##### Table of Contents





As filed with the Securities and Exchange Commission
April 30, 2004

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SECURITIES AND EXCHANGE COMMISSION



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FORM 20-F







PARTNER COMMUNICATIONS COMPANY LTD.



















Title of class   
            ORDINARY SHARES
OF NIS 0.01 EACH
182,695,574    YES       x
    
    NO       o
  
  ITEM 17       o
    
    ITEM 18       x




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TABLE OF CONTENTS ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    5ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    5ITEM 3. KEY INFORMATION
    
    
    6ITEM 4. INFORMATION ON THE COMPANY
    
    
    32ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    80ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    95ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    118ITEM 8. FINANCIAL INFORMATION
    
    
    132ITEM 9. THE OFFER AND LISTING
    
    
    136ITEM 10. ADDITIONAL INFORMATION
    
    
    139ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    156ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    159ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    159ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS
    
    
    159ITEM 15. CONTROLS AND PROCEDURES
    
    
    159ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    159ITEM 16B. CODE OF ETHICS
    
    
    160ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    160ITEM 17. FINANCIAL STATEMENTS
    
    
    161ITEM 18. FINANCIAL STATEMENTS
    
    
    161ITEM 19. EXHIBITS
    
    
    162GLOSSARY OF SELECTED TELECOMMUNICATIONS TERMS
    
    
    165Exhibit 4.(a).33Exhibit 4.(a).34Exhibit 4.(a).35Exhibit 4.(a).36Exhibit 4.(a).37Exhibit 4.(a).38Exhibit 4.(a).48Exhibit 8Exhibit 12.(a).1Exhibit 12.(a).2Exhibit 13.(a).1Exhibit 14.(a).1
 Page 1




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INTRODUCTION As used herein, references to we, our, us, Partner or the
Company are references to Partner Communications Company Ltd. and to its
wholly-owned subsidiary, Partner Future Communications 2000 Ltd., except as the
context otherwise requires. In addition, references to our financial
statements are to our consolidated financial statements except as the context
otherwise requires. In this document, references to $, US$, US dollars and dollars are
to United States dollars and references to NIS and shekels are to New
Israeli Shekels. This annual report contains translations of NIS amounts into
US dollars at specified rates solely for the convenience of the reader. No
representation is made that the amounts referred to in this annual report as
convenience translations could have been or could be converted from NIS into US
dollars at these rates, at any particular rate or at all. The translations of
NIS amounts into US dollars appearing throughout this annual report have been
made at the representative exchange rate on December 31, 2003 of NIS 4.379=
US$1.00 as published by the Bank of Israel, unless otherwise specified. See
Item 3A. Key InformationSelected Financial DataExchange Rate Data. We maintain our financial books and records in shekels. Our financial
statements included in this annual report are prepared in accordance with
accounting principles generally accepted in the United States, or US GAAP, and
the accompanying discussion of the results of our operations is based on our
results under US GAAP. See Item 18. Financial Statements and Item 5A.
Operating and Financial Review and ProspectsOperating Results. Page 2




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FORWARD-LOOKING STATEMENTS This annual report includes forward-looking statements within the meaning
of Section 27A of the US Securities Act of 1933, as amended, Section 21E of the
US Securities Exchange Act of 1934, as amended, and the safe harbor provisions
of the US Private Securities Litigation Reform Act of 1995. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about Partner. Words such as believe, anticipate, expect, intend, seek, will,
plan, could, may, project, goal, target and similar expressions
often identify forward-looking statements but are not the only way we identify
these statements. All statements other than statements of historical fact
included in this annual report, including the statements in the sections of
this annual report entitled Item 3D. Key InformationRisk Factors, Item 4.
Information on the Company and Item 5. Operating and Financial Review and
Prospects and located elsewhere in this annual report regarding our future
performance, plans to increase revenues or margins or preserve or expand market
share in existing or new markets, reduce expenses and any statements regarding
other future events or our future prospects, are forward-looking statements. Because such statements involve risks and uncertainties, actual results
may differ materially from the results currently expected. Factors that could
cause such differences include, but are not limited to:  
    
    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 network and business strategy, including risks relating
to the operations of new systems and technologies, substantial expenditures required and 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;  
    
    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;  
    
    the effects of vigorous competition in the market in which we operate, which may decrease prices charged, increase churn
and change our customer mix, profitability and average revenue per user; Page 3




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
    
    the availability and cost of capital and the consequences of increased leverage;  
    
    the effects of the high degree of regulation in the telecommunications market in which we operate;  
    
    fluctuations in foreign exchange rates;  
    
    the results of litigation filed or that may be filed against us;  
    
    uncertainties with respect to whether our investment in Matav
will happen, on what terms, and
whether we will be able to respond successfully to the resulting challenges or achieve any of the
expected benefits; and  
    
    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; 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. Page 4




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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. 
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. Page 5




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ITEM 3. KEY INFORMATION 3A. Selected Financial Data The following table sets forth our selected financial data as at and for
each of the years in the five-year period ended December 31, 2003 prepared in
accordance with US GAAP. The selected financial data for each of the years in
the three-year period ended December 31, 2003 and at December 31, 2003 and 2002
are derived from our consolidated financial statements set forth elsewhere in
this annual report. The selected financial data for each of the years in the
two-year period ended December 31, 2000 and at December 31, 2001, 2000 and 1999
are derived from our audited financial statements not appearing in this annual
report. We were incorporated in September 1997 and began full commercial
operations on January 1, 1999. The selected financial data set forth below
should be read in conjunction with Item 5. Operating and Financial Review and
Prospects and the financial statements and notes thereto included elsewhere in
this annual report. Year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003ConveniencetranslationNew Israeli Shekels
    
    into US $In thousands (except per share data)Statement of Operations DataRevenues, netServices
    
