plans which Partner allegedly changed during the last
seven years. At this stage, no hearings have taken place, and unless and until the claim
is recognized as a class action, we and our legal counsel are unable to evaluate the
probability of success of such claim, or the range of a potential loss with any degree of
certainty and therefore no provision has been made. However, we deny any and all liability
and intend to vigorously defend against the claim.

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In
November 2006 a claim was filed against us and three other defendants, along with a motion
to recognize the claim as a class action. The applicants contend that a cellular service
provided by the other defendants that are service providers and its managers fraudulently
charged the defendants and other cellular consumers for services that the consumers never
requested or consented to receive. The sum of the claim was assessed by the applicants at
NIS 28 million. A similar claim and motion to certify the claim as a class action was
filed against Cellcom. We have submitted our responses to the motion to certify the claim
as a class action. A preliminary hearing on the claim is set for June 2007.

A
separate claim and motion to certify as a class action regarding the same matter was filed
against us and others in December 2006. The sum of the claim was assessed by the
applicants to be NIS 28 million. We filed a motion to join both claims and the date to
file our response to the second claim has been postponed until a decision is reached
regarding our motion. At this stage, and until the claims are recognized as class actions,
we and our legal counsel are unable to evaluate the probability of success of such claims
or the range of a potential loss with any degree of certainty and therefore no provision
has been made for such claims in our financial statements. However, we deny any and all
liability and intend to vigorously defend against the claim.

In
November 2006 a claim was filed against us, together with a motion to certify the claim as
a class action. The applicant contends that we illegally tied the purchase of 3G handsets
to the purchase of internet bundles. In addition, the claim states causes of action based
on the violation of consumer protection laws and violation of uniform contracts law. The
amount of the claim was stated by plaintiff as NIS 35 million. We have filed our response
to the claim and no hearing has yet been set. At this stage, and until the claim is
recognized as class actions, we and our legal counsel are unable to evaluate the
probability of success of the claim or the range of potential loss with degree of
certainty and therefore no provision has been made for the claim in our financial
statements. However, we deny any and all liability and intend to vigorously defend against
the claim.

In
January 2007, a purported class action lawsuit was filed against us and against two other
cellular operators and two landline operators in connection with an alleged violation of
statutory requirements to implement number portability. The claimants demand NIS 1,000 for
each of our 2,626,000 subscribers for a total demand of approximately NIS 2,600 million.
We are evaluating the class action complaint and at this preliminary stage of the
proceedings we are unable to determine the outcome of this litigation or the range of a
potential loss with any degree of certainty. We have denied, however, any and all
liability and we intend to vigorously defend against these charges.

In
February 2007, a claim was filed against us in the amount of NIS 33 million together with
a motion to certify the claim as a class action for allegedly collecting Value Added Tax
illegally for services rendered to residents of Eilat, Israel. In May 2007, the claim was
dismissed.

In
February 2007, a claim was filed against us and two other cellular telecommunication
companies together with a request to recognize to certify the claim as a class action. The
claim is for sums that were allegedly overcharged in breach of our licenses, based on
intervals larger than the intervals the defendants were allegedly authorized to charge
under their licenses, for calls initiated or received by the subscribers while abroad. If
the lawsuit is classified as a class action, the total amount claimed from the defendants
is estimated by the plaintiffs to be approximately NIS 449 million, of which,
approximately NIS 88 million, is attributed to us. At this stage, and until the claim is
recognized as a class action, we and our legal counsel are unable to evaluate the
probability of success of such claim, or the range of a potential loss with any degree of
certainty and therefore no provision has been made. However, we deny any and all liability
and intend to vigorously defend against the claim.

In
May 2007, a claim was filed against us and another Israeli cellular company together with
a request to recognize the claim as a class action. The claim alleges that the defendants
charged their subscribers undue roaming rates, while their cellular phones were located in
Israel and randomly roamed over foreign networks of neighboring countries. If the claim is
certified as a class action, the total amount claimed against us is estimated by the
plaintiffs to be at least NIS 21.3 million. At this stage, and until the claim is
certified as a class action, we and our legal counsel are unable to evaluate the
probability of success of such claim and therefore no provision has been made for the
claim in our financial statements.

Dividend Distribution
Policy

Our
Articles of Association allows for our board of directors to approve all future dividend
distributions, without the need for shareholder approval, subject to the provisions
governing dividends under the Companies Law. We first paid a dividend to our Shareholders
in 2005. In addition, the terms of our credit facility restrict the amount of dividends we
may pay to our shareholders. See Item 5. Operation and Financial Review and
ProspectsLiquidity and Capital ResourcesLiquidity.

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We
intend to pay any dividends in shekels. Under current Israeli regulations, any dividends
or other distributions paid in respect of ordinary shares may be freely repatriated in
non-Israeli currencies at the rate of exchange prevailing at the time of conversion,
provided that Israeli income tax has been paid on or withheld from such dividends. Because
exchange rates between the shekel and the US dollar fluctuate continuously, a holder of
ADSs will be subject to currency fluctuation generally and, particularly, between the date
when dividends are declared and the date dividends are paid.

# 8B. Significant Changes

No
significant change has occurred since the date of our financial statements.

# ITEM 9. THE OFFER AND
LISTING

# 9A. Offer and Listing Details

Our
capital consists of ordinary shares, which are traded on the Tel Aviv Stock Exchange under
the symbol PTNR. American Depositary Shares, or ADSs, each representing one of
the Companys ordinary shares are quoted on the Nasdaq National Market under the
symbol PTNR and are traded on the London Stock Exchange under the symbol
PCCD. The ADSs are evidenced by American Depositary Receipts, or ADRs,
originally issued by JPMorgan Chase, as depositary under a Deposit Agreement, dated as of
November 1, 1999, among the Company, JPMorgan Chase and registered holders from time to
time of ADRs. ADSs were first issued in October 1999. Since March 2006, the Bank of New
York has served as our depository.

The
table below sets forth, for the periods indicated, the reported high and low closing
quotations, not adjusted for dividends or splits, based on the Daily Official List of the
London Stock Exchange, information supplied by the National Association of Securities
Dealers, Inc., and information supplied by the Tel Aviv Stock Exchange.

|               | Nasdaq | London Stock Exchange | Tel Aviv Stock Exchange
|-------------- | ------ | --------------------- | -----------------------
|
|
|
|
|2002           |        |                       |                        
|First Quarter  |        |                       |                        
|Second Quarter |        |                       |                        
|Third Quarter  |        |                       |                        
|Fourth Quarter |        |                       |                        
|2003           |        |                      
|First Quarter  |        |                       |                        
|Second Quarter |        |                       |                        
|Third Quarter  |        |                       |                        
|Fourth Quarter |        |                       |                        
|2004           |        |                      
|First Quarter  |        |                       |                        
|Second Quarter |        |                       |                        
|Third Quarter  |        |                       |                        
|Fourth Quarter |        |                       |                        
|2005           |        |                      
|First Quarter  |        |                       |                        
|Second Quarter |        |                       |                        
|Third Quarter  |        |                       |                        
|Fourth Quarter |        |                       |                        
|2006           |        |                      
|First Quarter  |        |                       |                        
|Second Quarter |        |                       |                        
|Third Quarter  |        |                       |                        
|Fourth Quarter |        |                       |                        

---

|*     
The
data for the fourth quarter of 2004 is based on last trade reported to the London Stock
Exchange. From January 1, 2005 through May 31, 2007, there were no trades of our ADS
executed on the London Stock Exchange trading system.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Previous Six Months

|              | Nasdaq | London Stock Exchange | Tel Aviv Stock Exchange
|------------- | ------ | --------------------- | -----------------------
|
|
|
|
|December 2006 |        |                       |                        
|January 2007  |        |                       |                        
|February 2007 |        |                       |                        
|March 2007    |        |                       |                        
|April 2007    |        |                       |                        
|May 2007      |        |                       |                        

*     As
indicated above, from January 1, 2005 through May 31, 2007, there were no trades of our
ADS executed on the London Stock Exchange trading system.

# 9B. Plan of Distribution

Not
applicable.

# 9C. Markets

Our
ADSs are quoted on the Nasdaq National Market under the symbol PTNR and are
traded on the London Stock Exchange under the symbol PCCD. Our ordinary shares
are traded on the Tel Aviv Stock Exchange under the symbol PTNR.

# 9D. Selling Shareholders

Not
applicable.

# 9E. Dilution

Not
applicable.

# 9F. Expenses of the Issue

Not
applicable.

# ITEM 10. ADDITIONAL
INFORMATION

# 10A. Share Capital

Not
applicable.

# 10B. Memorandum and Articles
of Association

Purposes and Objects of
the Company

We
are a public company registered under the Israeli Companies Law as Partner Communications
Company Ltd., registration number 52-004431-4.

Pursuant
to our memorandum of association, we were formed for the purpose of participating in the
auction for the granting of a license to operate mobile radio telephone services in
Israel, to provide such services, and without derogating from the above, we are also
empowered to hold any right, obligation or legal action and to operate in any business or
matter approved by the Company.

Pursuant
to section three of our articles of association, our purpose is to operate in accordance
with business considerations to generate profits; provided, however, that the board of
directors is entitled to donate reasonable amounts to worthy causes, even if such donation
is not within the frame of these business considerations.

Pursuant
to section four of our articles of association, our objective is to engage in any legal
business.

The Powers of the
Directors

The power of our directors to vote on
a proposal, arrangement or contract in which the director is materially interested is
limited by the relevant provisions of the Companies Law. In addition, the power of our
directors to vote compensation to themselves or any members of their body, requires the
approval of the audit committee and the shareholders at a general meeting. The Annual
Meeting of the Shareholders must be convened to appoint and terminate directors or their
term of service.

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See
Item 6C. Board PracticesApproval of Related Party Transactions.

Rights Attached to Shares

Our registered
share capital consists of a single class of 235 million ordinary shares, par value NIS
0.01 per share, of which 154,516,217 ordinary shares were issued and outstanding as of
December 31, 2006, and 156,208,427 shares were issued and outstanding as of May 1, 2007.
All outstanding ordinary shares are validly issued. On April 20, 2005, we repurchased
33,317,933 million ordinary shares from certain of our founding Israeli shareholders, as
described above under Item 7B. Related Party TransactionsRepurchase of Shares
from Founding Israeli Shareholders. These shares were cancelled. The rights attached
to our ordinary shares are as follows:

Dividend Rights

Holders
of ordinary shares are entitled to the full amount of any cash or share dividend
subsequently declared. The board of directors may propose and approve distribution of a
dividend with respect to any fiscal year only out of profits, in accordance with the
provisions of the Companies Law. See Item 10E. Additional
InformationTaxation.

Shares
which are treated as dormant under our Articles of Association retain the rights to
receive dividends or other distributions to shareholders, and to participate in rights
offerings, but no other rights.

One
year after a dividend has been declared and is still unclaimed, the board of directors is
entitled to invest or utilize the unclaimed amount of dividend in any manner to the
benefit of the Company until it is claimed. We are not obligated to pay interest or
linkage on an unclaimed dividend.

Voting Rights

Holders
of ordinary shares have one vote for each ordinary share held on all matters submitted to
a vote of shareholders. Such voting rights may be affected by the grant of any special
voting rights to the holders of a class of shares with preferential rights that may be
authorized in the future. The quorum required for an ordinary meeting of shareholders
consists of at least two shareholders present in person or by proxy who hold or represent,
in the aggregate, at least one third of the voting rights of the issued share capital. In
the event that a quorum is not present within thirty minutes of the scheduled time, the
shareholders meeting will be adjourned to the same day of the following week, or the
next business day thereafter, at the same time and place, or such time and place as the
board of directors may determine. If at such reconvened meeting a quorum is not present at
the time appointed for holding the meeting, one or more shareholders present in person or
by proxy holding or representing in the aggregate at least 10% of the voting rights in us
will constitute a quorum.

Any
shareholder seeking to vote at a general meeting of our shareholders must first notify us
if any of the shareholders holdings in us requires the consent of the Minister of
Communications. The instructions of a shareholder will not be valid unless accompanied by
a certification by the shareholder as to whether or not the shareholders holdings in
us or the shareholders vote requires the consent of the Ministry of Communications
due to a breach by the shareholder of the restrictions on transfer or acquisition of means
of control, or provisions regarding cross-ownership with other mobile telephone operators
or shareholdings or agreements which may reduce or harm competition. If the shareholder
does not provide such certification, his instructions will be invalid and his vote not
counted.

An
ordinary resolution, such as a resolution for the election of directors, or the
appointment of auditors, requires approval by the holders of a majority of the voting
rights represented at the meeting, in person or by proxy, and voting thereon. Under our
articles of association, resolutions such as a resolution amending our memorandum or
articles of association or approving any change in capitalization, liquidation, changes in
the objectives of the company, or the name of the company, or other changes as specified
in our articles of association, requires approval of a special majority, representing the
holders of no less than 75% of the voting rights represented at the meeting, in person or
by proxy, and voting thereon.

Under
our articles of association our directors are elected by an ordinary majority of the
shareholders at each duly convened annual meeting, and they serve until the next annual
meeting, provided that external directors shall be elected in accordance with applicable
law and/or relevant stock exchange rules applicable to us; or until their respective
successors are elected and qualified, whichever occurs first, or in the case of Israeli
directors who are appointed by the founding Israeli shareholders, upon a written notice
signed by at least two of the founding Israeli shareholders who are the record holders of
at least 50%of minimum Israeli holding shares, to the Company Secretary of his or her
appointment, until their respective successors are elected upon such notice. In each
annual meeting the directors that were elected at the previous annual meeting are deemed
to have resigned from their office, excluding an external director, who according to the
Companies Law, is elected for a period of three years and the Israeli director whose
appointment is terminated by a written notice by himself or by the founding Israeli
shareholders. A resigning director may be reelected. Each ordinary share represents one
vote. No director may be elected or removed on the basis of a vote by dormant shares. The
ordinary shares do not have cumulative voting rights in the election of directors.

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Directors
may be appointed also in certain circumstances by an extraordinary general meeting and by
the board of directors upon approval of 75% of the directors. Such director, excluding an
external director, shall serve for a term ending at the next annual general meeting.

Rights in the
Companys Profits

Our
shareholders have the rights to share in our profits distributed as a dividend and any
other permitted distribution. See Item 10B. Rights Attached to SharesDividend
Rights.

Rights in the Event of
Liquidation

All
of our ordinary shares confer equal rights among them with respect to amounts distributed
to shareholders in case of liquidation.

Limitations on Ownership
and Control

Ownership
and control of our ordinary shares are limited by the terms of our license and our
articles of association. See Item 4B. Information on the CompanyBusiness
OverviewOur Mobile Telephone License License Conditions.

In
order to comply with the conditions and restrictions imposed on us by the Ministry of
Communications or under our License in relation to ownership or control over us, under
certain events specified in our articles of association, the board of directors may
determine that certain ordinary shares are dormant shares. According to our articles of
association, dormant shares bear no rights as long as they are dormant shares, except for
the right to receive dividends and other distributions to shareholders. Consequently, we
have received an exemption from the requirement set out in Nasdaqs Marketplace Rule
4351 that voting rights of existing shareholders of publicly traded common stock
registered under Section 12 of the US Securities Exchange Act cannot be disparately
reduced or restricted through any corporate action or issuance.

Changing Rights Attached
to Shares

According
to our articles of association, in order to change the rights attached to any class of
shares, the general meeting of the shareholders must adopt a resolution to change such
rights by a special majority, representing at least 75% of the votes of shareholders
participating and voting in the general meeting, and in case of changing the rights
attached to certain class of shares, the approval by special majority of each class
meeting, is required.

Annual and Extraordinary
Meetings

The
board of directors must convene an annual meeting of shareholders at least once every
calendar year, within fifteen months of the last annual meeting. Notice of a general
meeting must be sent to each registered shareholder within five days after the record date
set by the board of directors for that meeting, unless a different notice time is required
under applicable law or unless all shareholders who qualify to vote at the time approve in
writing of a shorter notice period. An extraordinary meeting may be convened by the board
of directors, as it decides or upon a demand of any two directors or 25% of the directors,
whichever is lower, or of one or more shareholders holding in the aggregate at least 4.99%
of our issued capital. An extraordinary meeting must be held not more than thirty-five
days from the publication date of the announcement of the meeting. See Item 10B.
Rights Attached to SharesVoting Rights.

Limitations on the Rights
to Own Our Securities

For
limitations on the rights to own our securities see Item 4B. Information on the
Company  Business Overview  Our Mobile Telephone License  License
Conditions,   Our Permit Regarding Cross Ownership and Item
10B. Rights Attached to Shares Limitations on ownership and control.

Limitations on Change in
Control and Disclosure Duties

For
limitations on change in control, see Item 4B. Information on the Company 
Business Overview  Our Mobile Telephone License  License Conditions,
Item 4B. Information on the Company  Business Overview  Our Mobile
Telephone License  Our Permit Regarding Cross Ownership and Item 10B.
Rights Attached to Shares  Limitations on ownership and control.

Changes in our Capital

Changes
in our capital are subject to the approval of the shareholders at a general meeting by a
special majority of 75% of the votes of shareholders participating and voting in the
general meeting.

# 10C. Material Contracts

In
January 2006, we signed an agreement with Med I.C.1 (1999) Ltd. to purchase its
fiber-optic cable infrastructure comprising of a network of approximately 900 kilometers
of submerged and terrestrial transmission fiber in Israel. We entered into this agreement
in order to enable us to reduce our transmission costs as well as to provide our business
customers with bundled services of transmission of data and voice. In July 2006, we
completed this transaction for a final purchase price of approximately NIS 71 million
($16.8 million).

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In
January 2007, we signed a two-year contract with the international long-distance provider
Golden Lines (012), to carry all of our international call traffic. The
agreement provides that Partner will route calls to its customers that are roaming abroad
via Golden Lines (012). In addition, Partner will route outgoing international calls from
foreign roamers hosted on Partners network in Israel. Under the agreement, all
international signaling traffic related to Partners roamers abroad and foreign
roamers hosted on Partners network while visiting Israel will be also be routed
through Golden Lines (012). We expect that the costs related to these services provide by
Golden Lines (012) will exceed US $10 million over a two-year period.

For
information on our share repurchase, see Item 7B. Related Party Transactions 
Repurchase of Shares from Founding Israeli Shareholders. For information on our
redemption of the Notes due 2010, see Item 5.Liquidity and Capital
Resources.

# 10D. Exchange Controls

There
are no Israeli government laws, decrees or regulations that restrict or that affect our
export or import of capital or the remittance of dividends, interest or other payments to
non-resident holders of our securities, including the availability of cash and cash
equivalents for use by us and our wholly-owned subsidiaries, Partner Future Communications
2000 Ltd. and Partner Land-Line Communications Solutions (of which Partner Future
Communications 2000 Ltd. serves as the general partner and the Company serves as the
limited partner), except or otherwise as set forth under Item 10E. Additional
Information  Taxation.

Under
Israeli law (and our memorandum and articles of association), persons who are neither
residents nor nationals of Israel may freely hold, vote and transfer ordinary shares in
the same manner as Israeli residents or nationals.

# 10E. Taxation

Israeli Tax Considerations

The
following is a summary of the current tax laws of the State of Israel as they relate to us
and to our shareholders and also includes a discussion of the material Israeli tax
consequences for persons purchasing our ordinary shares or ADSs, both referred to below as
the Shares. To the extent that the discussion is based on legislation yet to
be subject to judicial or administrative interpretation, there can be no assurance that
the views expressed herein will accord with any such interpretation in the future. This
discussion is not intended and should not be construed as legal or professional tax advice
and does not cover all possible tax considerations.

Potential
investors are urged to consult their own tax advisors as to the Israeli or other tax
consequences of the purchase, ownership and disposition of our ordinary shares, including,
in particular, the effect of any foreign, state or local taxes.

Israeli Tax Reforms

On
July 24, 2002, the Israeli Knesset enacted income tax reform legislation, commonly
referred to as the 2003 Tax Reform. The 2003 Tax Reform has introduced
fundamental and comprehensive changes into Israeli tax laws. Most of the legislative
changes took effect on January 1, 2003. The 2003 Tax Reform has introduced a transition
from a primarily territorial-based tax system to a personal-based system of taxation with
respect to Israeli residents. The 2003 Tax Reform has also resulted in significant
amendment of the international taxation provisions, and new provisions concerning the
taxation of capital markets including the abolishment of currently exempt investment
routes (e.g., capital gains generated by Israeli individuals from the sale of
securities traded on the Tel-Aviv Stock Exchange). Under the 2003 Tax Reform legislation
the Shares are no longer regarded and defined as foreign traded securities and
thus certain associated Israeli tax aspects will accordingly be subject to change as
discussed below.

A
relatively short time after the 2003 Tax Reform, the Israeli Parliament approved on July
25, 2005 an additional income tax reform legislation (the 2006 Tax
Reform) pursuant to the recommendations of a committee appointed by the Israeli
Minister of Finance, which incorporated additional fundamental changes to Israeli tax law.
The 2006 Tax Reform, inter alia, includes a gradual reduction of income tax rates
for both individuals and corporations through 2010, and outlines a path towards uniformity
in the taxation of interest, dividend and capital gains derived from securities. Most of
the amendments to the tax law are effective as of January 1, 2006, subject to certain
exceptions. Transition rules apply in certain circumstances.

Various
issues related to the 2003 Tax Reform and the 2006 Tax Reform remain unclear in view of
the legislative language utilized and the lack of authoritative interpretations at this
stage. The analysis below is therefore based on our current understanding of the new
legislation.

General Corporate Tax
Structure

The
corporate tax rate applicable in 2006 is 31% and had been scheduled to be reduced to 29%
in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and beyond.

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Special Provisions
Relating to Taxation under Inflationary Conditions

Our
taxable income is determined under the Income Tax (Inflationary Adjustment) Law 1985, or
the Inflationary Adjustments Law, which attempts to overcome some of the
problems presented to a traditional tax system by rapid inflation. Generally, the
Inflationary Adjustments Law provides tax deductions and adjustments to depreciation
deductions and tax loss carry forwards to mitigate the effects resulting from an
inflationary economy.

The
Inflationary Adjustments Law is highly complex. Its principal features can be described as
follows:

| | Where
a companys equity, as calculated under the Inflationary Adjustments Law, exceeds
its fixed assets (as defined in the Inflationary Adjustments Law), a deduction from
taxable income is permitted equal to the excess multiplied by the applicable annual rate
of inflation. The maximum deduction permitted in any single tax year is 70% of taxable
income, with the unused portion permitted to be carried forward, and linked to the
Israeli consumer price index. The unused portion that was carried forward may be
deductible in full in the following year.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Where
a companys fixed assets exceeds its equity, then the excess multiplied by the
applicable annual rate of inflation is added to taxable corporate business income but not
to other income, such as capital gains.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Subject
to specified limitation, depreciation deductions on fixed assets and losses carried
forward are adjusted for inflation based on the change in the consumer price index.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Israeli Income Tax Ordinance and regulations promulgated there under allow
Foreign-Invested Companies, to adjust their tax returns based on exchange rate
fluctuations of the shekel against the US Dollar rather than changes in the CPI, in lieu
of the principles set forth by the Inflationary Adjustments Law. For these purposes, a
Foreign-Invested Company is a company in which more than 25% of the share capital in terms
of rights to distributions, voting and appointment of directors, and of the combined share
capital, including shareholder loans and capital notes, is held by persons who are not
residents of Israel. A company that elects to measure its results for tax purposes based
on the US Dollar exchange rate cannot change that election for a period of three years
following the election. We adjust our tax returns based on the changes in the CPI. Because
we qualify as a Foreign-Invested Company, we are entitled to elect measurement of our
results for tax purposes on the basis of changes in the exchange rate of the US Dollar in
future tax years.

Tax on Capital Gains of
Shareholders

| | General.
Israeli law imposes a capital gains tax on the sale of capital assets by an Israeli
resident and on the sale of capital assets located in Israel or the sale of direct or
indirect rights to assets located in Israel, including on the sale of our Shares by some
of our shareholders (see discussion below). The Israeli Tax Ordinance distinguishes
between Real Gain and Inflationary Surplus. Real Gain is the
excess of the total capital gain over Inflationary Surplus computed on the basis of the
increase in the CPI between the date of purchase and the date of sale. In 2006, the Real
Gain accrued at the sale of an asset that is purchased on or after January 1, 2003 is
taxed at a 25% rate for corporations, and 20% rate for individuals. Additionally, if such
shareholder is considered a Significant Shareholder at any time during the
12-month period preceding such sale (i.e. if such shareholder holds directly or
indirectly, including along with others, at least 10% of any means of control in the
company), the tax rate will be 25%. However, the foregoing tax rates will not apply to
(i) dealers in securities; and (ii) shareholders who have acquired their shares prior to
an initial public offering (that may be subject to a different tax arrangement).
Inflationary surplus that accrued after December 31, 1993, is exempt from tax.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Real
Gains derived from the disposal after January 1, 2003 of an asset purchased prior to this
date will be subject to capital gains tax at a blended rate. The regular corporate tax
rate of 29% (for 2007) and a marginal tax rate of up to 48% for individuals will be
applied to the gain amount which bears the same ratio to the total gain realized as the
ratio which the holding period commencing at the acquisition date and terminating on
January 1, 2003 bears to the total holding period. The remainder of the gain realized
will be subject to capital gains tax at a 25% rate for corporations and 20% for
individuals (25% for an individual who was a Significant Shareholder at any
time during the 12-month period preceding such sale).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Generally,
within 30 days of a transaction a detailed return, including a computation of the tax due
should be submitted to the Israeli Tax Authorities and a tax advance amounting to the tax
liability arising from the capital gain is payable. At the sale of traded securities, the
aforementioned detailed return may not be submitted and the tax advance should not be
paid, if all tax due was withheld at the source according to applicable provisions of the
Israeli Tax Ordinance and regulations promulgated thereunder. Capital gains are also
reportable on annual income tax returns.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Taxation
of Israeli Residents. In July 2001 our ordinary shares were listed for trading on the
Tel Aviv Stock Exchange. As a result of our dual listing and due to the 2003 Tax Reform
(inclusion of new provisions concerning the taxation of capital markets) and that since
our ordinary shares are no longer considered foreign traded securities, the
tax treatment of our shareholders under Israeli law has changed.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

73

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The
following is a summary of the most significant Israeli capital gains tax implications
arising with respect to the sale of our Shares by shareholders who are not engaged in the
business of trading securities. As demonstrated below, the timing of the
shareholders purchase of the shares will determine the tax outcomes in this regard.

# Sale of shares purchased
after January 1, 2003

Individuals

A
shareholder will generally be subject to tax at 20% rate on realized real capital gain. To
the extent that the shareholder claims a deduction of financing expenses, the gain will be
subject to tax at a rate of 25% (until otherwise stipulated in bylaws that may be
published in the future).

Corporations

# Corporations that are
subject to the Inflationary Adjustments Law

The
shareholder will be subject to tax at the corporate rate on the realized capital gain
(currently 29% for 2007).

# Corporations that are
not subject to the Inflationary Adjustments Law

Generally,
the shareholder will be subject to tax at the corporate tax rate of 25% on realized real
capital gains.

Different
taxation rules may apply to shareholders who purchased their shares prior to the listing
on the Tel Aviv Stock Exchange. They should consult with their tax advisors for the
precise treatment upon sale.

| | Taxation
of Non-Israeli Residents. As mentioned above, Israeli law generally imposes a capital
gains tax on sales of capital assets, including securities and any other direct or
indirect rights to capital assets located in Israel. This tax is also applicable to
nonresidents of Israel as follows:
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Foreign
investors (individuals and corporations) that are not engaged in the business of trading
securities through a permanent establishment in Israel, who purchased the shares after
the listing on the Tel Aviv Stock Exchange will be exempt from tax on capital gains
derived from the sale of the shares. Foreign corporations will not be entitled to such
exemption if an Israeli resident (i) has a controlling interest of 25% or more in such
non-Israeli corporation, or (ii) is the beneficiary of or is entitled to 25% or more of
the revenues or profits of such foreign corporation, whether directly or indirectly.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Different
taxation rules may apply to shareholders who purchased their shares prior to the listing
on the Tel Aviv Stock Exchange. They should consult with their tax advisors for the
precise treatment upon sale.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Taxation
of Investors Engaged in a Business of Trading Securities. Individual and corporate
dealers in securities in Israel are taxed at tax rates applicable to business income.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Withholding
at Source from Capital Gains from Traded Securities. Under the 2006 Tax Reform,
Israeli stockbrokers have a duty to withhold tax upon the sale of traded securities. The
applicable withholding tax rate is generally 20% from the real gain.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dividends

The
following Israeli tax consequences shall apply in the event of actual payment of any
dividends on ordinary shares or ADSs.

Income
from dividends in 2006 and thereafter, other than bonus shares (stock dividends), to
Israeli residents who purchased our Shares will generally be subject to income tax at a
rate of 20% for individuals, or 25% if the dividends receipt is a Significant Shareholder
(as defined above) at any time during the 12-month period preceding such distribution and
will be exempt from income tax for Israeli corporations.

Non-residents
of Israel (both individuals and corporations) are subject to income tax on income accrued
or derived from sources in Israel, including dividends from Israeli corporations. The
distribution of dividend income, other than bonus shares (stock dividends), to
non-residents of Israel will generally be subject to income tax at a rate of 20% (or 25%
for a shareholder that is considered a Significant Shareholder (as defined above) at any
time during the 12-month period preceding such distribution), unless a lower rate is
stipulated by a treaty between Israel and the shareholders country of residence.

In the event of actual payment of any
dividends on our ordinary shares or ADSs the following withholding rates will be applied:
(i) Israeli resident corporation  0%, (ii) Israeli resident individual  20%
(iii) non-Israeli resident  20%, subject to a reduced tax rate under an applicable
double tax treaty.

74

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Taxation of Residents of
the United States under the US Treaty

Residents
of the United States will generally be subject to withholding tax in Israel on dividends
paid, if any, on Shares (including ADSs). Generally, under the Convention Between the
Government of the United States of America and the Government of the State of Israel with
Respect to Taxes on Income (the US Treaty), the maximum rate of withholding
tax on dividends paid to a holder of Shares (including ADSs) who is a resident of the
United States (as defined in the US Treaty) will be 25%. Since the tax rate of 25% is
generally higher than the maximum Israeli tax rate on dividends pursuant to the 2006 Tax
Reform, the maximum tax rate should be 20%. The maximum rate of withholding tax on
dividends paid by Israeli corporation to a US corporation generally will be 12.5% if,
inter alia, during the part of the Israeli corporations taxable year which
precedes the date of payment and during the whole of its prior taxable year, at least 10%
of the outstanding shares of the voting stock of the Israeli corporation was owned by the
US corporation.

The
US Treaty exempts from taxation in Israel any capital gain realized on the sale, exchange
or other disposition of Shares (including ADSs) provided the following conditions are met
(a) the seller is a resident of the United States for purposes of the US Treaty, and (b)
the seller owns directly or indirectly, less than 10% of our voting stock at all times
during the 12-month period preceding such sale, exchange or other disposition (c) the
seller, being an individual, is present in Israel for a period or periods of less than 183
days at the taxable year; and (d) the capital gain from the sale was not derived through a
permanent establishment of the seller in Israel.

Purchasers
of Shares (including ADSs), who are residents of the United States and who hold 10% or
more of the outstanding ordinary shares at any time during such 12-month period will be
subject to Israeli capital gains tax. However, under the US Treaty, residents of the
United States (as defined in the US Treaty) generally would be permitted to claim a credit
for this tax against US federal income tax imposed on the sale, exchange or other
disposition, subject to the limitations in US laws applicable to the utilization of
foreign tax credits generally.

The
application of the US Treaty provisions to dividends and capital gains described above is
conditioned upon the fact that such income is not effectively connected with a permanent
establishment (as defined in the US Treaty) maintained by the non-Israeli resident in
Israel.

A
non-resident of Israel that has dividend income derived from or accrued in Israel, from
which tax was withheld at the source, is generally exempt from the duty to file tax
returns in Israel in respect of such income, provided such income was not connected to or
derived from a trade or business conducted in Israel by the tax payer.

Repatriation

Non-residents
of Israel who acquire any of the Shares (including ADSs) of the Company will be able to
repatriate dividends, liquidation distributions and the proceeds from the sale of such
ADSs or ordinary shares, in non-Israeli currencies at the rate of exchange prevailing at
the time of repatriation provided that any applicable Israel income tax has been paid, or
withheld, on such amounts. US holders should refer to the United States Federal
Income Taxation  Dividends section below with respect to the US federal tax
treatment of foreign currency gain or loss.

United States Federal
Income Tax Considerations

The
following discussion is a summary of certain material US federal income tax considerations
applicable to a US holder (as defined below) regarding the acquisition, ownership and
disposition of ordinary shares or ADSs. This summary is based on provisions of the
Internal Revenue Code of 1986, as amended (the Code), existing and proposed US
Treasury regulations, administrative pronouncements, rulings and judicial decisions in
effect as of the date of this Annual Report. All of these authorities are subject to
change, possibly with retroactive effect, and to change or changes in interpretation. In
addition, this summary does not discuss all aspects of US federal income taxation that may
be applicable to investors in light of their particular circumstances or to investors who
are subject to special treatment under US federal income tax law, including US
expatriates, insurance companies, banks, regulated investment companies, securities
broker-dealers, financial institutions, tax-exempt organizations, persons holding ordinary
shares or ADSs as part of a straddle, hedging or conversion transaction, persons subject
to the alternative minimum tax, persons who acquired their ordinary shares or ADSs
pursuant to the exercise of employee stock options or otherwise as compensation, persons
having a functional currency other than the US dollar, persons owning (directly,
indirectly or by attribution) 10% or more of our outstanding share capital or voting
stock, and persons not holding the ordinary shares or ADSs as capital assets.

As
used herein, the term US holder means a beneficial owner of an ordinary share
or an ADS who is eligible for benefits as a US resident under the limitation on benefits
article of the US Treaty (as defined above in Taxation of residents of the
United States under the US Treaty), and is:

| | a
citizen or individual resident of the United States for US federal income tax purposes;
|- | -----------------------------------------------------------------------------------------

| | a
corporation (or an entity taxable as a corporation for US federal income tax purposes)
created or organized in or under the laws of the United States or any political
subdivision thereof (including the District of Columbia);
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | an
estate whose income is subject to US federal income taxation regardless of its source; or
|- | --------------------------------------------------------------------------------------------

| | a
trust if (A) a US court is able to exercise primary supervision over the trusts
administration and (B) one or more US persons have the authority to control all of the
trusts substantial decisions.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

75

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If
a partnership, or other entity treated as a partnership for US federal income tax
purposes, holds ordinary shares or ADSs, the tax treatment of a partner generally will
depend upon the status of the partner and the activities of the partnership. A partner in
a partnership that holds ordinary shares or ADSs is urged to consult its own tax advisor
regarding the specific tax consequences of owning and disposing of ordinary shares or
ADSs.

For
US federal income tax purposes, US holders of ADRs will be treated as owners of the ADSs
evidenced by the ADRs and the ordinary shares represented by the ADSs. Furthermore,
deposits or withdrawals by a US holder of ordinary shares for ADSs, or of ADSs for
ordinary shares, will not be subject to US federal income tax or Israeli income tax. The
statements of US federal income tax laws set forth assume that each obligation in the
Deposit Agreement and any related agreement will be performed in accordance with its
terms.

US
holders should review the summary above under Israeli Taxation and
Israeli TaxationTaxation of residents of the United States under the US
Treaty for a discussion of the Israeli taxes which may be applicable to them.

Holders
of ordinary shares or ADSs should consult their own tax advisors concerning the specific
Israeli, US federal, state and local tax consequences of the ownership and disposition of
the ordinary shares or ADSs in light of their particular situations as well as any
consequences arising under the laws of any other taxing jurisdiction. In particular, US
holders are urged to consult their own tax advisors concerning whether they will be
eligible for benefits under the US Treaty.

Dividends

A
US holder generally will be required to include in gross income as ordinary dividend
income the amount of any distributions paid on the ordinary shares and ADSs, including the
amount of any Israeli taxes withheld in respect of such dividend. Dividends paid by us
will not qualify for the dividends-received deduction applicable in certain cases to US
corporations.

The
amount of any distribution paid in NIS, including the amount of any Israeli withholding
tax thereon, will be included in the gross income of a US holder of ordinary shares in an
amount equal to the US dollar value of the NIS calculated by reference to the spot rate of
exchange in effect on the date the distribution is received by the US holder or, in the
case of ADSs, by the Depositary. If a US holder converts dividends paid in NIS into US
dollars on the day such dividends are received, the US holder generally should not be
required to recognize foreign currency gain or loss with respect to such conversion. If
the NIS received in the distribution are not converted into US dollars on the date of
receipt, any foreign currency gain or loss recognized upon a subsequent conversion or
other disposition of the NIS will be treated as US source ordinary income or loss. Special
rules govern and special elections are available to accrual method taxpayers to determine
the US dollar amount includible in income in the case of taxes withheld in a foreign
currency. Accrual basis taxpayers are urged to consult their own tax advisors regarding
the requirements and the elections applicable in this regard.

Any
dividends paid by us to a US holder on the ordinary shares or ADSs will be treated as
foreign source income and will be categorized as passive income or, in the
case of certain US holders, financial services income for US foreign tax
credit purposes. For taxable years beginning after December 31, 2006, dividend income
generally will constitute passive category income or, in the case of certain
US holders, general category income. Subject to the limitations in the Code,
as modified by the US Treaty, a US holder may elect to claim a foreign tax credit against
its US federal income tax liability for Israeli income tax withheld from dividends
received in respect of ordinary shares or ADSs. US holders who do not elect to claim the
foreign tax credit may instead claim a deduction for Israeli income tax withheld, but only
for a year in which the US holder elects to do so with respect to all foreign income
taxes. A deduction does not reduce US tax on a dollar-for-dollar basis like a tax credit.
The deduction, however, is not subject to the limitations applicable to foreign tax
credits. The rules relating to the determination of the foreign tax credit are complex.
Accordingly, if you are a US holder of ordinary shares or ADSs, you should consult your
own tax advisor to determine whether and to what extent you would be entitled to the
credit.

Certain
US holders (including individuals) are eligible for reduced rates of US federal income tax
(at a maximum rate of 15%) in respect of qualified dividend income received in
taxable years beginning before January 1, 2011. For this purpose, qualified dividend
income generally includes dividends paid by a non-US corporation if, among other things,
the US holders meet certain minimum holding periods and the non-US corporation satisfies
certain requirements, including that either (i) the shares (or ADSs) with respect to which
the dividend has been paid are readily tradable on an established securities market in the
United States, or (ii) the non-US corporation is eligible for the benefits of a
comprehensive US income tax treaty (such as the US Treaty) which provides for the exchange
of information. We currently believe that dividends paid with respect to our ordinary
shares and ADSs, should constitute qualified dividend income for US federal income tax
purposes. We anticipate that our dividends will be reported as qualified dividends on
Forms 1099-DIV delivered to US holders. Each individual US holder of ordinary shares or
ADSs is urged to consult his own tax advisor regarding the availability to him of the
reduced dividend tax rate in light of his own particular situation and regarding the
computations of his foreign tax credit limitation with respect to any qualified dividend
income paid by us, as applicable.

The
US Treasury has expressed concern that parties to whom ADSs are released may be taking
actions that are inconsistent with the claiming of foreign tax credits or reduced rates in
respect of qualified dividends by US holders of ADSs. Accordingly, the discussion above
regarding the creditability of Israeli withholding tax or the availability of qualified
dividend treatment could be affected by future actions that may be taken by the US
Treasury with respect to ADSs.

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Sale, Exchange or Other
Disposition

Upon
the sale, exchange or other disposition of ordinary shares or ADSs, a US holder generally
will recognize capital gain or loss equal to the difference between the US dollar value of
the amount realized on the sale, exchange or other disposition and the US holders
adjusted tax basis, determined in US dollars, in the ordinary shares or ADSs. Any gain or
loss recognized upon the sale, exchange or other disposition of the ordinary shares or
ADSs will be treated as long-term capital gain or loss if, at the time of the sale,
exchange or other disposition, the holding period of the ordinary shares or ADSs exceeds
one year. In the case of individual US holders, capital gains generally are subject to US
federal income tax at preferential rates if specified minimum holding periods are met. The
deductibility of capital losses by a US holder is subject to significant limitations. US
holders should consult their own tax advisors in this regard.