    
    839,596
    
    
    
    1,969,176
    
    
    
    2,972,079
    
    
    
    3,766,584
    
    
    
    4,117,887
    
    
    
    940,371Equipment
    
    
    59,621
    
    
    
    134,683
    
    
    
    277,270
    
    
    
    287,979
    
    
    
    349,832
    
    
    
    79,889899,217
    
    
    
    2,103,859
    
    
    
    3,249,349
    
    
    
    4,054,563
    
    
    
    4,467,719
    
    
    
    1,020,260Cost of revenuesServices
    
    
    920,972
    
    
    
    1,653,454
    
    
    
    2,187,612
    
    
    
    2,499,534
    
    
    
    2,586,707
    
    
    
    590,707Equipment
    
    
    562,089
    
    
    
    508,053
    
    
    
    531,551
    
    
    
    569,924
    
    
    
    549,749
    
    
    
    125,5421,483,061
    
    
    
    2,161,507
    
    
    
    2,719,163
    
    
    
    3,069,458
    
    
    
    3,136,456
    
    
    
    716,249Gross profit (loss)
    
    
    (583,844
    )
    
    
    (57,648
    )
    
    
    530,186
    
    
    
    985,105
    
    
    
    1,331,263
    
    
    
    304,011Selling and marketing expenses
    
    
    265,124
    
    
    
    327,881
    
    
    
    292,960
    
    
    
    308,079
    
    
    
    314,008
    
    
    
    71,708General and administrative expenses
    
    
    158,588
    
    
    
    154,637
    
    
    
    134,282
    
    
    
    143,594
    
    
    
    162,387
    
    
    
    37,083Operating profit (loss)
    
    
    (1,007,556

    )
    
    
    (540,166
    )
    
    
    102,944
    
    
    
    533,432
    
    
    
    854,868
    
    
    
    195,220Financial expenses, net
    
    
    290,397
    
    
    
    228,609
    
    
    
    400,927
    
    
    
    445,180
    
    
    
    321,710
    
    
    
    73,467Loss on impairment of investments
in non-marketable securities
    
    
    
    
    
    
    
    
    
    
    8,862
    
    
    
    4,054
    
    
    
    3,530
    
    
    
    806Income (loss) before tax benefit
    
    
    (1,297,953
    )
    
    
    (768,775
    )
    
    
    (306,845
    )
    
    
    84,198
    
    
    
    529,628
    
    
    
    120,947Tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    633,022
    
    
    
    144,559Income (loss) before cumulative
effect of a change in accounting
principles
    
    
    (1,297,953
    )
    
    
    (768,775
    )
    
    
    (306,845
    )
    
    
    84,198
    
    
    
    1,162,650
    
    
    
    265,506Cumulative effect, at beginning of
year, of a change in accounting
principles
    
    
    
    
    
    
    
    
    
    
    3,483
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) for the year
    
    
    (1,297,953
    )
    
    
    (768,775
    )
    
    
    303,362
    
    
    
    84,198
    
    
    
    1,162,650
    
    
    
    265,506
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Year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003ConveniencetranslationNew Israeli Shekels
    
    into US $In thousands (except per share data)Earnings (loss) per ordinary share and
per ADSBasic:Before cumulative effect
    
    
    (8.86
    )
    
    
    (4.30
    )
    
    
    (1.72
    )
    
    
    0.47
    
    
    
    6.39
    
    
    
    1.46Cumulative effect
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    
    
    
    
    
    
    
    
    (8.86
    )
    
    
    (4.30
    )
    
    
    (1.70
    )
    
    
    0.47
    
    
    
    6.39
    
    
    
    1.46Diluted:Before cumulative effect
    
    
    (8.86
    )
    
    
    (4.30
    )
    
    
    (1.72
    )
    
    
    0.46
    
    
    
    6.34
    
    
    
    1.45Cumulative effect
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    
    
    
    
    
    
    
    
    (8.86
    )
    
    
    (4.30
    )
    
    
    (1.70
    )
    
    
    0.46
    
    
    
    6.34
    
    
    
    1.45Weighted average number of shares
outstandingBasic:
    
    
    146,481,482
    
    
    
    178,888,888
    
    
    
    178,909,274
    
    
    
    179,984,090
    
    
    
    181,930,803
    
    
    
    181,930,803Diluted:
    
    
    146,481,482
    
    
    
    178,888,888
    
    
    
    178,909,274
    
    
    
    183,069,394
    
    
    
    183,243,157
    
    
    
    183,243,157Other Financial DataCapital expenditures, net
    
    
    823,995
    
    
    
    544,927
    
    
    
    599,493
    
    
    
    556,376
    
    
    
    232,293
    
    
    
    53,047EBITDA(1)
    
    
    (581,959
    )
    
    
    (58,741
    )
    
    
    656,369
    
    
    
    1,052,240
    
    
    
    1,379,830
    
    
    
    315,102Statement of Cash Flows DataNet cash provided by (used in) operating
activities
    
    
    (835,949
    )
    
    
    (353,272
    )
    
    
    422,548
    
    
    
    682,191
    
    
    
    1,031,492
    
    
    
    235,554Net cash used in investing activities
    
    
    (690,396
    )
    
    
    (809,731
    )
    
    
    (629,061
    )
    
    
    (815,968
    )
    
    
    (376,769
    )
    
    
    (86,039
    )Net cash provided by (used in) financing
activities
    
    
    1,924,930
    
    
    
    748,775
    
    
    
    210,916
    
    
    
    129,865
    
    
    
    (652,309
    )
    
    
    (148,963
    )Balance Sheet Data (at year end)Current assets
    
    
    774,242
    
    
    
    588,545
    
    
    