In
general, gain or loss recognized by a US holder on the sale, exchange or other disposition
of ordinary shares or ADSs will be US source income or loss for US foreign tax credit
purposes. Pursuant to the US Treaty, however, gain from the sale or other disposition of
ordinary shares or ADSs by a holder who is a US resident, for US Treaty purposes, and who
sells the ordinary shares or ADSs within Israel may be treated as foreign source income
for US foreign tax credit purposes.

US
holders who hold ordinary shares or ADSs through an Israeli stockbroker or other Israeli
intermediary may be subject to an Israeli withholding tax on any capital gains recognized
if the US holder does not obtain approval of an exemption from the Israeli Tax
Authorities. US holders are advised that any Israeli tax paid under circumstances in which
an exemption from such tax was available will not give rise to a deduction or credit for
foreign taxes paid for US federal income tax purposes. US holders are advised to consult
their Israeli stockbroker or intermediary regarding the procedures for obtaining an
exemption.

If
a US holder receives NIS upon the sale of ordinary shares, that US holder may recognize
ordinary income or loss as a result of currency fluctuations between the date of the sale
of the ordinary shares and the date the sales proceeds are converted into US dollars.

Passive Foreign
Investment Company Rules

A
non-US corporation will be classified as a Passive Foreign Investment Company (a
PFIC) for any taxable year if at least 75% of its gross income consists of
passive income (such as dividends, interest, rents, royalties (other than rents or
royalties derived in the active conduct of a trade or business and received from an
unrelated person), or gains on the disposition or certain minority interests), or at least
50% of the average value of its assets consist of assets that produce, or are held for the
production of, passive income. We currently believe that we were not a PFIC for the year
ended December 31, 2006. However, this conclusion is a factual determination that must be
made at the close of each year and is based on, among other things, a valuation of our
ordinary shares, ADSs and assets, which will likely change from time to time. If we were
characterized as a PFIC for any taxable year, a US holder would suffer adverse tax
consequences. These consequences may include having gains realized on the disposition of
ordinary shares or ADSs treated as ordinary income rather than capital gains and being
subject to punitive interest charges on certain dividends and on the proceeds of the sale
or other disposition of the ordinary shares or ADSs. Furthermore, dividends paid by a PFIC
are not eligible to be treated as qualified dividend income (as discussed
above).

Application
of the PFIC rules is complex. US holders should consult their own tax advisors regarding
the potential application of the PFIC rules to the ownership of our ordinary shares or
ADSs.

Information Reporting and
Backup Withholding

Dividend
payments with respect to ordinary shares or ADSs and proceeds from the sale, exchange or
other disposition of ordinary shares or ADSs may be subject to information reporting to
the Internal Revenue Service (the IRS) and possible US backup withholding at a
current rate of 28%. Backup withholding will not apply, however, to a holder who furnishes
a correct taxpayer identification number or certificate of foreign status and makes any
other required certification or who is otherwise exempt from backup withholding. US
persons who are required to establish their exempt status generally must provide IRS Form
W-9 (Request for Taxpayer Identification Number and Certification). Non-US holders
generally will not be subject to US information reporting or backup withholding. However,
such holders may be required to provide certification of non-US status (generally on IRS
Form W-8BEN) in connection with payments received in the United States or through certain
US-related financial intermediaries.

Backup
withholding is not an additional tax. Amounts withheld as backup withholding may be
credited against a holders US federal income tax liability, and a holder may obtain
a refund of any excess amounts withheld by filing the appropriate claim for refund with
the IRS and furnishing any required information.

# 10F. Dividends and
Paying Agents

Not
applicable.

# 10G. Statement By Experts

Not
applicable.

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# 10H. Documents on Display

Reports
and other information of Partner filed electronically with the US Securities and Exchange
Commission may be found at www.sec.gov. They can also be inspected without charge and
copied at prescribed rates at the public reference facilities maintained by the SEC in
Room 1024, 450 Fifth Avenue, N.W., Washington, D.C. 20549 and, as long as our notes are
listed on the Luxembourg Stock Exchange, at the office of the paying agent in Luxembourg.

# 10I. Subsidiary
Information

Not
applicable.

# ITEM 11. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

General

We
are exposed to market risk, including movements in foreign currency exchange rates. Where
appropriate, we enter into derivative transactions to hedge underlying exposure foreign
currencies and inflation (CPI). As a matter of policy we do not enter into transactions of
a speculative or trading nature. Interest rate and foreign exchange exposures are
monitored by tracking actual and projected commitments and through the use of sensitivity
analysis.

We
have borrowings in shekels linked to the CPI and unlinked shekels. The following table
provides information derived from the financial statements about these borrowings, as of
December 31, 2006.

# Non-Derivative
Instruments

|                                                             | Book Value (NIS equivalent in
millions, except percentages)
|------------------------------------------------------------ | -----------------------------------------------------------
|
|
|
|
|NIS linked to the CPI(1)                                     |                                                            
|Long-term fixed Notes due 2012                               |                                                            
|NIS linked to the CPI(1)                                     |                                                            
|Long-term - fixed bank debt                                  |                                                            
|Weighted average interest rate payable on fixed rate debt    |                                                            
|Unlinked NIS(1)                                              |                                                            
|Long-term - floating                                         |                                                            
|Weighted average interest rate payable on floating rate debt |                                                            
|Total                                                        |                                                            

|(1) | Book
value approximates fair value at December 31, 2006.
|--- | --------------------------------------------------------

Expected Maturity Dates:

We have a senior credit facility with
Bank Hapoalim B.M., Bank Leumi Le-Israel B.M. and Israel Discount Bank Ltd., in which
United Mizrahi Bank Ltd. also participates. The facility is divided into two tranches: a
$161 million term loan facility (Facility A) and a $100 million revolving loan
facility (Facility B) both expiring September 1, 2009. Facility A must be
reduced to $50 million by August 31, 2008. Until February 19, 2007, the facilities were
secured by a first ranking floating charge on our assets. With effect March 1, 2007, we
have reduced Facility A to $75 million (in addition to an advance of approximately $25
million carried over from our previous facility, which on balance sheet date, was reduced
to $11 million) and Facility B to $75 million. As a result, the total maximum availability
under the facility is currently approximately $161 million.

Foreign Exchange and
Inflation

Substantially
all of our revenues and a majority of our operating expenses are denominated in shekels.
However, through December 31, 2006, a material 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.
Thus, devaluation of the shekel against the dollar (or other foreign currencies),
increases 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.

Our
hedging strategy is to neutralize and mitigate our currency exposures by entering into
hedging transactions which convert into shekels the liabilities not denominated in
shekels. We do not hold or issue derivative financial instruments for trading purposes.

Our
bank credit facility borrowings and Notes due 2012 are currently in shekels, some of which
are linked to the 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 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. We enter into
derivative transactions in order to protect ourselves from an increase in the CPI in
respect of the principal of the CPI  linked Notes.

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The
transactions are mainly designated to hedge the cash flows related to payments in respect
of purchases of handsets and capital expenditures in foreign currency. However, these
contracts do not qualify for hedge accounting under FAS 133.

The
notional amount does not necessarily represent amounts exchanged by the parties and,
therefore, is not a direct measure of our exposure.

The
following table provides information derived from the financial statements about our
outstanding foreign exchange instruments.

# Derivative Instruments

| |                                                           | As of
December
31, 2006 | Maturing in
2007 | Fair Value at
December 31,
2006
| | --------------------------------------------------------- | ----------------------- | ---------------- | -------------------------------
|
|
|
|
| | Forward transactions - for the exchange of:               |                         |                  |                                
| | Dollars into NIS                                          |                         |                  |                                
| | Embedded derivatives - Dollars into NIS                   |                         |                  |                                
| | Forward transactions - for the changes in the Israeli CPI |                         |                  |                                

# ITEM 12. DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES

Not
applicable.

# ITEM 13. DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES

None.

# ITEM 14. MATERIAL
MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

# ITEM 15. CONTROLS AND
PROCEDURES

(a)       
          Disclosure Controls and Procedures. Our management, including our Chief
          Executive Officer and Chief Financial Officer carried out an evaluation of the
          effectiveness of the design and operation of our disclosure controls and
          procedures as of December 31, 2006. Disclosure controls and procedures means
          controls and other procedures designed to ensure that information required to be
          disclosed in the reports that we file under the Securities Exchange Act of 1934,
          as amended, is recorded, processed, summarized and reported within the time
          periods specified in the rules and forms of the SEC. Disclosure controls and
          procedures include, without limitation, controls and procedures designed to
          ensure that information required to be disclosed in the reports we file or
          submit under the Securities Exchange Act of 1934, as amended, is accumulated and
          communicated to our management, including our principal executive and principal
          financial officers, or persons performing similar functions, as appropriate, to
          allow timely decisions regarding required disclosure.

There
are inherent limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or overriding
of the controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control objectives.
Nevertheless, our disclosure controls and procedures are designed to provide reasonable
assurance of achieving the desired control objectives. Based upon our evaluation, our
chief executive officer and chief financial officer concluded that the disclosure controls
and procedures in place as of December 31, 2006 were effective at such reasonable
assurance level.

(b)       
          Managements Annual Report on Internal Control over Financial
          Reporting. Our management, under the supervision of our Chief Executive
          Officer and Chief Financial Officer, is responsible for establishing and
          maintaining adequate internal control over our financial reporting, as defined
          in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended. The
          Companys internal control over financial reporting is a process designed
          to provide reasonable assurance regarding the reliability of financial reporting
          and the preparation of financial statements for external purposes in accordance
          with generally accepted accounting principles. Internal control over financial
          reporting includes policies and procedures that:

79

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| |  | pertain
to the  maintenance  of our records that in reasonable  detail  accurately  and fairly
 reflect our          transactions and asset dispositions;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | provide
reasonable assurance that our transactions are recorded as necessary to permit the
preparation of our financial statements in accordance with generally accepted accounting
principles;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | provide
reasonable assurance that our receipts and expenditures are made only in accordance with
authorizations of our management and board of directors (as appropriate); and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | provide
reasonable assurance regarding the prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on our
financial statements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Our
management, including our Chief Executive Officer and Chief Financial Officer conducted an
evaluation of the effectiveness of our internal control over financial reporting as of
December 31, 2006 based on the framework for Internal Control-Integrated Framework
set forth by The Committee of Sponsoring Organizations of the Treadway Commission. Based
on this assessment, management concluded that the Companys internal control over
financial reporting was effective as of December 31, 2006.

Our
auditors, Kesselman & Kesselman, a member of PricewaterhouseCoopers International
Limited, and an independent registered public accounting firm, has issued their
attestation report on managements assessment of internal control over financial
reporting. Their report is included in Item 18.

(c)       
          Changes in Internal Control Over Financial Reporting. There were
          no changes in our internal control over financial reporting that occurred during
          the year ended December 31, 2006 that have materially affected, or are
          reasonably likely to materially affect, our internal control over financial
          reporting.

# ITEM 16A. AUDIT
COMMITTEE FINANCIAL EXPERT

The
board of directors has determined that Moshe Vidman and Dr. Michael Anghel are audit
committee financial experts as defined in Item 16A of Form 20-F. All the members of
the Audit Committee are independent directors as defined in the Nasdaq listing
standards applicable to us.

# ITEM 16B. CODE OF ETHICS

We
have adopted a code of ethics that applies to our directors, officers and employees. We
undertake to provide to any person without charge, upon request, a copy of our code of
ethics, which you may request from Partners legal department, tel.: +972-54-4814191.

# ITEM 16C. PRINCIPAL
ACCOUNTANT FEES AND SERVICES

Kesselman
& Kesselman, independent certified public accountants in Israel and a member of
Pricewaterhouse Coopers International Limited (PwC) have served as our
independent public accountants for each of the fiscal years in the three-year period ended
December 31, 2006, for which audited financial statements appear in this annual report on
Form 20-F.

The
following table presents the aggregate fees for professional services rendered by PwC to
Partner in 2005 and 2006.

| |                        | 2005 (NIS thousands) | 2006 (NIS thousands)
| | ---------------------- | -------------------- | --------------------
|
|
|
|
| | Audit Fees (1)         |                      |                     
| | Audit-related Fees (2) |                      |                     
| | Tax Fees (3)           |                      |                     
| | All other fees         |                      |                     
| | TOTAL                  |                      |                     

---

|(1) | Audit Fees consist of fees billed for the annual audit services engagement and
               other audit services, which are those services that only the external auditor
               can reasonably provide, and include the group audit; statutory audits; comfort
               letters and consents; and assistance with and review of documents filed with the
               SEC.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

80

---

---



|(2) | Audit-related Fees consist of fees billed for assurance and related services
               that are reasonably related to the performance of the audit or review of our
               financial statements or that are traditionally performed by the external
               auditor, and include consultations concerning financial accounting and reporting
               standards and internal control reviews. The audited related fees in 2005 include
               also fees in respect of the issuance of the Notes and expenses related to the
               Sarbanes Oxley Act.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Tax Fees include fees billed for tax compliance services, including the
               preparation of tax returns and claims for tax refund; tax consultations, such as
               assistance and representation in connection with tax audits and appeals, and
               requests for rulings or technical advice from taxing authority.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Audit Committee
Pre-approval Policies and Procedures

Our Audit Committees specific
responsibilities in carrying out its oversight of the quality and integrity of the
accounting, auditing and reporting practices of the Company include the approval of audit
and non-audit services to be provided by the external auditor. The Audit Committee
approves in advance the particular services or categories of services to be provided to
the Company during the following yearly period and also sets forth a specific budget for
such audit and non-audit services. Additional non-audit services may be pre-approved by
the Audit Committee.

ITEM 16D. EXEMPTIONS FROM THE
LISTING STANDARDS FOR AUDIT COMMITTEES

Not
applicable.

# ITEM 16E. PURCHASES OF
EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASES

Neither
we nor any affiliated purchasers, as defined in Rule 10b  18(a)(3) under
the US Securities Exchange Act of 1934, purchased any of our shares during 2006.

# ITEM 17. FINANCIAL
STATEMENTS

The
company has responded to Item 18. Financial Statements in lieu of responding
to this item.

# ITEM 18. FINANCIAL
STATEMENTS

The
following financial statements are filed as part of this annual report.

|                                                                                                   | Page
|-------------------------------------------------------------------------------------------------- | ----
|
|
|
|
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                            |     
|CONSOLIDATED FINANCIAL STATEMENTS:                                                                 |     
|Balance sheets as of December 31, 2005 and 2006                                                    |     
|Statements of operations for the years ended December 31, 2004, 2005 and 2006                      |     
|Statements of changes in shareholders' equity for the years ended December 31, 2004, 2005 and 2006 |     
|Statements of cash flows for the years ended December 31, 2004, 2005 and 2006                      |     
|Notes to financial statements                                                                      |     

81

---

---



# ITEM 19. EXHIBITS

Pursuant to the rules and regulations
of the Securities and Exchange Commission, we have filed certain agreements as exhibits to
this Annual Report on Form 20-F. These agreements may contain representations and
warranties by the parties. These representations and warranties have been made solely for
the benefit of the other party or parties to such agreements and (i) may have been
qualified by disclosures made to such other party or parties, (ii) were made only as of
the date of such agreements or such other date(s) as may be specified in such agreements
and are subject to more recent developments, which may not be fully reflected in our
public disclosure, (iii) may reflect the allocation of risk among the parties to such
agreements and (iv) may apply materiality standards different from what may be viewed as
material to investors. Accordingly, these representations and warranties may not describe
our actual state of affairs at the date hereof and should not be relied upon.

|Exhibit No. |  | Description
|----------- |  | -----------

|              |                                                                                                  
|------------- | -------------------------------------------------------------------------------------------------
|
|
|
|
|1.1           | Partner's Amended and Restated Articles of Association                                           
|*1.2          | Partner's Certificate of Incorporation                                                           
|*1.3          | Partner's Memorandum of Association                                                              
|**2.(a).1     | Form of Share Certificate                                                                        
|^^2.(a).2     | Amended and Restated Deposit Agreement Between Partner and the Bank of New York                  
|^2.(b)        | Form of Indenture between Partner and the Trust Company of Union Bank Ltd.                       
|^4.(a).1      | Restatement of the Relationship Agreement dated April 20, 2005                                   
|**4.(a).2     | License from the Israeli Ministry of Communications issued April 8, 1998                         
|**4.(a).4     | License Agreement for use of the Orange Brand in Israel dated September 14, 1998                 
|**4.(a).5     | Brand Support/Technology Transfer Agreement dated July 18, 1999                                  
|**4.(a).6     | Agreement with Ericsson Radio Systems AB dated May 28, 1998                                      
|#++4.(a).7    | Agreement with LM Ericsson Israel Ltd. dated November 25, 2002                                   
|^#4.(a).8     | Dealer Agreement with Super-Pharm dated February 12, 2004                                        
|**4.(a).9     | Lease Agreement with Mivnei Taasia dated July 2, 1998                                            
|^^^4.(a).13   | Asset Purchase Agreement with Med-1 dated as of January 22, 2006                                 
|#***4.(a).14  | Amendment No. 1 to License from the Israeli Ministry of Communications issued May 11, 1999       
|***4.(a).15   | Amendment No. 2 to License from the Israeli Ministry of Communications issued September 29, 1999 
|***4.(a).16   | Amendment No. 3 to License from the Israeli Ministry of Communications issued October 3, 1999    
|***4.(a).17   | Amendment No. 4 to License from the Israeli Ministry of Communications issued June 28, 2000      
|***4.(a).18   | Amendment No. 5 to License from the Israeli Ministry of Communications issued September 10, 2000 
|***4.(a).19   | Amendment No. 6 to License from the Israeli Ministry of Communications issued March 19, 2001     
|+4.(a).20     | Amendment No. 7 to License from the Israeli Ministry of Communications issued September 23, 2001 
|+4.(a).21     | Amendment No. 8 to License from the Israeli Ministry of Communications issued December 27, 2001  
|+4.(a).22     | Amendment No. 9 to License from the Israeli Ministry of Communications issued March 13, 2002     
|+4.(a).23     | Amendment No. 10 to License from the Israeli Ministry of Communications issued April 14, 2002    
|+4.(a).24     | Amendment No. 11 to License from the Israeli Ministry of Communications issued April 25, 2002    
|++4.(a).25    | Amendment No. 12 to License from the Israeli Ministry of Communications issued June 26, 2002     
|++4.(a).26    | Amendment No. 13 to License from the Israeli Ministry of Communications issued June 30, 2002     
|++4.(a).27    | Amendment No. 14 to License from the Israeli Ministry of Communications issued September 11, 2002
|++4.(a).28    | Amendment No. 15 to License from the Israeli Ministry of Communications issued October 24, 2002  
|++4.(a).29    | Amendment No. 16 to License from the Israeli Ministry of Communications issued November 26, 2002 
|++4.(a).30    | Amendment No. 17 to License from the Israeli Ministry of Communications issued February 2, 2003  
|+++4.(a).31   | Amendment No. 18 to License from the Israeli Ministry of Communications issued May 29, 2003      
|+++4.(a).32   | Amendment No. 19 to License from the Israeli Ministry of Communications issued July 31, 2003     
|+++4.(a).33   | Amendment No. 20 to License from the Israeli Ministry of Communications issued October 8, 2003   
|+++4.(a).34   | Amendment No. 21 to License from the Israeli Ministry of Communications issued October 9, 2003   
|+++4.(a).35   | Amendment No. 22 to License from the Israeli Ministry of Communications issued March 16, 2004    
|+++4.(a).36   | Amendment No. 23 to License from the Israeli Ministry of Communications issued March 21, 2004    
|^4.(a).37     | Amendment No. 24 to License from the Israeli Ministry of Communications issued May 9, 2004       
|^4.(a).38     | Amendment No. 25 to License from the Israeli Ministry of Communications issued July 4, 2004      
|^4.(a).39     | Amendment No. 26 to License from the Israeli Ministry of Communications issued July 11, 2004     
|^4.(a).40     | Amendment No. 27 to License from the Israeli Ministry of Communications issued August 8, 2004    
|^4.(a).41     | Amendment No. 28 to License from the Israeli Ministry of Communications issued November 30, 2004 
|^4.(a).42     | Amendment No. 29 to License from the Israeli Ministry of Communications issued December 16, 2004 
|^4.(a).43     | Amendment No. 30 to License from the Israeli Ministry of Communications issued December 23, 2004 
|^4.(a).44     | Amendment No. 31 to License from the Israeli Ministry of Communications issued March 9, 2005.    
|^^^4. (a). 45 | Amendment No. 32 to License from the Israeli Ministry of Communications issued May 10,2005.      
|^^^4. (a). 46 | Amendment No. 33 to License from the Israeli Ministry of Communications issued July 14, 2005.    