    631,148
    
    
    
    816,416
    
    
    
    865,319
    
    
    
    197,607Investments and long-term receivables
    
    
    8,112
    
    
    
    119,524
    
    
    
    140,969
    
    
    
    45,991
    
    
    
    72,630
    
    
    
    16,586Fixed assets, net
    
    
    1,216,765
    
    
    
    1,507,045
    
    
    
    1,749,052
    
    
    
    1,864,511
    
    
    
    1,694,584
    
    
    
    386,980License and deferred charges, net
    
    
    1,436,949
    
    
    
    1,289,933
    
    
    
    1,112,959
    
    
    
    1,269,348
    
    
    
    1,325,948
    
    
    
    302,797Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    413,752
    
    
    
    94,486Total assets
    
    
    3,436,068
    
    
    
    3,505,047
    
    
    
    3,634,128
    
    
    
    3,996,266
    
    
    
    4,372,233
    
    
    
    998,456Current liabilities(2)
    
    
    571,261
    
    
    
    583,243
    
    
    
    1,194,704
    
    
    
    735,153
    
    
    
    760,256
    
    
    
    173,614Long-term liabilities(2)
    
    
    2,063,815
    
    
    
    2,832,964
    
    
    
    2,633,200
    
    
    
    3,357,497
    
    
    
    2,536,413
    
    
    
    579,222Total liabilities
    
    
    2,635,076
    
    
    
    3,416,207
    
    
    
    3,827,904
    
    
    
    4,092,650
    
    
    
    3,296,669
    
    
    
    752,836Shareholders equity (capital deficiency)
    
    
    800,992
    
    
    
    88,840
    
    
    
    (193,776
    )
    
    
    (96,384
    )
    
    
    1,075,564
    
    
    
    245,620Total liabilities and shareholders equity
    
    
    3,436,068
    
    
    
    3,505,047
    
    
    
    3,634,128
    
    
    
    3,996,266
    
    
    
    4,372,233
    
    
    
    998,456
 Page 7




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(1)
    
    EBITDA represents earnings (loss) 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 flows 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. The EBITDA figures presented above
are substantially the same as those resulting from the calculation of
Consolidated Adjusted EBITDA as required under the indenture governing our
13% senior subordinated notes due 2010.  (2)
    
    See Notes 5, 6 and 7 to our consolidated financial statements for
information regarding long-term liabilities and current maturities of
long-term bank loans. Page 8




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Year ended December 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003ConveniencetranslationNew Israeli Shekels
    
    into US $In thousands (except per share data)Reconciliation Between Operating Cashflows and
EBITDANet cash provided by (used in) operating
activities
    
    
    (835,949
    )
    
    
    (353,272
    )
    
    
    422,548
    
    
    
    682,191
    
    
    
    1,031,492
    
    
    
    235,554Liability for employee rights upon retirement
    
    
    (9,583
    )
    
    
    (11,581
    )
    
    
    (18,736
    )
    
    
    (18,632
    )
    
    
    (15,540
    )
    
    
    (3,549
    )Accrued interest, exchange and linkage
differences on long-term liabilities
    
    
    (141,663
    )
    
    
    13,214
    
    
    
    (54,522
    )
    
    
    (91,027
    )
    
    
    67,438
    
    
    
    15,400Amount carried to deferred charges
    
    
    
    
    
    
    7,489
    
    
    
    22
    
    
    
    3,805Accrued interest, exchange and linkage
differences on security deposit
    
    
    
    
    
    
    2,574
    
    
    
    6,590
    
    
    
    6,925
    
    
    
    (8,877
    )
    
    
    (2,027
    )Sundry
    
    
    (2,560
    )
    
    
    (181
    )Increase (Decrease) in accounts receivable:Trade
    
    
    204,732
    
    
    
    197,308
    
    
    
    55,944
    
    
    
    56,638
    
    
    
    (22,721
    )
    
    
    (5,189
    )Other
    
    
    17,180
    
    
    
    (23,970
    )
    
    
    14,235
    
    
    
    8,056
    
    
    
    5,557
    
    
    
    1,260Decrease (Increase) in accounts payable and
accruals:Trade
    
    
    (133,238
    )
    
    
    (93,499
    )
    
    
    (57,271
    )
    
    
    (31,909
    )
    
    
    93,444
    
    
    
    21,339Shareholdercurrent account
    
    
    16
    
    
    
    (20
    )
    
    
    2,230Other
    
    
    (8,063
    )
    
    
    (84,685
    )
    
    
    (68,068
    )
    
    
    (14,796
    )
    
    
    (47,541
    )
    
    
    (10,857
    )Increase (Decrease) in inventories
    
    
    43,921
    
    
    
    65,614
    
    
    
    (36,859
    )
    
    
    12,996
    
    
    
    (34,647
    )
    
    
    (7,912
    )Increase in asset retirement obligation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    (1,228
    )
    
    
    (280
    )Financial Expenses(*)
    
    
    283,248
    
    
    
    221,906
    
    
    
    393,739
    
    
    
    437,993
    
    
    
    312,453
    
    
    
    71,354Cumulative effect, at beginning of year and
change in accounting principles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,483
    )EBITDA
    
    
    (581,959
    )
    
    
    (58,741
    )
    
    
    656,369
    
    
    
    1,052,240
    
    
    
    1,379,830
    
    
    
    315,102
   (*) Financial expenses excluding any charge for the amortization of
pre-launch financial costs. Page 9




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At December 31,2001
    
    2002
    
    2003Industry DataEstimated population of Israel (in thousands)(1)
    
    
    6,500
    
    
    
    6,650
    
    
    
    6,757Estimated Israeli mobile telephone subscribers (in thousands)(2)
    
    
    5,470
    
    
    