82

---

---



|^^^4. (a). 47 | Amendment No. 34 to License from the Israeli Ministry of Communications issued March 2, 2006                                                                                   
|------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4. (a). 48    | Amendment No. 35 to License from the Israeli Ministry of Communications issued July 25, 2006                                                                                   
|4. (a). 49    | Amendment No. 36 to License from the Israeli Ministry of Communications issued July 26, 2006                                                                                   
|4. (a). 50    | Amendment No. 37 to License from the Israeli Ministry of Communications issued October 29, 2006                                                                                
|4. (a). 51    | Amendment No. 38 to License from the Israeli Ministry of Communications issued November 5, 2006                                                                                
|4. (a). 52    | Amendment No. 39 to License from the Israeli Ministry of Communications issued November 6, 2006                                                                                
|4. (a). 53    | Amendment No. 40 to License from the Israeli Ministry of Communications issued January 8, 2007                                                                                 
|4. (a). 54    | Amendment No. 41 to License from the Israeli Ministry of Communications issued February 11, 2007                                                                               
|4. (a). 55    | Amendment No. 42 to License from the Israeli Ministry of Communications issued January 14, 2007                                                                                
|4. (a). 56    | Amendment No. 43 to License from the Israeli Ministry of Communications issued February 19, 2007                                                                               
|4. (a). 57    | Amendment No. 44 to License from the Israeli Ministry of Communications issued April 25, 2007                                                                                  
|4. (a). 58    | Special License from the Israeli Ministry of Communications for the Provision of Fixed-Line Domestic Transmission and Data Communication Services issued August 14, 2006.      
|4. (a). 59    | Amendment No. 1 to Special
License for the Provision of Fixed-Line Domestic Transmission and Data Communication
Services issued  September 10, 2006.                           
|4. (a). 60    | Exclusive General License from the
Israeli Ministry of Communications for the Provision of Domestic Transmission and Data
Communication Services issued  January, 15 2007.     
|4. (a). 61    | Amendment No. 1 to Fixed-Line License from the Israeli Ministry of Communications issued January 14, 2007                                                                      
|4. (a). 62    | Amendment No. 2 to Fixed-Line License from the Israeli Ministry of Communications issued January 31, 2007                                                                      
|4. (a). 63    | Amendment No. 3 to Fixed-Line License from the Israeli Ministry of Communications issued February 19, 2007                                                                     
|^4.(a).64     | Facility Agreement dated April 14, 2005                                                                                                                                        
|#+++4.(a).65  | Purchase Agreement with Nortel Networks Israel (Sales and Marketing) Ltd. dated November 12, 2003.                                                                             
|^4.(a).66     | Share Buy Back Agreement dated February 7, 2005                                                                                                                                
|6.            | See Note 1q to our financial statements for information explaining how earnings (loss) per share information was calculated.                                                   
|8.            | List of Subsidiaries                                                                                                                                                           
|12.(a).1      | Certification by CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
|12.(a).2      | Certification by CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
|13.(a).1      | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                          
|14.(a).1      | Consent of Kesselman & Kesselman                                                                                                                                               

---

|* | Incorporated
by reference to our registration statement on Form F-1 (No. 333-12340).
|- | ------------------------------------------------------------------------------------

|** | Incorporated
by reference to our registration statement on Form F-1 (No. 333-10992).
|-- | ------------------------------------------------------------------------------------

|*** | Incorporated
by reference to our annual report on Form 20-F for the fiscal year ended December 31,
2000.
|--- | --------------------------------------------------------------------------------------------------------

|+ | Incorporated
by reference to our annual report on Form 20-F for the fiscal year ended December 31,
2001.
|- | --------------------------------------------------------------------------------------------------------

|++ | Incorporated
by reference to our annual report on Form 20-F for the fiscal year ended December 31,
2002.
|-- | --------------------------------------------------------------------------------------------------------

|+++ | Incorporated
by reference to our annual report on Form 20-F for the fiscal year ended December 31,
2003.
|--- | --------------------------------------------------------------------------------------------------------

|^ | Incorporated by
reference to our annual report on Form 20-F for the fiscal year ended December 31, 2004.
|- | --------------------------------------------------------------------------------------------------------

|^^ | Incorporated
by reference to our registration statement on Form F-6 (No. 333-132680).
|-- | -------------------------------------------------------------------------------------

|^^^ | Incorporated  by
reference to our annual report on Form 20-F for the fiscal year ended December 31, 2005.
|--- | ---------------------------------------------------------------------------------------------------------

|# | Confidential
treatment requested.
|- | ---------------------------------

Confidential material has been
redacted and has been separately filed with the Securities and Exchange Commission.

83

---

---



# GLOSSARY OF SELECTED
TELECOMMUNICATIONS TERMS

The
following explanations are not intended as technical definitions, but to assist the reader
in understanding certain terms as used in this annual report.

|                                 |                                                                                                                                                                                                                                                                                                                
|-------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
|AMPS                             | Advanced Mobile Phone System; the analogue cellular telephone technology adopted in the United States. Also N-AMPS (Narrowband AMPS), a more frequency-efficient variant of AMPS.                                                                                                                              
|                                
|Analog Technology                | A technology in which some property of an electrical signal is varied proportionally to the input signal being transmitted, stored or processed. Fixed transmitter/receiver equipment in each cell of a mobile                                                                                                 
|                                
|Base Transceiver Station ("BTS") | telecommunications network that communicates by radio with all mobile telephones in that cell.                                                                                                                                                                                                                 
|                                
|Base Station Controller ("BSC")  | Monitors and controls one or more base stations in order to exchange messages, handover mobile units from cell to cell and perform other system administrative tasks.                                                                                                                                          
|                                
|Blocked call                     | Where a mobile phone call fails because no channels are available in the cell in which the user is located.                                                                                                                                                                                                    
|                                
|CDMA                             | Code Division Multiple Access; a method by which many users sharing the same radio channel can be distinguished by unique code numbers.                                                                                                                                                                        
|                                
|Cell                             | In a cellular telephone system, the coverage area of a single base transceiver station or one sector therein.                                                                                                                                                                                                  
|                                
|Channel                          | A frequency or time slot in a telecommunications system over which distinct messages can be conveyed.                                                                                                                                                                                                          
|                                
|Churn                            | The number of customers who are disconnected from a network, either involuntarily, due to payment delinquency or suspected fraudulent use, or voluntarily, as customers switch to competing networks, relocate outside the network's service area, or cease using mobile telephones permanently or temporarily.
|                                
|D-AMPS                           | Digital Advanced Mobile Phone System; a digital cellular system first implemented in the United States and intended initially to permit gradual upgrading of AMPS networks.                                                                                                                                    
|                                
|Dropped call                     | When a mobile phone call is involuntarily terminated.                                                                                                                                                                                                                                                          
|                                
|GPRS                             | General Packet Radio Services (GPRS) is a packet-based wireless communication service that enables data rates from 56 up to 114 Kbps and continuous connection to the Internet for mobile phone and computer users. GPRS is based on Global System for Mobile (GSM) communication.                             
|                                
|GSM                              | The Global System for Mobile Communications, a comprehensive digital standard for the operation of all elements of a cellular telephone system. GSM originated in Europe, but is now the most popular digital mobile telephone standard worldwide.                                                             
|                                
|GSM 900                          | GSM operation in the 900 MHz frequency band; the original frequency band allocated to GSM, later extended by 10 MHz (EGSM).                                                                                                                                                                                    
|                                
|GSM 1800                         | GSM operation in the 1800 MHz frequency band; formerly known as DCS 1800 or PCN, first allocated for the expansion of mobile network competition in Europe, now used for the same purpose in many other areas.                                                                                                 
|                                
|GSM 1900                         | GSM operation in the 1900 MHz band; primarily used in North and South America                                                                                                                                                                                                                                  
|                                

84

---

---



|GSM Association                 | Formerly known as the GSM Memorandum of Understanding Association (GSM MoU), an organization of operators, government administrations, and equipment and service suppliers that promotes the development and promulgation of the GSM standard and relations between GSM operators.
|------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                               
|HSCSD                           | High Speed Circuit Switched Data is an infrastructure development which enables the transmission of data at higher speeds than the 9600 Bps speed previously available on GSM networks.                                                                                           
|                               
|Intelligent Network ("IN")      | Network architecture that centralizes the processing of calls and billing information of calls.                                                                                                                                                                                   
|                               
|Mobile Switching Center ("MSC") | A large, computer-based device used to connect calls within a mobile network and as the interface of the cellular network to other networks.                                                                                                                                      
|                               
|SMS                             | Short message service, a service which enables mobile telephone users to send and receive written messages on their handsets.                                                                                                                                                     
|                               
|UMTS                            | Universal Mobile Telecommunications System, the "third generation" of mobile telecommunications standard also referred to as 3G.                                                                                                                                                  
|                               
|Virtual Private Network ("VPN") | A private network provided by means of the facilities of a public telephone network but which operates by logic as a closed user group thereby providing the convenience of a private network with the economy of scale of a public network.                                      
|                               
|WAP                             | Wireless Application Protocol, a language specifically developed for mobile telephones that facilitates internet usage.                                                                                                                                                           

85

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
2006 ANNUAL REPORT



---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
2006 ANNUAL REPORT

TABLE OF CONTENTS

|                                                                                                   | Page     
|-------------------------------------------------------------------------------------------------- | ---------
|
|
|
|
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                            | F-3-F-4  
|CONSOLIDATED FINANCIAL STATEMENTS:                                                                
|Balance sheets as of December 31, 2005 and 2006                                                    | F-5-F-6  
|Statements of operations for the years ended December 31, 2004, 2005 and 2006                      | F-7      
|Statements of changes in shareholders' equity for the years ended December 31, 2004, 2005 and 2006 | F-8      
|Statements of cash flows for the years ended December 31, 2004, 2005 and 2006                      | F-9-F-10 
|Notes to financial statements                                                                      | F-11-F-48

The
amounts are stated in New Israeli Shekels (NIS) in thousands.



---

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

# PARTNER COMMUNICATIONS
COMPANY LTD.

We have completed an integrated audit of the
2006 consolidated financial statements of Partner Communications Company Ltd. and its subsidiary
(collectively  "the Company") and of its internal control over financial reporting as of December 31,
2006 and audits of its 2005 and 2004 consolidated financial statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are
presented below.

# Consolidated financial
statements

We have audited the consolidated
balance sheets of Partner Communications Company Ltd. and its subsidiary as of
December 31, 2006 and 2005 and the related consolidated statements of operations,
changes in shareholders equity and cash flows for each of the three years in
the period ended December 31, 2006. These financial statements are the responsibility
of the Companys Board of Directors and management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial
statements referred to above, present fairly, in all material respects, the consolidated financial
position of Partner Communications Company Ltd. and its subsidiary at December 31, 2006 and 2005, and
the consolidated results of their operations, changes in shareholders equity and their cash flows for
each of the three years in the period ended December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America.

F - 3

---

---



# Internal control over
financial reporting

Also, in our opinion,
managements assessment, included in Report of Partner Management on Internal Control
Over Financial Reporting appearing under item 15, that the Company maintained effective
internal control over financial reporting as of December 31, 2006 based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2006, based on criteria established in Internal Control 
Integrated Framework issued by the COSO. The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our responsibility is to
express opinions on managements assessment and on the effectiveness of the
Companys internal control over financial reporting based on our audit. We conducted
our audit of internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating managements assessment,
testing and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.

A companys internal control
over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets
that could have a material effect on the financial statements.

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

|                 |                                      
|---------------- | -------------------------------------
|
|
|
|
|Tel-Aviv, Israel | /s/ Kesselman & Kesselman            
|June 6, 2007     | Certified Public Accountants (Israel)

F - 4

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
CONSOLIDATED BALANCE SHEETS

|                                                             | December 31
|------------------------------------------------------------ | -----------
|
|
|
|
|A  s  s  e  t  s                                             |            
|CURRENT ASSETS:                                              |            
|Cash and cash equivalents                                    |            
|Accounts receivable (note 12):                               |            
|Trade                                                        |            
|Other                                                        |            
|Inventories                                                  |            
|Deferred income taxes (note 9)                               |            
|                                                             |            
|T o t a l  current assets                                    |            
|                                                             |            
|INVESTMENTS AND LONG-TERM RECEIVABLES:                       |            
|Accounts receivable - trade (note 12)                        |            
|Funds in respect of employee rights upon retirement (note 6) |            
|                                                             |            
|                                                             |            
|                                                             |            
|FIXED ASSETS, net of accumulated depreciation and            |            
|amortization (note 2)                                        |            
|                                                             |            
|LICENSE, DEFERRED CHARGES AND OTHER                          |            
|INTANGIBLE ASSETS, net of accumulated                        |            
|amortization (note 3)                                        |            
|                                                             |            
|DEFERRED INCOME TAXES (note 9)                               |            
|                                                             |            
|T o t a l  assets                                            |            
|                                                             |            

Date
of approval of the financial statements: June 6, 2007

|
David AvnerChief Executive Officer | 
Emanuel AvnerChief Financial Officer | 
Moshe VidmanDirector
|------------------------------------------------- | --------------------------------------------------- | -----------------------------------

F - 5

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
CONSOLIDATED BALANCE SHEETS

|                                                                     | December 31
|-------------------------------------------------------------------- | -----------
|
|
|
|
|Liabilities and shareholders' equity                                 |            
|CURRENT LIABILITIES:                                                 |            
|Current maturities of long-term liabilities (notes 4, 12e)           |            
|Accounts payable and accruals:                                       |            
|Trade                                                                |            
|Other (note 12c)                                                     |            
|Parent  group -  trade                                               |            
|Dividend payable                                                     |            
|                                                                     |            
|T o t a l   current liabilities                                      |            
|                                                                     |            
|LONG-TERM LIABILITIES:                                               |            
|Bank loans, net of current maturities (note 4)                       |            
|Notes payable (note 5)                                               |            
|Liability for employee rights upon retirement (note 6)               |            
|Other liabilities (note 12e)                                         |            
|                                                                     |            
|T o t a l   long-term liabilities                                    |            
|                                                                     |            
|COMMITMENTS AND CONTINGENT LIABILITIES (note 7)                      |            
|T o t a l   liabilities                                              |            
|                                                                     |            
|SHAREHOLDERS' EQUITY (note 8):                                       |            
|Share capital - ordinary shares of NIS 0.01 par                      |            
|value: authorized - December 31, 2005 and 2006 - 235,000,000 shares; |            
|issued and outstanding -                                             |            
|December 31, 2005 - 152,528,288 shares and                           |            
|December 31, 2006 - 154,516,217 shares                               |            
|Capital surplus                                                      |            
|Accumulated deficit                                                  |            
|                                                                     |            
|T o t a l   shareholders' equity                                     |            
|                                                                     |            
|                                                                     |            
|                                                                     |            

The
accompanying notes are an integral part of the financial statements.

F - 6

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                 | Year ended December 31
|------------------------------------------------ | ----------------------
|
|
|
|
|REVENUES - net:                                  |                       
|Services                                         |                       
|Equipment                                        |                       
|                                                 |                       
|                                                 |                       
|COST OF REVENUES:                                |                       
|Services                                         |                       
|Equipment                                        |                       
|                                                 |                       
|                                                 |                       
|                                                 |                       
|GROSS PROFIT                                     |                       
|SELLING AND MARKETING EXPENSES                   |                       
|GENERAL AND ADMINISTRATIVE EXPENSES              |                       
|                                                 |                       
|OPERATING PROFIT                                 |                       
|FINANCIAL EXPENSES, net (note 12f)               |                       
|                                                 |                       
|INCOME BEFORE TAXES ON INCOME                    |                       
|TAXES ON INCOME (note 9)                         |                       
|                                                 |                       
|INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE      |                       
|IN ACCOUNTING PRINCIPLES                         |                       
|CUMULATIVE EFFECT, AT BEGINNING OF YEAR,         |                       
|OF A CHANGE IN ACCOUNTING PRINCIPLES, net of tax |                       
|                                                 |                       
|NET INCOME FOR THE YEAR                          |                       
|                                                 |                       
|EARNINGS PER SHARE ("EPS"):                      |                       
|Basic:                                           |                       
|Before cumulative effect                         |                       
|Cumulative effect                                |                       
|                                                 |                       
|                                                 |                       
|                                                 |                       
|Diluted:                                         |                       
|Before cumulative effect                         |                       
|Cumulative effect                                |                       
|                                                 |                       
|                                                 |                       
|                                                 |                       
|WEIGHTED AVERAGE NUMBER OF                       |                       
|SHARES OUTSTANDING:                              |                       
|Basic                                            |                       
|                                                 |                       
|Diluted                                          |                       
|                                                 |                       

The accompanying
notes are an integral part of the financial statements.

F - 7

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

|                                                        | Share capital |  |  |             |  
|------------------------------------------------------- | ------------- |  |  | ----------- | -
|
|
|
|
|New Israeli Shekels:                                    |               |  |  |             |  
|BALANCE AT DECEMBER 31, 2003                            |               |  |  | 182,695,574 |  
|CHANGES DURING THE YEAR     ENDED DECEMBER 31, 2004:    |               | 
|Exercise of options granted to employees                |               |  |  | 1,341,647   |  
|Income tax benefit in respect of exercise of options    |               | 
|granted to employees                                    |               |  |  |             |  
|Employee share-based option compensation expenses       |               |  |  |             |  
|Net income                                              |               |  |  |             |  
|                                                        |               |  |  |             |  
|BALANCE AT DECEMBER 31, 2004                            |               |  |  | 184,037,221 |  
|CHANGES DURING THE YEAR     ENDED DECEMBER 31, 2005:    |               | 
|Repurchase of Company's shares (including purchase      |               | 
|cost of NIS 17,591,000)                                 |               |  |  | (33,317,933 | )
|Exercise of options granted to employees                |               |  |  | 1,809,000   |  
|Income tax benefit in respect of exercise of options    |               | 
|granted to employees                                    |               |  |  |             |  
|Employee share-based option compensation expenses       |               |  |  |             |  
|Dividend                                                |               |  |  |             |  
|Net income                                              |               |  |  |             |  
|                                                        |               |  |  |             |  
|BALANCE AT DECEMBER 31, 2005                            |               |  |  | 152,528,288 |  
|CHANGES DURING THE YEAR     ENDED DECEMBER 31, 2006:    |               | 
|Exercise of options granted to employees                |               |  |  | 1,987,929   |  
|Cumulative effect, at beginning of year, of a change in |               | 
|accounting principles                                   |               |  |  |             |  
|Employee share-based option compensation expenses       |               |  |  |             |  
|Dividend                                                |               |  |  |             |  
|Net income                                              |               |  |  |             |  
|                                                        |               |  |  |             |  
|BALANCE AT DECEMBER 31, 2006                            |               |  |  | 154,516,217 |  
|Convenience translation into u.s. dollars (note 1a):    |               | 
|BALANCE AT JANUARY 1, 2006                              |               |  |  | 152,528,288 |  
|CHANGES DURING THE YEAR     ENDED DECEMBER 31, 2006:    |               | 
|Exercise of options granted to employees                |               |  |  | 1,987,929   |  
|Cumulative effect, at beginning of year, of a           |               | 
|change in accounting principles                         |               |  |  |             |  
|Employee share-based option compensation expenses       |               |  |  |             |  
|Dividend                                                |               |  |  |             |  
|Net income                                              |               |  |  |             |  
|                                                        |               |  |  |             |  
|BALANCE AT DECEMBER 31, 2006                            |               |  |  | 154,516,217 |  
|                                                        |               |  |  |             |  

The
accompanying notes are an integral part of the financial statements.

F - 8

---

---



(Continued) - 1

PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                      | Year ended December 31
|----------------------------------------------------- | ----------------------
|
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                 |                       
|Net income for the year                               |                       
|Adjustments to reconcile net income to net cash       |                       
|provided by operating activities:                     |                       
|Depreciation and amortization                         |                       
|Employee share-based option compensation expenses     |                       
|Liability for employee rights upon retirement         |                       
|Deferred income taxes                                 |                       
|Income tax benefit in respect of exercise of options  |                       
|granted to employees                                  |                       
|Accrued interest, exchange and linkage                |                       
|differences on (erosion of) long-term liabilities     |                       
|Amount carried to deferred charges                    |                       
|Capital loss (gain) on sale of fixed assets           |                       
|Cumulative effect, at beginning of year, of a change  |                       
|in accounting principles                              |                       
|Changes in operating asset and liability items:       |                       
|Decrease (increase) in accounts receivable:           |                       
|Trade                                                 |                       
|Other                                                 |                       
|Increase (decrease) in accounts payable and accruals: |                       
|Trade                                                 |                       
|Other                                                 |                       
|Parent  group - trade                                 |                       
|Increase (decrease) in asset retirement obligations   |                       
|Decrease (increase) in inventories                    |                       
|                                                      |                       
|Net cash provided by operating activities             |                       
|                                                      |                       
|CASH FLOWS FROM INVESTING ACTIVITIES:                 |                       
|Purchase of fixed assets                              |                       
|Acquisition of optic fibers activity                  |                       
|Proceeds from sale of fixed assets                    |                       
|Purchase of additional spectrum                       |                       
|Payment in respect of transmission services license   |                       
|Funds in respect of employee rights upon retirement   |                       
|                                                      |                       
|Net cash used in investing activities                 |                       
|                                                      |                       

F - 9

---

---



(Continued) - 2

PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                       | Year ended December 31
|------------------------------------------------------ | ----------------------
|
|
|
|
|CASH FLOWS FROM FINANCING ACTIVITIES:                  |                       
|Repayment of capital lease                             |                       
|Repurchase of company's shares (including purchase     |                       
|cost of NIS 17,591,000)                                |                       
|Issuance of notes payable under a prospectus, net of   |                       
|issuance costs                                         |                       
|Redemption of notes payable                            |                       
|Proceeds from exercise of stock options granted to     |                       
|employees                                              |                       
|Windfall tax benefit in respect of exercise of options |                       
|granted to employees                                   |                       
|Dividend paid                                          |                       
|Long-term bank loans received                          |                       
|Repayment of long-term bank loans                      |                       
|                                                       |                       
|Net cash used in financing activities                  |                       
|                                                       |                       
|INCREASE (DECREASE) IN CASH AND CASH                   |                       
|EQUIVALENTS                                            |                       
|CASH AND CASH EQUIVALENTS AT                           |                       
|BEGINNING OF YEAR                                      |                       
|                                                       |                       
|CASH AND CASH EQUIVALENTS AT                           |                       
|END OF YEAR                                            |                       
|                                                       |                       
|                                                       |                       
|SUPPLEMENTARY DISCLOSURE OF CASH                       |                       
|FLOW INFORMATION - cash paid during the year:          |                       
|Interest                                               |                       
|                                                       |                       
|Advances to income tax authorities                     |                       
|                                                       |                       

Supplementary information on
investing and financing activities not involving cash flows

At December 31, 2004, 2005 and 2006,
trade payables include NIS 103.8 million, NIS 90.3 million and NIS 201.8 million ($ 47.7
million), respectively, in respect of acquisition of fixed assets. In addition, at
December 31, 2004 and 2005 trade payables included NIS 13.8 million and NIS 27.7 million
in respect of acquisition of additional spectrum, respectively.

At December 31, 2005, dividend
payable of approximately NIS 45 million was outstanding. During 2005, the Company has
undertaken a capital lease with respect to fixed assets in the amount of NIS 15.8 million.

These balances are recognized in the
cash flow statements upon payment.

The accompanying notes are an
integral part of the financial statements.

F - 10

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES:

| | a. | General:
| | -- | --------

| | Nature
of operations:
| | ---------------------

| | 1) | Partner
Communications Company Ltd. (the Company) operates a mobile
          telecommunications network in Israel. The Company launched its 3G network on
          December 1, 2004. As of April 20, 2005, the Company is a subsidiary of
Hutchison           Telecommunications International Limited (HTIL).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | The
Company was incorporated on September 29, 1997, and operates under a           license
granted by the Ministry of Communications to operate a cellular           telephone
network for a period of 10 years beginning April 7, 1998. The Company           commenced
full commercial operations on January 1, 1999.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company paid a one-time license fee of approximately new Israeli shekels
(NIS) 1.6 billion which is presented under license, deferred charges and other
intangible assets. The Company is entitled to request an extension of the license
for an additional period of six years and then renewal for one or more additional six
year periods. Should the license not be renewed, the new license-holder is obliged to
purchase the communications network and all the rights and obligations of the subscribers
for a fair price, as agreed between the parties or as determined by an arbitrator.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2001, the Company was awarded additional spectrum (2G band (1800MHz) and third
generation (3G) UMTS band (1900MHz and 2100MHz)). Following the award of the above
spectrum, the Companys license was amended and extended through 2022.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
consideration for the above additional spectrum the Company paid NIS 180 million for the
2G spectrum, and NIS 220 million for the 3G spectrum.
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the terms of the amended license, the Company provided a guarantee in NIS equivalent of $
10 million to the State of Israel to secure the Companys adherence to the terms of
the license.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 14, 2006 the Company was awarded a temporary license from the Ministry of
Communications for the offering of transmission services. The validity of the temporary
license is the later of July 31, 2007 and the awarding of a special general license for
domestic fixed services to a corporation under the Companys control.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the year the Company paid a total amount of NIS 300,000 in respect of this license. On
January 15, 2007 the license was awarded to Partner Land-Line Communication Solutions
 a limited Partnership under the Companys control. An additional NIS 700,000
was paid upon the Companys receipt of the license. The temporary transmission
services license will be converted into the special general license for domestic fixed
services by July 2007. The license is for a period of 20 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | On
July 3, 2006 the Company acquired MED I.C-1 (1999) Ltd. (Med 1)
          transmission activity including 900 kilometers of transmission fiber for
          approximately NIS 71 million ($ 16.8 million) in cash. The Company purchased
          Med-1 transmission network to lower its transmission expenses and to have
          the ability to provide its customers with additional services. As of July 3,
          2006 the transmission activity has been included in the financial results.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | The
Company has adopted Financial Accounting Standards SFAS No. 141, Business
Combinations. In accordance with the FAS when a corporation and one or more incorporated
or unincorporated businesses are combined into one entity, the purchase price paid by an
acquiring entity should be allocated to the identifiable individual assets acquired and
liabilities assumed based on their fair values, with the remaining unallocated purchase
price recorded as goodwill.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of the acquisition was NIS 106 million. In accordance with SFAS 141, since the
fair value exceeds the purchase price, the excess of fair value over the purchase price
was allocated pro-rata between the acquired tangible and intangible assets.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company allocated the purchase price paid for Med 1s transmission activity as
follows (see also note 1: e, f):
| | -------------------------------------------------------------------------------------------------------------------

| |                         | NIS in
thousands | Estimated Remaining Useful
Life
| | ----------------------- | ---------------- | -------------------------------
|
|
|
|
| | Fixed assets            |                  |                                
| | Customer Relationships  |                  |                                
| | with Carriers           |                  |                                
| | Customer Relationships  |                  |                                
| | with Business Customers |                  |                                
| |                         |                  |                                
| |                         |                  |                                
| |                         |                  |                                

| | Use
of estimates in the preparation of financial statements
| | -----------------------------------------------------------

| | The
preparation of financial statements in conformity with generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of contingent
assets and liabilities at the dates of the financial statements and the reported amounts
of revenues and expenses during the reporting years. Actual results could differ from
those estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Functional
currency and reporting currency
| | ------------------------------------------

| | The
functional currency of the Company and its subsidiary is the local currency New Israeli
Shekels  NIS. The consolidated financial statements have been drawn up on the basis
of the historical cost of Israeli currency and are presented in NIS.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Convenience
translation into U.S. dollars (dollars or $)
| | ------------------------------------------------------------

| | The
NIS figures at December 31, 2006 and for the period then ended have been translated into
dollars using the representative exchange rate of the dollar at December 31, 2006 ($1 =
NIS 4.225). The translation was made solely for convenience. The translated dollar
figures should not be construed as a representation that the Israeli currency amounts
actually represent, or could be converted into, dollars.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accounting
principles
| | ---------------------

| | The
consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States (U.S. GAAP).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | b. | Principles
of consolidation:
| | -- | ----------------------------

| | 1) | The
consolidated financial statements include the accounts of the Company and           its
wholly-owned subsidiary (together  the Group).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Intercompany
balances between the Company and its subsidiary have been           eliminated.
| | -- | --------------------------------------------------------------------------------------------

| | c. | Inventories
| | -- | -----------

| | Inventories
of cellular telephones (handsets) and accessories are stated at the lower of cost or
estimated net realizable value. Cost is determined on the first-in, first-outbasis.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company determines its allowance for inventory obsolescence and slow moving inventory,
based upon expected inventory turnover, inventory aging and current and future
expectations with respect to product offerings.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Non-marketable
securities
| | -- | -------------------------

| | These
investments are stated at cost, less provision for impairment losses. The balance of
these investments are fully impaired.
| | --------------------------------------------------------------------------------------------------------------------------------

| | e. | Fixed
assets:
| | -- | -------------

| | 1) | These
assets are stated at cost.
| | -- | --------------------------------

| | 2) | Direct
consultation and supervision costs and other direct costs relating to
               setting up the Companys communications network and information
systems for                recording and billing calls are capitalized to cost of the
assets.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | Interest
costs in respect of loans and credit which served to finance the
               construction or acquisition of fixed assets  incurred until
installations                of the fixed assets are completed  are capitalized to
cost of such assets.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | Assets
are depreciated by the straight-line method, on basis of their estimated           useful
life.
| | -- | ------------------------------------------------------------------------------------------------------

| | Annual
rates of depreciation are as follows:
| | --------------------------------------------

| |                                                          | %                  
| | -------------------------------------------------------- | -------------------
|
|
|
|
| | Communications network                                   | 10 - 20 (mainly 15)
| | Computers, hardware and software for information systems | 15-33              
| | Office furniture and equipment                           | 7-15               
| | Optic fibers (see note 1a(3))                            | 6-10               

| | Leasehold
improvements are amortized by the straight-line method over the term of the lease
(including reasonably assured option periods), or the estimated useful life (5-10 years)
of the improvements, whichever is shorter.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5) | Fixed
assets leased by the Company under capital leases are classified as the           Companys
assets and are recorded, at the inception of the lease, at the           lower of the
assets fair value or the present value of the minimum lease           payments.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | e. | Fixed
assets (continued):
| | -- | -------------------------

| | 6) | Computer
Software Costs
| | -- | -----------------------

| | The
cost of internal-use software is capitalized in accordance with Statement of Position
(SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. Subsequent additions, modifications or upgrades to internal-use
software are capitalized only to the extent that they allow the software to perform a
task it previously did not perform. Software maintenance and training costs are expensed
in the period in which they are incurred. Capitalized computer software costs are
amortized using the straight-line method over a period of 3 to 7 years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | License,
deferred charges and other intangible assets:
| | -- | ------------------------------------------------------

| | 1) | License:
| | -- | --------

| | The
license (see also 1a(2) above) is stated at cost and is amortized by the straight-line
method over the utilization period of the license starting January 1, 1999.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
the extensions of the license (as described in note 1a(2) above) the unamortized balance
of the Companys existing license as well as the cost of the additional spectrum put
into service are amortized on a straight-line basis  over the period ending in 2022.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
costs relating to the 3G band are amortized as of December 1, 2004, by the straight-line
method over the period ending in 2022.
| | -----------------------------------------------------------------------------------------------------------------------------------

| | Interest
expenses which served to finance the license fee  incurred until the commencement
of utilization of the license  were capitalized to cost of the license. During the
year 2004  NIS 8 million interest costs were capitalized to the cost of the license.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Customer
relationships relating to Med-1 fiber optic acquisition are amortized           using the
estimated useful life which is 5-7 years.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | Deferred
charges:
| | -- | -----------------

| | a) | Costs
relating to the obtaining of long-term credit lines are deferred and           amortized
using the effective interest rate determined for the borrowing           transactions
over the life of line of credit.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | Issuance
costs relating to Notes payable (see note 5) are amortized using the           effective
interest rate stipulated for the Notes.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | g. | Impairment
of long-lived assets
| | -- | -------------------------------

| | The
Company has adopted Statement of Financial Accounting Standards No. 144 (FAS 144), Accounting
for the Impairment or Disposal of Long-Lived Assets. FAS 144 requires that
long-lived assets, including certain intangible assets, to be held and used by an entity
be reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. Under FAS 144, if the sum of the
expected future cash flows (undiscounted and without interest charges) of the long-lived
assets is less than the carrying amount of such assets, an impairment loss would be
recognized, and the assets written down to their estimated fair values.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Cash
equivalents
| | -- | ----------------

| | The
Company considers all highly liquid investments, which include short-term bank deposits
(up to 3 months from date of deposit) that are not restricted as to withdrawal or use, to
be cash equivalents.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. | Comprehensive
income
| | -- | --------------------

| | The
Company has no comprehensive income components other than net income.
| | -------------------------------------------------------------------------

| | j. | Revenue
recognition
| | -- | -------------------

| | Revenues
from services primarily consist of charges for airtime, roaming and value added services
provided to the Companys customers, are recognized upon performance of the
services, net of credits and adjustments for services discounts. Revenues from pre-paid
calling cards are recognized upon customers usage of the cards. Revenues from sale
of handsets and accessories are recognized upon delivery and the transfer of ownership to
the subscriber.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from long-term credit arrangements (longer than one year) are recognized on the basis of
the present value of future cash flows, discounted according to interest rates at the
time of the transaction. The difference between the original credit and its present value
is recorded as interest income over the credit period.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Emerging
Issues Task Force (EITF) Issue 00-21, Revenue Arrangements with
Multiple Deliverables addresses the accounting, by a vendor, for contractual
arrangements in which multiple revenue-generating activities will be performed by the
vendor. EITF Issue 00-21 addresses when and, if so, how an arrangement involving multiple
deliverables should be divided into separate units of accounting. Based on EITF 00-21,
the Company determined that the sale of handsets with accompanying services constitutes a
revenue arrangement with multiple deliverables. Accordingly consideration received for
handsets, up to their fair value, that is not contingent upon the delivery of additional
items (such as the services), is recognized as equipment revenues, when revenue
recognition criteria for the equipment as stated above are met. Consideration for
services is recognized as services revenues, when earned.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | k. | Concentration
of credit risks  allowance for doubtful accounts
| | -- | ---------------------------------------------------------------

| | The
Companys revenues are derived from a large number of customers. Accordingly, the
Companys trade balances do not represent a substantial concentration of credit risk.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | An
appropriate provision for doubtful accounts is included in the accounts of the Company.
The allowance charged to expenses (including bad debts), determined as a percentage of
specific debts doubtful of collection, based upon historical experience, for the years
ended December 31, 2004, 2005 and 2006 totaled NIS 21,256,000, NIS 28,739,000 and NIS
26,470,000 ($ 6,265,000) (see note 12a), respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
cash and cash equivalents as of December 31, 2006 are deposited mainly with leading
Israeli banks. Therefore, in the opinion of the Company, the credit risk inherent in
these balances is remote.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2004, the Company factored most of its long-term trade receivables resulting from sales
of handsets. The factoring was made through clearing companies, on a non-recourse basis.
The sale of accounts receivable was recorded by the Company 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.
The resulting costs were charged to financial expenses-net, as incurred.
During the years ended December 31, 2004 and 2005, the Company factored NIS 331,611,000
and NIS 7,834,000, respectively, from long-term trade receivables.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | l. | Handsets
warranty obligations
| | -- | -----------------------------

| | The
provision for handsets warranty obligations is calculated at the rate of 1.0%-3.5% of the
cost of the handsets sold, see note 12c. The Company has entered into several agreements
under which the supplier does not provide any warranty but rather provides additional
handsets to satisfy its warranty obligation. In these cases, the Company provides for
warranty costs at the same time as the revenues are recognized.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | m. | Advertising
expenses
| | -- | --------------------

| | Advertising
expenses are charged to the statement of operations as incurred. Advertising expenses for
the years ended December 31, 2004, 2005 and 2006 totaled NIS 115,909,000, NIS 97,651,000
and NIS 105,035,000 ($ 24,860,000), respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n. | Deferred
income taxes
| | -- | ---------------------

| | Deferred
taxes are determined utilizing the asset and liability method, based on the differences
between the amounts presented in these financial statements and those taken into account
for tax purposes, in accordance with the applicable tax laws. Valuation allowances are
provided if, based upon the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized (see note 9d).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
tax assets and liabilities are presented as current or long-term items in accordance with
the nature of assets or liabilities to which they relate.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
tax assets in respect of carryforward tax losses are presented as current or long-term
assets, according to their expected utilization date.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | o. | Foreign
currency transactions and balances
| | -- | ------------------------------------------

| | Balances
in, or linked to, foreign currency are stated on the basis of the exchange rates
prevailing at balance sheet dates. For foreign currency transactions included in the
statements of operations, the exchange rates at transaction dates are used. Transaction
gains or losses arising from changes in the exchange rates used in the translation of
such balances are carried to financial income or expenses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Derivative
financial instruments (derivatives)
| | -- | ------------------------------------------------

| | The
Company has adopted FAS 133, as amended, which establishes accounting and reporting
standards for derivatives, including certain derivatives embedded in other contracts, and
for hedging activities. Under FAS 133, all derivatives are recognized on the balance
sheet at their fair value. On the date that the Company enters into a derivative
contract, it designates the derivative, for accounting purposes, as: (1) hedging
instrument, or (2) non-hedging instrument. Any changes in fair value are to be reflected
as current gains or losses or other comprehensive gains or losses, depending upon whether
the derivative is designated as a hedge and what type of hedging relationship exists.
Changes in fair value of non-hedging instruments are carried to financial
expenses-net on a current basis. To date, the Company did not have any contracts
that qualify for hedge accounting under FAS 133.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company occasionally enters into commercial (foreign currency) contracts in which a
derivative instrument is embedded. This embedded derivative is separated from
the host contract and carried at fair value when (1) the embedded derivative possesses
economic characteristics that are not clearly and closely related to the economic
characteristics of the host contract and (2) a separate, stand-alone instrument with the
same terms would qualify as a derivative instrument (see note 11).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | q. | Earning
Per Share (EPS)
| | -- | -----------------------

| | Basic
EPS is computed by dividing net income by the weighted average number of shares
outstanding during the years.
| | -------------------------------------------------------------------------------------------------------------------

| | Diluted
EPS reflects the increase in the weighted average number of shares outstanding that would
result from the assumed exercise of employee stock options, calculated using the
treasury-stock-method.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | r. | Stock
based compensation
| | -- | ------------------------

| | Prior
to January 1, 2006 the Company accounted for employee stock based compensation under the
intrinsic value model in accordance with Accounting Principles Board Opinion No. 25 Accounting
for Stock Issued to Employees (APB 25) and related interpretations. In
accordance with FAS 123  Accounting for Stock-Based Compensation (FAS
123), the Company disclosed pro forma data assuming the Company had accounted for
employee stock option grants using the fair value-based method defined in FAS 123.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2004, the Financial Accounting Standards Board (FASB) issued the
revised Statement of Financial Accounting Standards (FAS) No. 123,
Share-Based Payment (FAS 123R), which addresses the accounting for
share-based payment transactions in which the company obtains employee services in
exchange for (a) equity instruments of the company or (b) liabilities that are based on
the fair value of the companys equity instruments or that may be settled by the
issuance of such equity instruments .In March 2005, the SEC issued Staff Accounting
Bulletin No. 107 (SAB 107) regarding the SECs interpretation of FAS 123R.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FAS
123R eliminates the ability to account for employee share-based payment transactions
using APB Opinion No. 25  Accounting for Stock Issued to Employees, and
requires instead that such transactions be accounted for using the grant-date fair value
based method. This Statement applies to all awards granted or modified after the Statements
effective date. In addition, compensation cost for the unvested portion of previously
granted awards that remain outstanding on the Statements effective date shall be
recognized on or after the effective date, as the related services are rendered, based on
the awards grant-date fair value as previously calculated for the pro-forma
disclosure under FAS 123. Compensation expense for outstanding awards for which the
requisite service had not been rendered as of the effective date will be recognized over
the remaining service period using the compensation cost calculated for pro-forma
disclosure purposes under FAS 123.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted FAS 123R, as of January 1, 2006, using the modified prospective
application transition method, as permitted by FAS 123R. Under such transition method,
the Companys financial statements for periods prior to the effective date of FAS
123R (January 1, 2006) have not been restated. The adoption of FAS 123R resulted in a net
gain representing the cumulative effect of a change in accounting principle in an amount
of approximately NIS 1 million, which reflects the net cumulative impact of estimating
future forfeiture in the determination of period expense, rather that recording
forfeitures when they occur as previously required. The fair value of stock options
granted with service conditions, was determined using the Black & Scholes valuation
model, which is consistent with the Companys valuation techniques previously
utilized for options in footnote disclosures required under FAS 123, as amended by FAS
No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure. Such
value is recognized as an expense over the service period, net of estimated forfeitures,
using the accelerated method of amortization under FAS 123R.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