    6,333
    
    
    
    6,674Estimated Israeli mobile telephone penetration(3)
    
    
    84
    %
    
    
    95
    %
    
    
    99
    %
 Year ended December 31
    
    Three months endedMarch 31,
    
    June 30,
    
    Sept. 30,
    
    Dec. 31,1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2003
    
    2003
    
    2003
    
    2003Partner DataSubscribers (000s) (at
period end)(4)
    
    
    355
    
    
    
    834
    
    
    
    1,458
    
    
    
    1,837
    
    
    
    2,103
    
    
    
    1,894
    
    
    
    1,949
    
    
    
    2,032
    
    
    
    2,103Pre-paid
    
    
    
    
    
    
    132
    
    
    
    389
    
    
    
    540
    
    
    
    639
    
    
    
    553
    
    
    
    568
    
    
    
    606
    
    
    
    639Post-paid (private)
    
    
    267
    
    
    
    526
    
    
    
    829
    
    
    
    1,004
    
    
    
    1,117
    
    
    
    1,036
    
    
    
    1,064
    
    
    
    1,094
    
    
    
    1,117Post-paid (business)
    
    
    88
    
    
    
    176
    
    
    
    240
    
    
    
    293
    
    
    
    347
    
    
    
    306
    
    
    
    317
    
    
    
    332
    
    
    
    347Share of total Israeli
subscribers (at period
end)(5)
    
    
    13
    %
    
    
    21
    %
    
    
    27
    %
    

    
    29
    %
    
    
    31
    %
    
    
    29
    %
    
    
    29
    %
    
    
    30
    %
    
    
    31
    %Average monthly usage per
subscriber (mins.)(6)
    
    
    456
    
    
    
    392
    
    
    
    318
    
    
    
    280
    
    
    
    277
    
    
    
    267
    
    
    
    277
    
    
    
    286
    
    
    
    276Average monthly revenue per
subscriber including
inroaming (NIS)(7)
    
    
    393
    
    
    
    306
    
    
    
    214
    
    
    
    183
    
    
    
    171
    
    
    
    164
    
    
    
    171
    
    
    
    181
    
    
    
    170Pre-paid
    
    
    
    
    
    
    
    
    
    
    151
    
    
    
    127
    
    
    
    114
    
    
    
    113
    
    
    
    114
    
    
    
    116
    
    
    
    113Post-paid (private)
    
    
    
    
    
    
    
    
    
    
    192
    
    
    
    167
    
    
    
    154
    
    
    
    147
    
    
    
    155
    
    
    
    164
    
    
    
    152Post-paid (business)
    
    
    
    
    
    
    
    
    
    
    354
    
    
    
    343
    
    
    
    333
    
    
    
    318
    
    
    
    327
    
    
    
    355
    
    
    
    331Churn rate(8)
    
    
    6.8
    %
    
    
    5.5
    %
    
    
    5.8
    %
    
    
    10.9
    %
    
    
    13.6
    %
    
    
    4.0
    %
    
    
    3.5
    %
    
    
    3.0
    %
    
    
    3.2
    %Subscriber acquisition
costs per subscriber
(NIS)(9)
    
    
    1,464
    
    
    
    819
    
    
    
    458
    
    
    
    470
    
    
    
    362
    
    
    
    426
    
    
    
    452
    
    
    
    289
    
    
    
    298Estimated coverage of
Israeli population (at
period end)(10)
    
    
    96
    %
    
    
    97
    %
    
    
    97
    %
    
    
    97
    %
    
    
    97
    %
    
    
    97
    %
    
    
    97
    %
    
    
    97
    %
    
    
    97
    %Number of operational base
stations (at period end)
    
    
    846
    
    
    
    1,355
    
    
    
    1,882
    
    
    
    2,035
    
    
    
    2,138
    
    
    
    2,065
    
    
    
    2,104
    
    
    
    2,120
    
    
    
    2,138Number of microsites out of
total number of operational
base stations (at period
end)(11)
    
    
    46
    
    
    
    347
    
    
    
    703
    
    
    
    726
    
    
    
    729
    
    
    
    738
    
    
    
    753
    
    
    
    756
    
    
    
    729Number of employees (full
time equivalent) (at period
end)(12)
    
    
    1,453
    
    
    
    2,131
    
    
    
    2,523
    
    
    
    2,685
    
    
    
    2,769
    
    
    
    2,733
    
    
    
    2,748
    
    
    
    2,744
    
    
    
    2,769
   (1)
    
    The estimated population of Israel at December 31, 2001 is published by
the Central Bureau of Statistics in Israel. The figures for 2002 and 2003
are the Companys estimates.  (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 and Cellcom or by their shareholders
and from Partner subscriber data at December 31, 2001, 2002 and 2003. The
2001 figure Page 10




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for MIRS is our estimate. As MIRS received a general license on February 5,
2001 its subscribers have not been included in the Israeli subscriber count
in prior years. MIRSs entire subscriber base has been included in the
Israeli subscriber count from the date on which MIRS received its license.(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, new immigrants, 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, 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. Our pre-paid service
was launched on June 29, 2000. 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 Partner average monthly usage per subscriber by (i)
dividing, for each month in the relevant year, the total number of minutes
of usage, excluding in-roaming usage, during the month by the average
number of Partner subscribers in that month, and (ii) dividing the sum of
all such results for the months in the relevant year by 12.(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 Global System for Mobile Communications, or GSM, 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. Since June 2001, our
churn rate has also included subscribers who have not generated revenue
for the Company 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. In 2002, we
refined our reporting procedures for active subscribers. This change
caused a reduction in the reported number of active subscribers for 2002
of 41,000 subscribers. Some of the additional churn provided for, related
to periods prior to the third quarter of 2002. Page 11