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---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | r. | Stock
based compensation (continued)
| | -- | ------------------------------------

| | The
estimation of stock awards that will ultimately vest requires significant judgment, and
to the extent actual results or updated estimates differ from the Companys current
estimates, such amounts will be recorded as a cumulative adjustment in the period those
estimates are revised. The Company considers many factors when estimating expected
forfeitures, including types of awards, employee class, and historical experience. Actual
results, and future changes in estimates, may differ substantially from the Companys
current estimates.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table illustrates the effect on net income and EPS assuming the Company had
applied the fair value recognition provisions of FAS 123 to its stock based employee
compensation for the years presented prior to the adoption of FAS 123R:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                       | Year ended December 31,
| | ------------------------------------- | -----------------------
|
|
|
|
| | Net income, as reported               |                        
| | Add: stock based employee             |                        
| | compensation expense-net,             |                        
| | included  in reported net             |                        
| | income - net of income taxes          |                        
| | Deduct: stock based employee          |                        
| | compensation expense-net,             |                        
| | determined under fair value           |                        
| | method for all awards - net of income |                        
| | taxes                                 |                        
| |                                       |                        
| | Pro-forma net income                  |                        
| |                                       |                        
| |                                       |                        
| | Earning per share:                    |                        
| | Basic - as reported                   |                        
| |                                       |                        
| | Basic - pro forma                     |                        
| |                                       |                        
| | Diluted - as reported                 |                        
| |                                       |                        
| | Diluted - pro-forma                   |                        
| |                                       |                        

F - 19

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---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | s. | Asset
retirement obligations
| | -- | ----------------------------

| | FAS
143 Accounting for Asset Retirement Obligations (FAS 143)
requires that an asset retirement obligation (ARO) associated with the retirement of a
tangible long lived asset be recognized as a liability in the period in which it is
incurred and becomes determinable (as defined by the standard), with an offsetting
increase in the carrying amount of the associated asset. The cost of the tangible asset,
including the initially recognized ARO, is depreciated such that the cost of the ARO is
recognized over the useful life of the asset.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
ARO is recorded at fair value, and the accretion expense will be recognized over time as
the discounted liability is accreted to its expected settlement value. The fair value of
the ARO is measured using expected future cash out flows discounted at the Companys
credit-adjusted risk-free interest rate. The Company is subject to asset retirement
obligations associated with its cell sites operating leases. These lease agreements
contain clauses requiring restoration of the leased site at the end of the lease term,
creating asset retirement obligations, see also note 12d.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | t. | Recently
issued accounting pronouncements:
| | -- | ------------------------------------------

| | 1) | In
February 2006, the Financial Accounting Standards Board (FASB)
               issued Statement of Financial Accounting Standards No. 155, Accounting for
               Certain Hybrid Financial Instruments (SFAS No. 155), which
amends                SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities                (SFAS No. 133) and SFAS No. 140, Accounting for
Transfers and                Servicing of Financial Assets and Extinguishments of
Liabilities (SFAS No.                140). SFAS No. 155 simplifies the
accounting for certain derivatives                embedded in other financial instruments
by allowing them to be accounted for as                a whole if the holder elects to
account for the whole instrument on a fair value                basis. SFAS No. 155 also
clarifies and amends certain other provisions of SFAS                No. 133 and SFAS No.
140. SFAS No. 155 is effective for all financial                instruments acquired,
issued or subject to a remeasurement event occurring in                fiscal years
beginning after September 15, 2006. Earlier adoption is permitted,
               provided the Company has not yet issued financial statements, including
for                interim periods, for that fiscal year. The Company does not expect
that the                adoption of SFAS No. 155 will have a material impact on the
Companys                results of operations and financial condition.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | In
June 2006, the FASB ratified EITF Issue No. 06-03 How Taxes Collected from
               Customers and Remitted to Governmental Authorities Should Be Presented in
the                Income Statement (That Is, Gross Versus Net Presentation) (Issue
No.                06-03). Under Issue No. 06-03, a company must disclose its
accounting                policy regarding the gross or net presentation of certain
taxes. If taxes                included in gross revenues are significant, a company must
disclose the amount                of such taxes for each period for which an income
statement is presented (i.e.,                both interim and annual periods). Taxes
within the scope of this Issue are those                that are imposed on and
concurrent with a specific revenue-producing                transaction. Issue No. 06-03
is effective for the first annual or interim                reporting period beginning
after December 15, 2006 (as of January 1, 2007 for                the Company). The
Companys current policy is to recognize revenue net of                VAT,
accordingly the Company does not expect this new accounting pronouncement
               to materially effect the Companys results of operations and
financial                condition and disclosure.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

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---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | 3) | In
July 2006, the FASB issued Interpretation No. 48 (FIN No. 48),
               Accounting for Uncertainty in Income Taxes, which clarifies the accounting
for                uncertainty in income taxes recognized in the financial statements in
accordance                with FASB Statement No. 109, Accounting for Income Taxes. FIN
No. 48                prescribes a two-step process to determine the amount of tax
benefit to be                recognized. First, the tax position must be evaluated to
determine the                likelihood that it will be sustained upon examination. If
the tax position is                deemed more-likely-than-not to be
sustained, the tax position is                then measured to determine the amount of
benefit to recognize in the financial                statements. The tax position is
measured at the largest amount of benefit that                is greater than 50 percent
likely of being realized upon ultimate settlement.                FIN No. 48 also
provides guidance on various related matters such as                derecognition,
interest and penalties and disclosure. FIN No. 48 is effective                for fiscal
years beginning after December 15, 2006 (as of January 1, 2007 for                the
Company). The Company does not expect the adoption of FIN No. 48 to have
               material impact on the Companys results of operations and financial
               condition and disclosure.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | In
September 2006 the FASB issued SFAS No. 157, Fair Value Measurements                (SFAS
No. 157), which provides guidance for using fair value to                measure
assets and liabilities. The standard also responds to investors               requests
for more information about (1) the extent to which companies measure
               assets and liabilities at fair value, (2) the information used to measure
fair                value, and (3) the effect that fair-value measurements have on
earnings. SFAS                No. 157 will apply whenever another standard requires (or
permits) assets or                liabilities to be measured at fair value. The standard
does not expand the use                of fair value to any new circumstances. SFAS No.
157 is effective for financial                statements issued for fiscal years
beginning after November 15, 2007, and                interim periods within those fiscal
years (as of January 1, 2008 for the                Company).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is currently evaluating the impact of SFAS No. 157 on the Companys results
of operations and financial condition.
| | ------------------------------------------------------------------------------------------------------------------------------

| | 5) | In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering
               the Effects of Prior Year Misstatements when Quantifying Misstatements in
               Current Year Financial Statements (SAB No. 108). SAB No. 108
               provides guidance on the consideration of the effects of prior year
               misstatements in quantifying current year misstatements for the purpose of
a                materiality assessment. SAB 108 establishes an approach that requires
               quantification of financial statement errors based on the effects of each
of the                companys balance sheet and statement of operations and the
related                financial statement disclosures. SAB No. 108 permits existing
public companies                to record the cumulative effect of initially applying
this approach in the first                year ending after November 15, 2006 by
recording the necessary correcting                adjustments to the carrying values of
assets and liabilities as of the beginning                of that year with the
offsetting adjustment recorded to the opening balance of                retained
earnings. Additionally, the use of the cumulative effect transition                method
requires detailed disclosure of the nature and amount of each individual
               error being corrected through the cumulative adjustment and how and when
it                arose. The Company has adopted SAB No. 108. The adoption of SAB No. 108
did not                result in corrections of the Companys financial statements.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | Reclassifications
| | -- | -----------------

| | Certain
comparative figures have been reclassified to conform to the current year presentation.
| | -----------------------------------------------------------------------------------------------

F - 21

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 2  FIXED
ASSETS:

| | a. | Composition
of fixed assets  net, is as follows:
| | -- | -------------------------------------------------

| |                                                  | December 31
| | ------------------------------------------------ | -----------
|
|
|
|
| | Communications network                           |            
| | Computers, hardware and software for             |            
| | information systems                              |            
| | Office furniture and equipment                   |            
| | Leasehold improvements                           |            
| | Cellular telephones - base stock                 |            
| | Optic fibers                                     |            
| |                                                  |            
| |                                                  |            
| | Less - accumulated depreciation and amortization |            
| |                                                  |            
| |                                                  |            
| |                                                  |            

| | The
cost of communication network in the amount of approximately NIS 1,258 million is fully
depreciated and still in use.
| | -------------------------------------------------------------------------------------------------------------------------

| | Depreciation
and amortization in respect of fixed assets totaled NIS 482,390,000, NIS 575,606,000 and
NIS 529,560,000 ($ 125,340,000) for the periods ended December 31, 2004, 2005 and 2006,
respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Fixed
assets include interest expenses, direct consultation and supervision
               costs and other direct costs of establishing the cellular communications
network                and information systems, which were capitalized (before commencing
full                commercial operations or utilization of the related fixed assets) in
respect of:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                          | December 31
| | -------------------------------------------------------- | -----------
|
|
|
|
| | Communications network                                   |            
| | Computers, hardware and software for information systems |            
| |                                                          |            
| |                                                          |            
| | L  e  s  s  - accumulated depreciation                   |            
| |                                                          |            
| | Depreciated balance                                      |            
| |                                                          |            

| | c. | As
to pledges on the fixed assets  see note 10.
| | -- | ------------------------------------------------

F - 22

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---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 3  LICENSE,
DEFERRED CHARGES AND OTHER INTANGIBLE ASSETS:

| |                                             | December 31
| | ------------------------------------------- | -----------
|
|
|
|
| | License (note 1a(2))                        |            
| | Less - accumulated amortization             |            
| |                                             |            
| |                                             |            
| |                                             |            
| | Customers relationship                      |            
| | Less - accumulated amortization             |            
| |                                             |            
| |                                             |            
| |                                             |            
| | Deferred charges - in respect of obtaining: |            
| | Long-term credit lines                      |            
| | Notes payable                               |            
| |                                             |            
| |                                             |            
| | Less - accumulated amortization             |            
| |                                             |            
| |                                             |            
| |                                             |            
| |                                             |            
| |                                             |            

| | License
amortization expenses for the years ended December 31, 2004, 2005 and 2006 totaled NIS
63,931,000, NIS 79,255,000 and NIS 79,395,000 ($ 18,792,000), respectively. Amortization
expenses on deferred charges for the years ended December 31, 2004, 2005 and 2006 totaled
NIS 11,901,000, NIS 28,642,000 and NIS 11,950,000 ($ 2,828,000), respectively  2005
 includes NIS 11,064,000 in respect of the redemption of the Notes, see also note
5b.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amortization
expenses on customers relationship for the year ended December 31, 2006 totaled NIS
1,529,000 ($ 362,000).
| | -----------------------------------------------------------------------------------------------------------------------

F - 23

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---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 3  LICENSE, DEFERRED
CHARGES AND OTHER INTANGIBLE ASSETS(continued):

| | The
expected amortization expenses of the license and customers relationship for the next
five years are as follows:
| | --------------------------------------------------------------------------------------------------------------------

|                        | NIS | Convenience
translation into
dollars
|----------------------- | --- | ------------------------------------
|
|
|
|
|Year ended December 31: |     |                                     
|2007                    |     |                                     
|2008                    |     |                                     
|2009                    |     |                                     
|2010                    |     |                                     
|2011                    |     |                                     

# NOTE 4  LONG-TERM
BANK LOANS

| | The
Company has a senior credit facility with Bank Hapoalim B.M., Bank Leumi Le-Israel B.M.
and Israel Discount Bank Ltd., in which United Mizrahi Bank Ltd. also participates. The
facility is divided into two tranches: a $150 million term loan facility (Facility A)
and a $100 million revolving loan facility (Facility B), both expiring on
September 1, 2009. Facility A must be reduced to $50 million by August 31, 2008. Until
February 19, 2007, the facilities were secured by a first ranking floating charge on the
Companys assets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
effect March 1, 2007, the Company reduced Facility A to $75 million (in addition to an
advance of approximately $25 million carried over from the Companys previous
facility, which on balance sheet date, was reduced to $11 million), and Facility B to $75
million. As a result, the total maximum availability under the facility is currently
approximately $161 million.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
credit facility is a US dollar denominated facility, and advances may be drawn in US
dollars and New Israeli Shekels, as set forth in c below.
| | --------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

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---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 4  LONG-TERM
BANK LOANS(continued)

| | a. | Status
of the credit facility at December 31, 2006 is as follows:
| | -- | -----------------------------------------------------------------

| |            | Total
availability | Amounts
drawn | Amounts
available for
drawing
| | ---------- | ------------------ | ------------- | -----------------------------
|
|
|
|
| | Facility A |                    |               |                              
| | Facility B |                    |               |                              
| |            |                    |               |                              
| |            |                    |               |                              
| |            |                    |               |                              

| | b. | The
amounts outstanding, classified by linkage terms and interest rates, are as
          follows:
| | -- | --------------------------------------------------------------------------------------------------

| |                                | December 31
| | ------------------------------ | -----------
|
|
|
|
| |                                |            
| | In NIS - linked to the Israeli |            
| | consumer price index (CPI) (1) |            
| | In NIS - unlinked (2)          |            
| |                                |            
| |                                |            
| | Less - current maturities      |            
| |                                |            
| |                                |            
| |                                |            

| | (1) | Linkage
terms apply both to principal and interest.
| | --- | ---------------------------------------------------

| | (2) | The
loans bear interest at the on-call rate (a varying inter-bank           rate
in Israel), prime rate or fixed unlinked rate.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------

| | * | The
difference between the amounts displayed is the difference in exchange rates between the
date the amounts were drawn and that at the balance sheet date.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Facilities
A and B, may be drawn in NIS or US dollars, provided that the amount                of
principal outstanding in US dollars under the credit facility with respect to
               each participating lender shall not exceed 10% of that lenders total
               commitment unless otherwise agreed in advance.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | There
is a range of options as to how interest is calculated on borrowings           under the
credit facility. These options include fixed and variable rates, based           upon the
lending rates of each participating banks with a margin of 0.85%.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

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---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 4  LONG-TERM BANK LOANS(continued):

| | e. | Under
the credit facility the Company is required, inter alia, to fulfill           certain
operational conditions and to maintain certain financial ratios. If the           Company
defaults on the covenants, the banks are entitled to demand early           repayment of
the credit facility  in whole or in part. Under the credit           facility, the
Company has undertaken not to make distributions to its           shareholders, including
dividends, unless it complies with certain financial           ratios specified in the
Agreement or as otherwise agreed by the banks. The           Company believes that it is
in compliance with all covenants stipulated in the           credit facility.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | As
to pledges to secure loans and liabilities and other restrictions placed           with
respect thereto, see note 10.
| | -- | ------------------------------------------------------------------------------------------------------------------------

# NOTE 5  NOTES
PAYABLE:

| | a. | On
March 31, 2005, the Company completed an offering of NIS 2,000 million of
          unsecured notes, which were issued at their NIS par value. The notes have been
          registered in Israel and are traded on the Tel-Aviv Stock Exchange (TASE). Of
          these notes approximately NIS 36.5 million were purchased by Partner Future
          Communications 2000 Ltd., (PFC) a wholly owned subsidiary of the
          Company. PFC also received an additional allocation of notes having an
aggregate           principal amount of NIS 500 million. This notes that PFC received
pursuant to           this additional allocation do not confer the right to receive any
payment           whatsoever on account of principal or interest until they are sold by
PFC to a           third party.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
net proceeds from the offering were approximately NIS 1,929 million after deducting the
notes purchased by PFC, commissions and offering expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
principal amount of the Notes is payable in 12 equal quarterly installments, beginning
June 30, 2009 until March 31, 2012. The Notes bear NIS interest at the rate of 4.25% per
annum, linked to the Israeli Consumer Price Index, which is payable quarterly on the last
day of each quarter, commencing June 30, 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 31, 2006, the Notes closing price was 102.42 points par value.
| | --------------------------------------------------------------------------

| | Commission
fees and offering expenses in respect of the offering of the Notes totaled approximately
NIS 34 million. These expenses are presented as deferred charges and the amortization in
respect thereof is included in financial expenses, net.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

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---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5  NOTES PAYABLE
(continued)

| | b. | On
August 10, 2000, the Company completed an offering of $ 175 million of
          unsecured 13% Senior Subordinated Notes due 2010, which were issued at their
          dollar par value. The notes were registered under the U.S. Securities Act of
          1933.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 15, 2005, the Company exercised it right to redeem the notes at a redemption price
of 106.5% of their dollar par value  according to the option stipulated in the
Notes document. As a result of the redemption of the Notes the Company has recognized as
financial expenses an amount of approximately NIS 63 million, which after tax resulted in
a decrease of the Companys net income of NIS 42 million.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 6  LIABILITY
FOR EMPLOYEE RIGHTS UPON RETIREMENT:

| | a. | Israeli
labor laws and agreements require payment of severance pay upon           dismissal of an
employee or upon termination of employment in certain other           circumstances. The
Companys severance pay liability to its employees,           mainly based upon
length of service and the latest monthly salary (one           months salary for
each year worked), is reflected by the balance sheet           accrual under the liability
for employee rights upon retirement. The           Company records the liability as
if it was payable at each balance sheet date on           an undiscounted basis. The
liability is partly funded by purchase of insurance           policies and the amounts
funded are included in the balance sheet under           investments and long-term
receivables, as funds in respect of employee           rights upon retirement.
The policies are the Companys assets and           under labor agreements, subject
to certain limitations, they may be transferred           to the ownership of the
beneficiary employees.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | The
severance pay expenses for the years ended December 31, 2004, 2005 and 2006
               were approximately NIS 27 million, NIS 24 million and NIS 28 million
               (approximately $ 6.6 million), respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Cash
flows information regarding the companys liability for employee
               rights upon retirement:
| | -- | ------------------------------------------------------------------------------------------------------------

| | 1. | The
Company expects to contribute NIS 22 million ($ 5 million) in respect of
               severance pay in 2007.
| | -- | ------------------------------------------------------------------------------------------------------------------

| | 2. | Due
to the relatively young age of the Companys employees, benefit
               payments to employees reaching retirement age in the next 10 years, are
not                material. The amounts were determined based on the employees current
               salary rates and the number of service years that will accumulate upon
their                retirement date. These amounts do not include amounts that might be
paid to                employees who will cease working for the Company before their
normal retirement                age.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 7 
COMMITMENTS AND CONTINGENT LIABILITIES:

| | a. | Commitments:
| | -- | ------------

| | 1) | Royalty
Commitments
| | -- | -------------------

| | The
Company is committed to pay royalties to the Government of Israel on its income
from cellular services as defined in the Telecommunications (Royalties)
Regulations, 2001 (hereafter  the Regulations), which includes all kinds of
income of the Company from the granting of Bezeq services under the license including
airtime, roaming services and non-recurring connection fees, but excluding income
transferred to another holder of a communications license and deducting bad debts,
payments to another communication licensee in respect of interconnection, payments for
roaming services to foreign operators and expenses related to the sale of equipment.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 18, 2001, the Knessets Finance Committee approved the Telecommunications
(Royalties) Regulations, 2001 (hereafter  the Regulations). During 2004, a
reduction in the percentage of royalties was approved; accordingly, the rate of royalty
payments (3.5%) paid by cellular operators reduced annually by 0.5%, starting January 1st
2006, to a level of 1% at 2010.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
royalty expenses for the periods ended December 31, 2004, 2005 and 2006 were
approximately NIS 120,131,000, NIS 122,599,000 and NIS 114,462,000 ($ 26,900,000),
respectively, and are included under cost of services revenues.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Under
the Telegraph Regulations the Company is committed to pay an annual fixed
               fee for each frequency used. The Company paid a total amount of
approximately                NIS 31 million, NIS 47 million and NIS 55 million ($ 13
million), for the year                2004, 2005 and 2006, respectively. Under the above
Regulations should the                Company choose to return a frequency such payment
is no longer due.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | Operating
leases
| | -- | ----------------