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(9)
    
    Subscriber acquisition costs, or SAC, include mainly handset and car kit
costs, net of revenues received from sales of handsets, referred to as
handset subsidies, and commissions paid to dealers, distributors and
sales personnel. Subscriber acquisition costs per subscriber are
calculated by dividing the subscriber acquisition costs incurred during
the reporting period by the number of subscribers acquired in the
reporting period.The aforementioned components of SAC are included in our consolidated
financial statements as follows: handset and car kit costsin cost of
equipment revenues; commissions paid to dealers, distributors and sales
personnelin selling and marketing expenses; and revenues received from
sales of handsetsin equipment revenues.(10)
    
    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.(11)
    
    We did not begin to record data on the number of microsites until the
second quarter of 1999.(12)
    
    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. 1999
    
    2000
    
    2001
    
    2002
    
    2003Average(1)
    
    
    4.140
    
    
    
    4.077
    
    
    
    4.220
    
    
    
    4.736
    
    
    
    4.512High
    
    
    4.288
    
    
    
    4.198
    
    
    
    4.416
    
    
    
    4.994
    
    
    
    4.924Low
    
    
    4.013
    
    
    
    3.967
    
    
    
    4.067
    
    
    
    4.437
    
    
    
    4.283End of period
    
    
    4.153
    
    
    
    4.041
    
    
    
    4.416
    
    
    
    4.737
    
    
    
    4.379
    (1)
    
    Calculated based on the average of the exchange rates on the last day of
each month during the relevant period. Page 12




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October
    
    November
    
    December
    
    January
    
    February
    
    March2003
    
    2003
    
    2003
    
    2004
    
    2004
    
    2004High
    
    
    4.509
    
    
    
    4.537
    
    
    
    4.441
    
    
    
    4.483
    
    
    
    4.493
    
    
    
    4.483Low
    
    
    4.410
    
    
    
    4.448
    
    
    
    4.352
    
    
    
    4.371
    
    
    
    4.370
    
    
    
    4.535
 On April 25, 2004, the exchange rate
was NIS 4.569 per US dollar as published by
the Bank of Israel. Changes in the exchange rate between the shekel and the US
dollar could materially affect our financial results. 3B. Capitalization and Indebtedness Not applicable. 3C. Reasons for the Offer and Use of Proceeds Not applicable. Page 13




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3D. Risk Factors We operate in a highly regulated telecommunications market which limits our
flexibility to manage our business. In particular, the regulators decisions,
including those relating to tariffs, may materially adversely affect our
results of operations. Our business is highly regulated. We are subject to government regulation
regarding telecommunications licenses, antitrust, frequency allocation and
costs and arrangements pertaining to interconnection and leased lines. Our
business and operations could be adversely affected by changes in laws,
regulations or government policy affecting our business activities, such as
decisions by the regulator:  
    
    reducing call or SMS termination tariffs;  
    
    changing the method of calculating call duration;  
    
    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; and  
    
    setting policies and imposing new regulations governing electronic trade and content services. The Ministry of Communications reduced call termination tariffs from NIS
0.50 to NIS 0.45 at the beginning of 2003. In January 2004, the Ministry of
Communications appointed an international telecommunications consultancy firm
to study both call and SMS termination tariffs of the mobile telephone networks
in Israel. In addition, the Ministry of Communications recently amended our
license and the relevant regulations, reducing SMS termination tariffs from NIS
0.38 to NIS 0.285 effective May 1, 2004. The Ministry of Communications
indicated that this reduction is only an interim measure until the consultancy
firm completes its study. Following completion of this study, the Ministry of
Communications may further reduce both call and SMS termination tariffs, which
could have a significant and adverse effect upon our results of operations. The
Antitrust Authority has also been reviewing SMS interconnect agreements and has
informed us preliminarily that it believes the SMS interconnect arrangements
appear to be in restraint of trade. The Antitrust Authority has indicated that
it will refrain from action for the time being to allow the Ministry of
Communications to resolve the matter. The results of either of these two
inquiries could be the reduction or elimination of SMS termination tariffs,
which would adversely affect our results of operations. We expect our subscriber growth rate, and consequently our revenue growth rate,
to slow, because Israels mobile telephone services market is highly
penetrated, making it more difficult for us to obtain new subscribers than in
the past. Page 14




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Although Israels mobile telephone services market has experienced
substantial growth, and we have experienced substantial subscriber growth since
our commercial launch in 1999, the Israeli market for mobile telephone services
is now highly penetrated, and we expect the growth of the overall Israeli
market and of our own subscriber base to be slower than in the past. The
population of Israel at December 31, 2003 was approximately 6.8 million. At
December 31, 1998, prior to our full commercial launch, approximately 35% of
the Israeli population had mobile telephones. At December 31, 2003, that
percentage is estimated to be 99%, although this includes dormant subscribers
as well as other subscribers who are not included in the Israeli population
figures, such as Palestinians, new immigrants, and foreign workers. Because the
Israeli market for mobile telephones is highly penetrated, it will not grow at
the same rate as in the past, and our own subscriber growth will not develop at
the same rate as in the past. Similarly, whereas in the past our revenue growth
has largely resulted from growth in the overall market, our future revenues
will depend significantly on our ability to retain existing subscribers and to
attract subscribers from the other mobile telephone network operators. While
our market share, based on internal estimates, has increased from approximately
13% of Israeli mobile subscribers at December 31, 1999 to approximately 31% at
December 31, 2003, our market share growth was slower during 2003 than in 2002
and we expect this trend to continue into 2004. Competition from existing competitors may require us to continue to reduce our
tariffs, increase our subscriber acquisition costs and customer retention costs
and increase our churn rate. We compete primarily with Cellcom and Pelephone, two of the other mobile
telephone network operators in Israel. We were the only GSM network operator in
Israel until the second half of 2002. Cellcom then began providing GSM 1800
services, and consequently competition has intensified. As a result we have
lost and do not expect to regain a material part of our revenues from roaming
services offered to GSM subscribers visiting from abroad and Israelis traveling
abroad. In addition, because of the relative ease of switching between GSM
network operators, we have already faced and may continue to face an increase
in our churn rate and may be forced to increase our customer retention costs,
including subsidies towards upgrades of subscribers handsets, in order to
retain our subscribers. These developments may adversely affect our market
share, financial condition and results of operations. During 2003, Cellcom and Pelephone launched new technologies enabling
faster transfers of data: EDGE technology, in the case of Cellcom, and CDMA-1X,
in the case of Pelephone. If Cellcom or Pelephone successfully maximizes the
potential of these technologies before we successfully Page 15