| | The
Company has entered into operating lease agreements as follows:
| | -------------------------------------------------------------------

| | a) | Lease
agreements for its headquarters facility in Rosh Haayin for a
          fifteen-year period (until 2018). The Company has an option to shorten the
lease           periods by 3.5 to 8.5 years. The rental payments are linked to the
Israeli CPI.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | Lease
agreements for service centers and retail stores for a period of two to           five
years. The Company has an option to extend the lease periods for up to           twenty
additional years (including the original lease periods). The rental           payments
are linked partly to the dollar and partly to the Israeli CPI. Some of           the
extension options include an increase of the lease payment in a range of
          2%-10%.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | Lease
agreements in respect of cell sites throughout Israel are for periods of
               two to three years. The Company has an option to extend the lease periods
up to                ten years (including the original lease periods). The rental
payments fees are                partly linked to the dollar and are partly linked to the
Israeli CPI. Some of                the extension options include an increase of the
lease payment in a range of                2%-10%.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7  COMMITMENTS AND
CONTINGENT LIABILITIES(continued):

| | d) | Operating
lease agreements in respect of vehicles are for periods of three                years.
The rental payments are linked to the Israeli CPI.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | e) | The
minimum projected rental payments (including the payments in the periods of           the
reasonably assured option terms) for the next five years, at rates in effect           at
December 31, 2006, are as follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                         | NIS | Convenience
translation
into dollars
| | ----------------------- | --- | ------------------------------------
|
|
|
|
| | Year ended December 31: |     |                                     
| | 2007                    |     |                                     
| | 2008                    |     |                                     
| | 2009                    |     |                                     
| | 2010                    |     |                                     
| | 2011                    |     |                                     
| | 2012 and thereafter     |     |                                     
| |                         |     |                                     
| |                         |     |                                     
| |                         |     |                                     

| | f) | The
rental expenses for the years ended December 31, 2004, 2005 and 2006 were
               approximately NIS 176 million, NIS 185 million, and NIS 198 million ($ 47
               million), respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | At
December 31, 2006, the Company is committed to acquire fixed assets, for
          approximately NIS 249 million (approximately $ 59 million).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | 5) | At
December 31, 2006, the Company is committed to acquire handsets for
          approximately NIS 164 million (approximately $ 39 million).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------

| | 6) | As
to cost sharing agreement with Hutchison Telecommunications Limited, see           note
13c.
| | -- | -----------------------------------------------------------------------------------------------

| | b. | Contingent
Liabilities:
| | -- | -----------------------

| | 1) | On April 8, 2002, a claim was filed
against the Company, together with a motion to certify this claim as a class action,
alleging a variety of consumer complaints. The amount of the claim against the Company is
estimated at approximately NIS 545 million plus additional significant amounts relating to
other alleged damages. On March 14, 2007, the court rejected the class action and negated
the claim.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7  COMMITMENTS AND
CONTINGENCIES(continued):

| | 2) | On
April 13, 2003, a claim was filed against the Company and other cellular
          telecommunication companies, together with a request to recognize this claim as
          a class action, for alleged violation of antitrust law, alleging that no fee
          should have been collected for incoming SMS messages or alternatively, that the
          fee collected is excessive and that it is a result of illegal co-operation
          between the defendants. The amount of the claim against all the defendants is
          estimated at approximately NIS 90 million (or according to the claimants
          response  NIS 100 million per year until 1.3.2005). The Company filed its
          response on October 1, 2003. The claimants have filed their response to the
          Companys response on July 12, 2005. One of the respondents to the
          certification motion filed a motion to dismiss the documents attached to the
          plaintiffs response from the courts file (to which motion the
          Company concurred) and the Court granted this motion. The plaintiffs have filed
          a motion to grant leave to appeal this decision, which is now pending before
the           Supreme Court.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
this stage, and unless and until the claim is recognized as a class action, the Company
and its legal council are unable to evaluate the probability of success of such claim,
and therefore no provision has been made.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | During the year 2006, claims were
filed against the Company and other cellular telecommunication companies and, in one of
the claims, also against land line telecommunication companies, together with a request to
recognize these claims as a class action for collection of undue payment from its
customers on calls to land line companies when the receiver of the call hangs up first.
The plaintiffs maintain that the Company should stop charging its customers when the land
line operator subscriber hangs up, while in fact the cellular company continues to charge
until the initiator of the call (the Company subscriber) hangs up. The amount of the
claims against all the defendants is estimated, in one of the claims at approximately
NIS 100 million for the seven year period leading up to the filing of the claim; and
in the other claim the amount of the claim against the Company together with land line
companies at approximately NIS 53 million. At this stage, and until the claims are
recognized as class actions, the Company and its legal council are unable to evaluate the
probability of success of such claims and therefore no provision has been made.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | In
August 2006 the Company, together with the other cellular operators
          (hereinafter together  the petitioners), submitted a request to hold an
          urgent hearing, and a motion for an order nisi against the Government of Israel
          and the Minister of Communications to explain why they do not act immediately
to           postpone the date for implementing and activating the number portability
plan           from September 1, 2006, as provided in the Communications law (Bezeq and
          Broadcasts)  1982 (the Communications Law).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In the motion it is contended that
none of the relevant holders of Communication licenses in Israel can meet the time
schedules provided in the Communications Law, so that all the holders of these licenses in
Israel, including the petitioners, might as from September 1, 2006 unwillingly face claims
of violation of the Communications Law and the license. In May 2007 the Ministry of
Communications announced that the latest implementation date for number portability is
December 1, 2007. However, they are considering imposing substantial monetary sanctions on
relevant telecommunication license holders, including the Company, in accordance with the
Telecommunications Law for alleged violation of the obligation to implement number
portability by September 2006. We can submit our position to the Ministry of
Communications until June 24, 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7  COMMITMENTS AND
CONTINGENCIES(continued):

| | On
January 25, 2007 a claim of NIS 10.61 billion, together with a request for a
certification as a class action, were filed against the Company and against Bezeq  The
Israeli Telecommunication Co. Ltd., Hot Cable Systems Media Ltd., Cellcom Israel Ltd.,
Pelephone Communications Ltd. The claim is that the defendants have not implemented
number portability and are in violation of the Communication Law, mandating the
implementation of telephone number portability on September 1, 2006. It is claimed that
the defendants are thus harming the claimants and consumers of telephone services in
general. The claimants are demanding NIS 1,000 for each customer and relate to the
Company (a total of 2,626,000 customers). The claimants reserve their right to increase
the amount of the lawsuit as long as the claimed violation continues.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
this stage, and unless and until the claim is recognized as a class action, the Company
and its legal council are unable to evaluate the probability of success of such claim,
and therefore no provision has been made.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5) | On
February 27, 2007, a claim was filed against the Company and two other           cellular
telecommunication companies together with a request to recognize this           claim as
a class action. The claim is for sums that were allegedly overcharged           in breach
of the Company licenses, based on intervals larger than the intervals           the
defendants were allegedly authorized to charge under their licenses, for           calls
initiated or received by the subscribers while abroad. If the lawsuit is
          classified as a class action, the total amount claimed from the defendants is
          estimated by the plaintiffs to be approximately NIS 449 million, of which,
          approximately NIS 88 million, is attributed to the Company.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
this stage, and until the claim is recognized as a class action, the Company and its
legal council are unable to evaluate the probability of success of such claim, and
therefore no provision has been made.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6) | On
May 24 2007, a claim was filed against the Company and another Israeli cellular company
together with a request to recognize this claim as a class action. The claim alleges that
the defendants charged their subscribers undue roaming rates, while their cellular phones
were located in Israel and randomly roamed over foreign networks of neighboring
countries. If the claim is certified as a class action, the total amount claimed against
the Company is estimated by the plaintiffs to be at least NIS 21.3 million.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
this stage, and until the claim is recognize as a class action, the Company and its legal
council are unable to evaluate the probability of success of such claim and therefore no
provision has been made.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7) | During
the year 2006 and until the balance sheet date some more claims were           filed
against the Company in various subjects, together with a request to           recognize
these claims as class actions. The total amount of the claims against           the
Company is estimated at approximately NIS 143 million.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
this stage, and until the claims are recognized as a class action, the Company and its
legal council are unable to evaluate the probability of success of such claims and
therefore no provision has been made.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7  COMMITMENTS AND
CONTINGENCIES(continued):

| | 8) | The
Company does not have building permits for many of its cell sites and as a
          result is involved in numerous legal actions (including criminal proceedings
          against officers and directors) relating to this issue. Most of these
          proceedings have been settled under plea bargain arrangements, whereby the
          Company has paid fines of insignificant amounts.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management,
based upon current experience and the opinion of legal counsel, does not believe that
these legal actions will result in significant costs to the Company. The accounts do not
include a provision in respect thereof.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 9) | Section
197 of the Building and Planning Law states that a property owner has           the right
to be compensated by a local planning committee for reductions in           property
value as a result of a new building plan.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2006, the Non-ionizing Radiation Law was published, amending the Planning and
Building Law so that local Planning and Building committees must require indemnification
letters against reduction in property value from the cellular operators requesting
building permits.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accordingly,
on January 3, 2006, the National Council for Planning and Building published an interim
decision conditioning the issuance of building permits for cell site permits by local
planning and building councils upon provision of a 100% indemnification undertaking by
the cellular operators.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | This
decision shall remain in effect until it is replaced with an amendment to the National
Zoning Plan 36.
| | -----------------------------------------------------------------------------------------------------------

| | Since
January 3, 2006 the Company has provided the local authorities with approximately 100
indemnification letters as a pre-condition for obtaining building permits, while prior to
January 2006, the Company has provided the local authorities with 22 undertakings to
provide such letter of indemnification.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Due
to the fact that an enactment of law regarding this matter is not yet in place, at this
stage the extent of the Companys exposure from granting indemnification letters can
not be evaluated accurately.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | However,
if the Company shall be required to make substantial payments under the indemnity
letters, it could have an adverse effect on the Companys financial results.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
assume, that the requirement to provide indemnification letters might require us to
change locations of sites to different, less suitable locations and to dismantle some of
our sites. These changes in the deployment of the sites might have an adverse effect on
the extent, quality and capacity of our network coverage.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10) | The
Company is a party to various claims arising in the ordinary course of its
          operations. Management, based upon the opinion of its legal counsel, is of the
          opinion that the ultimate resolution of these claims will not have a material
          effect on the financial position of the Company, its result of operations and
          cash flows. The accounts do not include a provision in respect thereof.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 11) | As
to contingency in respect of income tax, see note 9e.
| | --- | --------------------------------------------------------

F - 32

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 8 
SHAREHOLDERS EQUITY:

| | a. | Share
capital:
| | -- | --------------

| | The
Companys shares are traded on the Tel-Aviv stock exchange (TASE), on the London
Stock Exchange (LSE) and, in the form of American Depository Receipts (ADRs),
each represent one ordinary share, on the NASDAQ National Market (Nasdaq  NM).
During 2001, the Company listed its shares in the TASE according to the dual listing
regulations. On December 31, 2006, the closing price per ADR on the Nasdaq  NM was
$ 11.43; the Companys shares were quoted on that date on the TASE at NIS 48.28 ($
11.43).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the provisions of the license granted to the Company (note 1a(2)), restrictions are
placed on transfer of Company shares and placing liens thereon. The restrictions include
the requirement that the advance written consent of the Minister of Communications be
received prior to transfer of 10% or more of the Companys shares to a third party.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 26, 2001, the Company filed a shelf registration statement on Form F-3 with the
United States Securities and Exchange Commission for future offerings of its securities.
Under the shelf registration, the Company can raise up to $400 million from the issue of
ordinary shares and debt securities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 20, 2005, the Company repurchased approximately 33.3 million of its shares pursuant
to an offer received from its founding Israeli Shareholders in February 2005. These
shareholders held together approximately 22.5% of the Companys outstanding shares
at the time of the offer. As a result of the repurchase, the collective shareholdings of
the founding Israeli shareholders was reduced to approximately 5.4% of the Companys
issued and outstanding share capital. The price per share at which these shares were
acquired was NIS 32.2216 per share. The shares were cancelled pursuant to the repurchase.
The excess of cost over its par value was charged to accumulated deficit.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Employees
stock option plans:
| | -- | ------------------------------

| | 1) | a. | On
March 3, 1999, the Companys Board of Directors approved an           employee stock
option plan (hereafter  the 1998 Plan),           pursuant to which
5,833,333 ordinary shares were reserved for issuance upon the           exercise of
5,833,333 options to be granted to key employees without           consideration, of
which 729,166 options were later cancelled. Through December           31, 2006  5,505,557
options have been granted pursuant to the 1998 Plan,           of which 4,886,524 options
have been exercised and 597,139 options were           forfeited and 1 expired (options
forfeited and expired were available for           subsequent grants).
| | -- | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options vest in five equal annual batches over a period of five years from the beginning
of employment of each employee, unless otherwise provided in the grant instrument,
provided the employee is still in the Companys employ. An option not exercised
within 8 years from the date of its allotment shall expire. The exercise price per share
of the options granted through December 31, 2000, which is denominated in dollars, is $
0.343. During 2002, the Company granted options under the 1998 Plan in accordance with
the terms of the 2000 plan, including the exercise price, vesting schedule and expiration
date (see b. below).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006  195,750 options of the 1998 Plan remain ungranted.
| | ----------------------------------------------------------------------------

F - 33

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8  SHAREHOLDERS
EQUITY(continued):

| | b. | In
October 2000, the Companys Board of Directors approved an employee           stock
option plan (hereafter  the 2000 Plan), pursuant to           which
4,472,222 ordinary shares were reserved for issuance upon the exercise of
          4,472,222 options to be granted to employees without consideration. The options
          vest in four equal annual batches over a period of four years from the date of
          grant of the option, provided the employee is still in the Companys
          employ. The option holder may exercise all or part of his options at any time
          after the date of vesting but no later than the expiration of the exercise
          period, which will fixed by the Employee Stock Option Committee and will not
          exceed ten years from the date of option grant.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
NIS denominated exercise price per share of the options, is equal to the market price of
the Companys shares on the date on which the options are granted.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
November 2003, 419,930 options of this plan were transferred to options under the 2003
amendment Plan (see c. below). Through December 31, 2006  5,317,555 options were
granted pursuant to the 2000 Plan, of which 3,219,866 options have been exercised,
1,395,333 options were forfeited and 102,250 expired (options forfeited and expired were
available for subsequent grants). As of December 31, 2006  232,320 options of the
2000 Plan remain ungranted.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | On
November 13, 2003, the Companys Board of Directors approved an           amendment
to the terms and provision of the 2000 Plan, in order to adjust the           terms of
the 2000 Plan to comply with new tax legislation that came into force           in
January 2003. On December 2003, the Company offered the employees, who           received
options under the 2000 plan, to exchange their unvested options, with           the same
amount of identical options, under the amended plan and to benefit from           the
capital gains tax route pursuant to Section 102(b)(2) of the Israeli
          Income Tax Ordinance. Employees holding options to purchase 962,104 ordinary
          shares accepted this offer.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 30, 2003, the Companys Board of Directors approved the grant of 195,000
options (out of the 419,930 options that were transferred from the 2000 Plan) under the
2003 amended Plan with an exercise price of NIS 20.45  which was less than the
market price on the date of grant. Through December 31, 2006 132,500 options have been
exercised. As of December 31, 2006  224,930 options of the 2003 amended Plan remain
ungranted.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options vest in four equal annual batches over a period of four years from the date of
grant of the option, provided the employee is still in the Companys employ.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | In
July 2004, the Companys Board of Directors approved a stock option           plan
(hereafter  the 2004 Plan), pursuant to which 5,775,000
          ordinary shares were reserved for issuance upon the exercise of 5,775,000
          options to be granted without consideration. The options vest in four equal
          annual batches, provided the employee is still in the Companys employ.
The           option holder may exercise all or part of his options at any time after the
date           of vesting but no later than the expiration of the exercise period, which
will           fixed by the Employee Stock Option Committee and will not exceed ten years
from           the date of option grant.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8  SHAREHOLDERS
EQUITY(continued):

| | Through
December 31, 2006  6,210,000 options have been granted to Companys employees
pursuant to the 2004 Plan, of which 706,375 options have been exercised, 1,112,125
options were forfeited and 3,125 options expired (options forfeited and expired are
available for subsequent grants).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006  680,250 of the 2004 Plan remain ungranted.
| | --------------------------------------------------------------------

| | After
balance sheet date 300,000 options were granted to employees.
| | -------------------------------------------------------------------

| | The
NIS denominated exercise price per share of the options, is equal to the average market
price of the Companys shares for the 30 trading days preceding the day on which the
options are granted, less 15%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | The
ordinary shares derived from the exercise of the options confer the same           rights
as the other ordinary shares of the Company.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------

| | f. | The
plans are subject to the terms stipulated by Section 102 of the Israeli           Income
Tax Ordinance. Inter alia, these terms provide that the Company will be           allowed
to claim, as an expense for tax purposes, the amounts credited to the           employees
as a benefit in respect of shares or options granted under the plans,           as
follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Through
December 31, 2003, the amount that the Company will be allowed to claim as an expense for
tax purposes will be the amount of the benefit taxable in the hands of the employee.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | From
January 1, 2004, the amount that the Company will be allowed to claim as an expense for
tax purposes, will be the amount of the benefit taxable as work income in the hands of
the employee, while that part of the benefit that is taxable as capital gains in the
hands of the employee shall not be allowable. All the above is subject to the
restrictions specified in Section 102 of the Income Tax Ordinance.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
aforementioned expense for tax purposes will be recognized in the tax year that the
employee is taxed, except as described below.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2002, the Company signed an agreement with the tax authorities concerning the
tax liabilities of its employees regarding the benefit arising from the options granted
to them. According to the agreement, the individual tax rate on the taxable income
received by the employees in connection with the benefit arising from the options will be
reduced; in return, the Company will defer the deduction of such an expense, for a period
of 4 years from the date it commences paying income taxes.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
agreement applies only to employees who have agreed to participate in the arrangement,
and relates to (1) options that were exercised by December 31, 2002; and/or (2) options
that vest by December 31, 2003 and were exercised by March 31, 2004. In each case, the
Section 102 trustee must have held the options for a period of 24 months from the date on
which they were granted.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8  SHAREHOLDERS
EQUITY(continued):

| | 2) | Following
is a summary of the status of the plans as of December 31, 2004, 2005           and 2006
and the changes therein during the years ended on those dates:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   | Year ended December 31
|---------------------------------- | ----------------------
|
|
|
|
|Balance outstanding at beginning   |                       
|of year                            |                       
|Changes during the year:           |                       
|Granted**                          |                       
|Exercised                          |                       
|Forfeited                          |                       
|Expired                            |                       
|                                   |                       
|Balance outstanding at end of year |                       
|                                   |                       
|Balance exercisable at end of year |                       
|                                   |                       

| | * | Includes
options under the 1998 Plan, the exercise price of which is weighted based on the
applicable dates NIS  dollar exchange rate.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| | ** | Below
market price.
| | -- | -------------------

| | *** | The
total intrinsic value of options exercised during 2004, 2005 and 2006 is NIS 23.0
million, NIS 35.5 million and NIS 36.8 million, respectively.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | The
weighted average fair value of options granted using the Black & Scholes
option-pricing model during 2004, 2005 and 2006 is NIS 18.98, NIS 21.36 and NIS 10.82 ($
2.56), respectively. The fair value of each option granted is estimated on the date of
grant based on the following weighted average assumptions: weighted average dividend
yield of 2004-2005 0% and 2006  6.14%; expected volatility of 55%, 58% and 39%,
respectively; risk-free interest rate: 2004  4%, 2005  3.5%, 2006  5.5%;
weighted average expected life: 5 years. The expected volatility is based on a historical
volatility, by statistical analysis of the daily share price for periods corresponding
the options expected term. The expected term is expected length of time until
expected date of exercising the options, based on historical data on employees exercise
behavior.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, there was NIS 20.4 million of total unrecognized compensation cost
(net of forfeitures) related to nonvested share-based compensation arrangements granted
under the plans.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 36