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##### Table of Contents



launch UMTS third generation technology, or if any of our competitors
successfully launches third generation services before we do, we will be at a
competitive disadvantage. To the extent that fixed-line telephones are used instead of mobile
telephones, we also compete with Bezeq, which is the only incumbent public
fixed-line operator in Israel. As well, a company jointly owned by the three
cable companies in Israel recently received a fixed-line telephone service
license. We may also face competition from additional fixed-line operators, if
additional fixed-line licenses are granted. If any of our existing competitors
is granted a fixed-line telephone service license or acquires or cooperates with a
fixed-line operator, we may be at a competitive disadvantage relative to those
operators who may be able to offer combined packages of fixed-line, mobile
telephone and other telecommunication services. The Ministry of Communications
may also choose to grant additional mobile telephone operator licenses, which
may further intensify competition in the mobile market in Israel. In
particular, the Minister of Communications recently appointed a tender
committee for allocating additional bands of 800, 1,800 and UMTS
spectrum to existing and new mobile
network operators. Increased competition may require us to increase our subscriber
acquisition costs and customer retention costs. Competition may also limit our
ability in the future to increase tariffs, or cause us to reduce tariffs. We
experienced a material increase in churn in each of 2002 and 2003. In 2004, we
may face a similar or greater churn rate than that experienced in 2003. For
more information, see Item 5A. Operating ResultsChurn. Competition may
further increase our expected level of churn. Risks and uncertainties in connection with UMTS third generation technology
mean that we may not profit from our investment in acquiring
UMTS third generation spectrum, establishing a UMTS third generation network,
or developing UMTS third generation services. The technology for new UMTS third generation services has not yet been
fully developed by the limited number of suppliers of the handsets, network
equipment and software to be used by us and our competitors in providing those
services. We have selected Nortel Networks to supply the infrastructure
necessary to build-out our UMTS third generation network. We are one of the
first UMTS third generation networks in the world to be built with Nortel
equipment, and we cannot assure you that Nortel will be able to successfully
deliver all of the requirements of our network, including interoperability with
our existing GSM network. If we cannot obtain reasonably priced devices,
technologically proven network equipment or software with sufficient
functionality or speed from Nortel or other suppliers, or if we experience
delays in the delivery or functional deployment of devices, Page 16




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##### Table of Contents



handsets and related network equipment or software, our ability to develop our
UMTS third generation network, and our customers ability to access it, will be
impaired. We also rely on applications developers to develop services that will
stimulate demand for our UMTS third generation network. We cannot predict
whether customer demand will develop as expected. If applications developers
fail to develop such services, or experience delays in their development of
such services, our ability to generate revenues from our UMTS third generation
network will be adversely affected. UMTS third generation technology is newer and has less mature standards
than second generation technology. We may not be able to roll-out or operate
new technologies to perform as expected or as favorably when compared to
existing or emerging competing communications technologies. Establishing our UMTS third generation network and developing services
requires investing substantial capital resources. There is no assurance that
subscribers will adopt UMTS third generation services, how widespread the usage
of these new services will be, how many subscribers will be willing to pay for
these services and new devices and whether the revenue generated from these
services will justify the costs involved in establishing and operating our UMTS
third generation network. Page 17




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The political and military conditions in Israel may adversely affect our
financial condition and results of operations. The political and military conditions in Israel directly influence us.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors. Hostilities
involving Israel, the interruption or curtailment of trade between Israel and
its trading partners and political instability within Israel or its neighboring
countries are likely to cause our revenues to fall and harm our business. Since October 2000, there has been a substantial deterioration in the
relationship between Israel and the Palestinians, which has resulted in
increased violence. Ongoing violence between Israel and its Arab neighbors and
Palestinians may have a material adverse effect on the Israeli economy, in
general, and on our business, financial condition or results of operations. Some of our directors, officers and employees are currently obligated to
perform annual reserve duty. Additionally, all reservists are subject to being
called to active duty at any time under emergency circumstances. We cannot
assess the full impact of these requirements on our workforce and business if
conditions should change, and we cannot predict the effect on us of any
expansion or reduction of these obligations. During an emergency, including a major communications crisis in Israels
national communications network, a natural disaster, or a special security
situation in Israel, control of our network may be assumed by a lawfully
authorized person in order to protect the security of the State of Israel or to
ensure the provision of necessary services to the public. During such
circumstances, the government also has the right to withdraw temporarily some
of the spectrum granted to us. We cannot assure you that we are fully prepared
for every disaster or emergency situation, or that we could recover fully from
any such occurrence. This may materially harm our ability to provide services
to our subscribers in such emergency circumstances. The telecommunications industry is subject to rapid and significant changes in
technology which could reduce the appeal of our services. We may face competition from existing or future technologies, including
fixed-line and cordless technologies, satellite-based personal communications
services, private and shared radio networks, wireless broadband access services
and other communications services that have the technical capability to handle
mobile telephone calls and to interconnect with the fixed-line telephone
network. The effect of emerging and future technological changes, including the
convergence of technologies, on the viability or competitiveness of our network
cannot be accurately predicted. We cannot assure Page 18