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8  SHAREHOLDERS
EQUITY(continued):

The following table summarizes
information about options outstanding at December 31, 2006:

| | Options outstanding
| | -------------------
|
|
|
|
| |                    
| |                    
| |                    
| |                    
| |                    
| |                    
| |                    
| |                    

| | Options exercisable
| | -------------------
|
|
|
|
| |                    
| |                    
| |                    
| |                    
| |                    
| |                    
| |                    
| |                    

| | c. | Dividends
| | -- | ---------

| | During
the year 2006 the Company distributed to its shareholders a cash dividend in the amount
of NIS 307 million.
| | ------------------------------------------------------------------------------------------------------------------

| | On
January 31, 2007, the Companys Board of Directors resolved and recommended the
distribution of a cash dividend in the amount of NIS 1.28 per share (approximately NIS
201 million ($48 million)) to shareholders of record on February 20, 2007. Cash dividends
are paid in Israeli currency.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9  TAXES
ON INCOME:

| | a. | Measurement
of results for tax purposes under the Income Tax (Inflationary Adjustments) Law,
1985
| | -- | -------------------------------------------------------------------------------------------------

| | Under
this law, results for tax purposes are measured in real terms, having regard to the
changes in the Israeli CPI. The Company and its subsidiary are taxed under this law.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Tax
rates applicable to income of the Company and its subsidiary
| | -- | ----------------------------------------------------------------

| | The
income of the company and its Israeli subsidiaries is taxed at the regular rate. Through
December 31, 2003, the corporate tax was 36%. In July 2004, Amendment No. 140 to the
Income Tax Ordinance was enacted. One of the provisions of this amendment is that the
corporate tax rate is to be gradually reduced from 36% to 30%. In August 2005, a further
amendment (No. 147) was published, which makes a further revision to the corporate tax
rates prescribed by Amendment No. 140. As a result of the aforementioned amendments, the
corporate tax rates for 2004 and thereafter are as follows: 2004  35%, 2005 34%,
2006  31%, 2007  29%, 2008  27%, 2009  26% and for 2010 and
thereafter  25%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the changes in the tax rates, the company adjusted  in each of the
years 2004 and 2005  at the time the aforementioned amendments were made, its
deferred tax balances, in accordance with the tax rates expected to be in effect in the
coming years; the effect of the change has been carried to income on a current basis.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Losses
carried forward to future years
| | -- | --------------------------------------

| | At
December 31, 2006, the subsidiary of the Company had carryforward losses of approximately
NIS 13 million (approximately $ 3 million). The carryforward tax losses are linked to the
Israeli CPI and can be utilized indefinitely.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 38

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9  TAXES
ON INCOME(continued):

| | d. | Deferred
income taxes
| | -- | ---------------------

| | The
major components of the net deferred tax asset, current and non-current, in respect of
the balances of temporary differences and the related valuation allowance as of December
31, 2005 and 2006, are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                     | December 31
| | ----------------------------------- | -----------
|
|
|
|
| | In respect of carryforward tax      |            
| | losses (see c. above)               |            
| | Subscriber acquisition costs        |            
| | Allowance for doubtful accounts     |            
| | Provisions for employee rights      |            
| | Depreciable fixed assets            |            
| | Amortized license                   |            
| | Options granted to employees        |            
| | Other                               |            
| |                                     |            
| |                                     |            
| | Valuation allowance - in respect of |            
| | carryforward tax losses             |            
| |                                     |            
| |                                     |            
| |                                     |            

| | The
changes in the valuation allowance for the years ended December 31, 2004, 2005 and 2006,
are as follows:
| | ------------------------------------------------------------------------------------------------------------

| |                              | 2004 | 2005 | 2006 | 2006  
| | ---------------------------- | ---- | ---- | ---- | ------
|
|
|
| | Balance at beginning of year |      |      |      | 8,555 
| | Utilization during the year  |      |      |      | (2,107
| | Change during the year       |      |      |      | (754  
| |                              |      |      |      |       
| | Balance at end of year       |      |      |      | 5,694 
| |                              |      |      |      |       

| | During
2005 and 2006, the Company utilized approximately NIS 549 million and approximately NIS
98 million ($ 23 million) of its carryforward tax losses, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, the Company fully realized the carryforward tax losses, except for
the wholly owned subsidiary carryforward tax losses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | A
full valuation allowance was provided in respect of the wholly owned subsidiary, as it is
more likely than not that its deferred tax assets will not be realized.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 39

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PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9  TAXES
ON INCOME(continued):

| | e. | Following
is a reconciliation of the theoretical tax expense, assuming all           income is
taxed at the regular tax rates applicable to companies in Israel (see           b.
above), and the actual tax expense:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                                                       | Year ended December 31
| | --------------------------------------------------------------------------------------------------------------------- | ----------------------
|
|
|
|
| | Income before taxes on income,                                                                                        |                       
| | as reported in the income statements                                                                                  |                       
| |                                                                                                                       |                       
| | Theoretical tax expense                                                                                               |                       
| | Increase in taxes resulting from adjustment to
    deferred tax balances due to changes in
    tax rates, see b above |                       
| | Increase in tax as resulting from                                                                                     |                       
| | disallowable deductions:                                                                                              |                       
| | In respect of previous year                                                                                           |                       
| | For the current year                                                                                                  |                       
| | Change in the estimated utilization period of                                                                         |                       
| | the tax assets                                                                                                        |                       
| | Difference between the basis of measurement                                                                           |                       
| | of income reported for tax purposes and                                                                               |                       
| | the basis of measurement of income for                                                                                |                       
| | financial reporting purposes - net                                                                                    |                       
| | Decrease in taxes resulting from utilization,                                                                         |                       
| | in the reported year, of carryforward                                                                                 |                       
| | tax losses for which deferred taxes                                                                                   |                       
| | were not created in previous years                                                                                    |                       
| | Other                                                                                                                 |                       
| |                                                                                                                       |                       
| | Taxes on income for the reported year                                                                                 |                       
| |                                                                                                                       |                       

| | * | Following
the ruling of the Supreme Court, on November 20, 2006 on the matter of Paz Gas Marketing
Company Ltd. and others vs. the assessing officer and others, which overturned the rules
regarding the recognition of financing expenses, the Company included in its financial
statements an additional provision for taxes in the amount of NIS 35 million. This
provision is an estimate of the additional tax expense relating to the possibility that
part of the financing expenses accrued in the years 2005 and 2006 in respect of a
financial debt, which is attributable, inter alia, to the financing of a repurchase of
Company shares, will not be recognized as an expense for tax purposes. The Company has
reasons justifying the recognition of these expenses for tax purposes, or part of them,
however since at this point the level of certainty required in order to recognize these
expenses does not exist, the aforementioned provision was recorded. The Company is
examining the possible effects of the ruling, if any, on its results in the future.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40

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PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9  TAXES
ON INCOME(continued):

| | f. | Taxes
on income included in the income statements:
| | -- | --------------------------------------------------

| | 1) | As
follows:
| | -- | -----------



| |                                       | Year ended December 31
| | ------------------------------------- | ----------------------
|
|
|
|
| | For
the reported year:                |                       
| | Current                               |                       
| | Deferred, see d above                 |                       
| | In respect of previous year - current |                       
| |                                       |                       
| |                                       |                       
| |                                       |                       

| | g. | Tax
assessments:
| | -- | ----------------

| | 1) | Tax
returns filed by the Company through the year ended December 31, 2002, are
          considered to be final.
| | -- | ----------------------------------------------------------------------------------------------------------------

| | 2) | The
subsidiary has not been assessed for tax purposes since incorporation.
| | -- | --------------------------------------------------------------------------

NOTE 10  LIABILITIES
SECURED BY PLEDGES AND RESTRICTIONS PLACEDIN RESPECT OF LIABILITIES

| | At
December 31, 2006, the Companys balances of liabilities in the amount of NIS 308
million ($ 73 million) under the Companys credit facility are secured by collateral
of a first ranking floating charge on all of the Companys current or future
business, property, rights and assets, other than its license (see also note 4). Under
the credit facility the Company has also undertaken not to create or permit to subsist
any further charges on its assets, with certain limited exceptions.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

---

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PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 11  FINANCIAL
INSTRUMENTS AND RISK MANAGEMENT:

| | a. | Linkage
of monetary balances:
| | -- | -----------------------------

| | 1) | As
follows:
| | -- | -----------

| |                              | December 31, 2006
| | ---------------------------- | -----------------
|
|
|
| | NIS:                         |                  
| | Assets                       |                  
| |                              |                  
| | Liabilities                  |                  
| |                              |                  
| |                              |                  
| | Convenience translation into |                  
| | dollars:                     |                  
| | Assets                       |                  
| |                              |                  
| | Liabilities                  |                  
| |                              |                  

| | 2) | Data
regarding the dollar exchange rate and the Israeli CPI:
| | -- | ------------------------------------------------------------

| |                                        | Exchange
rate of one
dollar | Israeli
CPI*
| | -------------------------------------- | --------------------------- | ------------
|
| | At December 31:                        |                             |             
| | 2006                                   |                             |             
| | 2005                                   |                             |             
| | 2004                                   |                             |             
| | 2003                                   |                             |             
| | Increase (decrease) during the period: |                             |             
| | 2006                                   |                             |             
| | 2005                                   |                             |             
| | 2004                                   |                             |             

| | * | Based
on the index for the month ending on each balance sheet date, on the basis of 1993
average = 100.
| | - | -------------------------------------------------------------------------------------------------------

F - 42

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PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 11  FINANCIAL
INSTRUMENTS AND RISK MANAGEMENT(continued):

| | b. | Derivative
financial instrument  foreign exchange risk management
| | -- | ------------------------------------------------------------------

| | The
Company enters into foreign currency derivative transactions in order to protect itself
against the risk that the eventual dollar cash flows resulting from the anticipated
payments in respect of purchases of handsets and capital expenditures in foreign currency
will be affected by changes in exchange rates. In addition the Company enters into
derivative transactions in order to protect itself against the increase in the CPI in
respect of the principal of the CPI-linked Notes payable. However, these contracts do not
qualify for hedge accounting under FAS 133.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company does not hold or issue derivative financial instruments for trading purposes.
| | -----------------------------------------------------------------------------------------

| | As
the counterparties to the derivatives are Israeli banks, the Company considers the
inherent credit risks remote.
| | -------------------------------------------------------------------------------------------------------------------

| | The
notional amounts of foreign currency derivatives as of December 31, 2005 and 2006 are as
follows:
| | -----------------------------------------------------------------------------------------------------

| |                              | December 31
| | ---------------------------- | -----------
|
|
|
|
| | Forward transactions for the |            
| | changes in the Israeli CPI   |            
| |                              |            
| |                              |            
| | Forward transactions for the |            
| | exchange of dollars into NIS |            
| |                              |            
| |                              |            
| | Embedded derivatives -       |            
| | dollars into NIS             |            
| |                              |            

| | The
derivative financial instruments are for a period of up to one year. As of December 31,
2006, the remaining contractual lives are for periods up to one year.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Fair
value of financial instruments
| | -- | -----------------------------------

| | The
financial instruments of the Company as of December 31, 2006 consist mainly of
non-derivative assets and liabilities (items included in working capital and long-term
liabilities); the Company also has some derivatives, which are presented at their fair
value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
view of their nature, the fair value of the financial instruments included in working
capital is usually identical or close to their carrying value. The fair value of
long-term loans approximates the carrying value, since they bear interest at rates close
to the prevailing market rates. Regarding the fair value of Notes payable see note 5.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of derivatives as of December 31, 2006, is a liability of approximately NIS
21.2 million (approximately $ 5.0 million) and an asset of approximately NIS 7.5 million
(approximately $ 1.8 million) (December 31, 2005  a liability of approximately NIS
7 million and an asset of approximately NIS 5.1 million).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 43

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PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION:

| | a. | Accounts
receivable:
| | -- | --------------------

| |    | December 31                                  
| | -- | ---------------------------------------------
|
|
|
|
| | 1) | Trade (current and long-term)                
| |    | The item is presented after the deduction of:
| |    | (a)                                          
| |    |                                              

| | * | Long-term
trade receivables (including current maturities) as of December 31, 2005 and 2006 in the
amount of NIS 406,072,000 and NIS 661,474,000 ($ 156,562,000), respectively, bear no
interest. These balances are in respect of handsets sold in installments (mostly 36
monthly payments). Income in respect of deferred interest is the difference between the
original and the present value of the trade receivable. The current amount is computed on
the basis of the interest rate relevant at the date of the transaction (5.85% 6.60%)
(2005  5%  5.4%).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Allowance
for doubtful accounts.
| | --- | --------------------------------

| | The
changes in the allowance for the years ended December 31, 2004, 2005 and 2006, are as
follows:
| | --------------------------------------------------------------------------------------------------

| |                              | 2004 | 2005 | 2006 | 2006   
| | ---------------------------- | ---- | ---- | ---- | -------
|
|
|
| | Balance at beginning of year |      |      |      | 77,295 
| | Utilization during the year  |      |      |      | (11,900
| | Change during the year       |      |      |      | 21,256 
| |                              |      |      |      |        
| | Balance at end of year       |      |      |      | 86,651 
| |                              |      |      |      |        

| | 2) | Other:
| | -- | ------

| |                           | December 31
| | ------------------------- | -----------
|
|
|
|
| | Inventory held by dealers |            
| | Government institutions   |            
| | Prepaid expenses          |            
| | Sundry                    |            
| |                           |            
| |                           |            
| |                           |            

F - 44

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---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION(continued):

| | b. | Inventory:
| | -- | ----------

| |                       | December 31
| | --------------------- | -----------
|
|
|
|
| | Handsets              |            
| | Accessories and other |            
| | Spare parts           |            
| |                       |            
| |                       |            
| |                       |            

| | c. | Accounts
payable and accruals - other:
| | -- | --------------------------------------

| |                                           | December 31
| | ----------------------------------------- | -----------
|
|
|
|
| | Employees and employee institutions       |            
| | Provision for vacation and recreation pay |            
| | Government institutions                   |            
| | Income received in advance                |            
| | Accrued interest on long-term liabilities |            
| | Derivative instruments                    |            
| | Handsets warranty                         |            
| | Sundry                                    |            
| |                                           |            
| |                                           |            
| |                                           |            

| | d. | Provision
for warranty  the changes in the provision for warranty           for the years
ended December 31, 2004, 2005, and 2006, are as follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |                               | 2004 | 2005 | 2006 | 2006  
| | ----------------------------- | ---- | ---- | ---- | ------
|
|
|
| | Balance at beginning of year  |      |      |      | 2,053 
| | Product warranties issued for |      |     
| | new sales                     |      |      |      | 2,943 
| | Utilization during the year   |      |      |      | (3,262
| |                               |      |      |      |       
| | Balance at end of year        |      |      |      | 1,734 
| |                               |      |      |      |       

F - 45

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PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION(continued):

| | e. | Other
liabilities:
| | -- | ------------------

| | 1. | Asset
retirement obligations  the changes in the asset retirement           obligations
for the years ended December 31, 2004, 2005 and 2006, are as           follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                     | 2004 | 2005 | 2006 | 2006 
| | ----------------------------------- | ---- | ---- | ---- | -----
|
|
|
| | Balance at January 1,               |      |      |      | 6,367
| | Liability incurred during the  year |      |      |      | 833  
| | Liability settled during the year   |      |      |      | (271 
| | Accretion expenses                  |      |      |      | 638  
| |                                     |      |      |      |      
| | Balance at December 31,             |      |      |      | 7,567
| |                                     |      |      |      |      

| | 2. | Capital
lease:
| | -- | --------------

| |                                   | December 31
| | --------------------------------- | -----------
|
|
|
|
| | Total commitment                  |            
| | Less - deferred interest expenses |            
| |                                   |            
| | Long term lease                   |            
| | Less - current maturities         |            
| |                                   |            
| |                                   |            
| |                                   |            

| | The
lease payments are linked to the US dollar and bear interest at the rate of 5.75%.
| | --------------------------------------------------------------------------------------

| | The
lease (net of current maturities) mature in the following years after the balance sheet
dates:
| | --------------------------------------------------------------------------------------------------

| |             | December 31, 2006
| | ----------- | -----------------
|
|
|
| | Second year |                  
| | Third year  |                  
| |             |                  
| |             |                  
| |             |                  

F - 46

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---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION(continued):

| | f. | Financial
expenses, net:
| | -- | ------------------------

| |                              | Year ended December 31
| | ---------------------------- | ----------------------
|
|
|
|
| | Financial income             |                       
| | Financial expenses           |                       
| | Expenses relating to the     |                       
| | redemption of notes, note 5b |                       
| | Derivative instruments       |                       
| | Exchange rate differences    |                       
| | CPI Linkage differences      |                       
| | Factoring costs              |                       
| | Less - capitalized interest  |                       
| |                              |                       
| |                              |                       
| |                              |                       

| | g. | Diluted
EPS
| | -- | -----------

| | Following
are data relating to the net income and the weighted average number of shares that were
taken into account in computing the basic and diluted EPS:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                           | Year ended December 31
| | ----------------------------------------- | ----------------------
|
|
|
|
| | Net income used for the computation of    |                       
| | basic and diluted EPS  (in thousands) :   |                       
| | Before cumulative effect                  |                       
| | Cumulative effect                         |                       
| |                                           |                       
| | Net income                                |                       
| |                                           |                       
| | Weighted average number of shares used    |                       
| | in computation of basic EPS               |                       
| | Add - net additional shares from assumed  |                       
| | exercise of employee stock options        |                       
| |                                           |                       
| | Weighted average number of shares used in |                       
| | computation of diluted EPS                |                       
| |                                           |                       

F - 47

---

---



PARTNER COMMUNICATIONS COMPANY LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 13  TRANSACTIONS AND
BALANCES WITH RELATED PARTIES:

| | a. | Transactions
with related parties:
| | -- | ----------------------------------

| |                                             | Year ended December 31
| | ------------------------------------------- | ----------------------
|
|
|
|
| | Purchase of fixed assets from related party |                       
| |                                             |                       
| | Acquisition of handsets from related        |                       
| | parties                                     |                       
| |                                             |                       
| | Financial expenses, mainly in respect       |                       
| | of the Facility agreement, net              |                       
| |                                             |                       
| | Selling commissions, maintenance and        |                       
| | other expenses                              |                       
| |                                             |                       

| | As
to the repurchase of Companys share, see note 8a.
| | -----------------------------------------------------

| | The
transactions are carried out in the ordinary course of business. Management believes that
such transactions were carried out under normal market conditions.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Balances
with related parties:
| | -- | ------------------------------

| |                           | December 31
| | ------------------------- | -----------
|
|
|
|
| | Accounts receivable trade |            
| |                           |            
| | Current liabilities       |            
| |                           |            

| | c. | Cost
sharing agreement
| | -- | ----------------------

| | The
Company entered, on August 15, 2002, into a Cost Sharing Agreement (the Agreement)
with Hutchison Telecommunications Limited, or HTL, and certain of its subsidiaries
(hereafter -the Hutchison group). The principal purpose of the Agreement is
to regulate the sharing of costs associated with various joint procurement and
development activities relating to the roll out and operation of a 3G Business.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Agreement sets out the basis upon which expenses and liabilities are paid or discharged
by the Hutchison group companies in connection with the joint procurement or development
activities. Under the Agreement, the Company has the right to decide, and give notice of,
which of the joint projects it wishes to participate in. As of December 31, 2006, the
Company had given notice of its participation in 7 projects. The Companys expected
share in these projects in financial terms (including its share of joint expenses and
liabilities) is not material.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 48

---

---



# SIGNATURES

The
Company hereby certifies that it meets all of the requirements for filing on Form 20-F and
that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.

| |  | Partner Communications Company Ltd.By: /s/ David Avner
David AvnerChief Executive OfficerJune 10, 2007
| |  | --------------------------------------------------------------------------------------------------------------------

| |  | By: /s/ Emanuel Avner
Emanuel AvnerChief Financial OfficerJune 10, 2007
| |  | -------------------------------------------------------------------------------------



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