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##### Table of Contents



you that the technologies we employ or intend to employ, including UMTS third
generation technology, will not become obsolete or subject to competition from
new technologies in the future. If we do not implement successfully the new national numbering plan, which came into effect in April 2004, we may experience a failure or disruption of our
critical information technology, core network or value added services systems,
including our billing system, which could adversely affect our operations and
our financial results. The Ministry of Communications has instructed all mobile network operators
to implement a new national numbering plan, which gives each mobile network
operator a single prefix, and adds a new digit to the beginning of each
subscribers current number. The new plan entered into effect on April 20,
2004. Implementing the new numbering plan involves changes in most of our
information technology, core network and value added services systems. We have
been preparing operationally for the implementation of the plan. However,
systems which are not properly adapted for the new numbering plan by the
required date could fail or cause disruptions in our operations. A failure or
disruption of any critical information technology, core network or value added
services system, including our billing system, may adversely affect our
financial and operational performance. There are alleged health risks related to antenna sites and the use of mobile
telecommunications devices, including handsets, which could expose us to
liability and lead to reduced usage of mobile phones or increased difficulties
in obtaining sites or permits to erect sites for base stations. We are aware of recent allegations that there may be health risks
associated with the effects of electromagnetic signals from antenna sites and
from mobile telephone handsets and from other mobile telecommunications
devices. In the construction and operation of our base stations we observe the
standards established by the International Radiation Protection Agency, which
sets guidelines for the safe exposure level for all uses of radio spectrum.
These standards have been adopted by the Ministry of the Environment. We have received type approval from the Ministry of Communication for all
of the handsets and other terminal equipment we sell. The Ministry of the
Environment also has authority to regulate the sale of handsets in Israel.
However, in accordance with the current practice among mobile telephone
operators in Israel, we have not obtained approvals or exemptions from the
Ministry of the Environment for the handsets we provide because, to date,
neither the Ministry of the Environment nor the Ministry of Health has issued
standards for the permitted level of radiation emissions from Page 19




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handsets. Since June 15, 2002, we have been required to provide information to
purchasers of handsets on the Specific Absorption Rate, or SAR, of the handset,
as well as its compliance with certain standards pursuant to a regulation
promulgated by the Ministry of Industry and Trade under the Consumer Protection
Law. In the event that new standards for permitted radiation emission levels
from handsets are issued, we will be obliged to comply with them. While there is currently no substantiated link between exposure to
electromagnetic signals at the level transmitted by our base transceiver
stations and our mobile telephone handsets and long-term damage to health, the
actual or perceived health risks of mobile telephone communications devices
could adversely affect us through a reduction in subscribers, reduced usage per
subscriber, increased difficulty in obtaining sites for base stations, and
exposure to potential liability. Furthermore, we are unable to obtain insurance
with respect to such liability. We have had difficulties obtaining some of the permits for which we have
applied, and have not yet applied for other permits that are required for the
erection of our antenna sites. These difficulties could continue and therefore
affect our ability to erect or maintain antenna sites. This could have an
adverse effect on the extent, quality and capacity of our network coverage
which could prevent us from achieving or maintaining the network coverage,
including the planned UMTS coverage, and quality requirements contained in our
license and adversely affect our business. In order to establish our mobile telephone network and achieve the
coverage required by our license, we have undertaken the rapid deployment of
antenna sites throughout Israel. In addition, in order to adapt our network for
GSM 1800 and UMTS third generation technology, we are required to erect
additional antennas and make modifications to our existing antennas. The
erection and operation of most of these antenna sites require building permits
from local or regional zoning authorities, as well as a number of additional
permits from governmental and regulatory authorities, such as:  
    
    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 UMTS third generation network build out, we
are erecting additional antenna sites and making modifications to our existing
antenna sites, for which we require new consents and approvals. Page 20




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Like our competitors, we have experienced difficulties in obtaining some
of these consents and permits, especially from local building authorities. As
of December 31, 2003, 35% of our antenna sites were operating without local
building permits. A substantial portion of these are microsites. We believe
that a portion of the sites operating without permits from local authorities do
not require local building permits under the Planning and Building Law. Our
ability to maintain and improve the extent and quality of our network coverage
depends in part on our ability to obtain appropriate sites and approvals to
install our network infrastructure, including antenna sites. If we continue to
experience difficulty in obtaining approvals for the erection of antenna sites,
this could adversely affect our existing network, delay the erection of
additional antenna sites to our network and adversely impact our UMTS third
generation network build-out. This difficulty could have an adverse effect on
the extent, quality and capacity of our network coverage and on our ability to
continue to market our products and services effectively. Our inability to
resolve these issues in a timely manner could also prevent us from achieving or
maintaining the network coverage and quality requirements contained in our
license. As
well, since National Building Plan 36 was approved, some planning
committees have started to require that, as a precondition for
issuing new permits for communications installations, we submit an
undertaking to indemnify the committee against claims for
depreciation in the value of nearby properties as a result of issuing
a permit to build, and the building of, communications installations. Our
position, like that of the other mobile network operators, is that
under existing law and the National Building Plan, the planning
committees have no authority to require us to submit such an
undertaking. However, the matter has not yet come to a judicial
decision. Although we are unable to estimate our financial exposure
should we be forced to submit such undertakings, this may have a material
adverse effect our financial condition and results of operations. In addition, we, like the other mobile telephone operators in Israel,
provide repeaters, also known as bi-directional amplifiers, to subscribers
seeking an interim solution to weak signal reception within specific indoor
locations. In light of the lack of a clear policy of the local planning and
building authorities, and in light of the practice of the other mobile
telephone operators, we have not requested permits under the Planning and
Building Law for the repeaters. However, we have received from the Ministry of
Communications an approval to connect the repeaters to our communications
network. We have also approached the Ministry of the Environment, asserting
that no permits are necessary for the repeaters, based on the Ministrys
previous advice that permits are not necessary for devices with comparable
levels of emission called Fixed Cellular Terminals. If the local planning and
building authorities determine that permits are necessary for the installation
of these devices, it could have a negative impact on our ability to obtain
permits for our repeaters. The erection of an antenna site without a required local building permit
is a violation of the Planning and Building Law, 1965 and, in some cases, has
resulted in a demolition order being imposed on us and in the filing of
criminal charges and civil proceedings against us and our officers and
directors. To date, we have been largely successful in avoiding or delaying the
execution of demolition orders. So far, settlements have resulted in the
imposition of demolition orders for the relevant sites, execution of which has
been stayed for a period of time to allow us to obtain the necessary permits or
to relocate the relevant antenna site. These settlements have not involved any
admission of guilt by our officers and directors. We cannot assure you that we
will continue to be successful in this regard or that we will not be faced with
demolition orders and criminal charges, including against our officers and
directors. In addition, we, like the other mobile telephone operators Page 21




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in Israel, may be required to dismantle antenna sites for which we have not yet
obtained the required consents and permits. To date, we have been subject to minimal monetary penalties. There is no
certainty that future penalties will be in the same amounts, but we believe
that the total amount of these penalties would not have a material effect on
our business and financial condition. We may be required in the future to offer access to our network infrastructure
to other operators. This may lower the entry barriers for potential new
competitors and adversely affect our financial condition and our ability to
provide services to our subscribers. Under the Communications Law (Telecommunications and Broadcasting), 1982,
the Ministry of Communications has the power to require us, like the other
telephone operators in Israel, to offer access to our network infrastructure to
other operators, although the Ministry of Communications has not required us to
do so yet. Our license also requires us, upon demand by the Minister of
Communications, to permit other operators to provide telecom services using our
network. Access to our network would lower the entry barriers for potential new
competitors and increase the likelihood of additional new competitors entering
the mobile telephone market in Israel. Our capacity is limited, and if we are
required to allocate capacity to other operators, the services to our
subscribers may be harmed. If we fail to agree with new operators that are
given access to our network regarding the tariffs for the usage of our
infrastructure, the Ministry of Communications may determine those tariffs. If
the Ministry of Communications sets those tariffs too low, this may adversely
affect our financial condition. Our company is controlled by a small number of shareholders. On December 31, 2003, our principal shareholders, comprising our founding
shareholders Hutchison Whampoa Limited, Elbit Limited, Matav-Cable Systems
Media Ltd., Eurocom Communications Ltd., and Polar Communications Ltd.
collectively held approximately 66% of our shares. At December 31, 2003,
Hutchison Whampoa Limited indirectly owned approximately 43.2% of our shares,
Elbit Limited owned approximately 8.7%, Matav-Cable Systems Media Ltd.
indirectly owned approximately 5.3%, and Eurocom Communications Ltd. and Polar
Communications Ltd., owned approximately 6.3% and 2.4%, respectively. Each of the principal shareholders directly holding Partner shares and
Elbit.COM Limited, Elbits wholly owned subsidiary, is a party to a
relationship agreement relating to its investment in our company which governs
their collective relationship as shareholders of Partner. This relationship
agreement sets forth, among other things, each of these parties rights and
obligations among Page 22




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themselves with respect to the composition of our Board of Directors, the
transfer of shares and other material issues pertaining to their investment in
our company. These principal shareholders together have the ability to influence our
business through their ability as a group to control all actions that require
shareholder approval and through their representatives on our Board of
Directors. They are not obligated, however, to provide us with financial
support or to exercise their rights as shareholders in our best interests or
the best interests of our minority shareholders and noteholders, and they may
engage in activities that conflict with such interests. If the interests of
these principal shareholders conflict with the interests of our other
shareholders and noteholders, those shareholders and noteholders could be
disadvantaged by the actions that these principal shareholders choose to
pursue. In addition, our principal shareholders may cause our business to
pursue strategic objectives that may conflict with the interests of our other
shareholders and noteholders. One
of our principal shareholders, Hutchison, is a global
leader in the mobile telecommunications market. It has a substantial interest
in 3G operating companies in Austria, Australia, Denmark, Hong Kong, Ireland,
Italy, Sweden and the United Kingdom. We rely on and benefit from the
assistance, knowledge and experience of Hutchison.
Hutchison has announced that it has filed an application with The Stock Exchange of Hong Kong
for the listing of a new company to which Hutchison would transfer its holdings
of our shares, together with its telecommunications business interests in
certain other companies. Subject to the approval of The Stock
Exchange of Hong Kong and the final decision of Hutchisons board of
directors and shareholders, Hutchison proposes that the new company
would conduct a public
offering in Hong Kong. Hutchison would, immediately following the
public offering, control the new company. No final decision has yet
been reached by Hutchisons board of directors or shareholders as to
whether and when the proposed transfer of its holdings of our shares
and its interests in certain other businesses will take place or the
public offering will be launched. We cannot assure you that Hutchison
will continue to be our principal shareholder, or if it ceases to be
our principal shareholder, that we will continue to enjoy the
benefits of our relationship with Hutchison that we currently do. A continuing deterioration in the economic conditions in Israel may adversely
affect our financial condition and results of operations. We are incorporated and based in, and currently derive almost all our
revenues from markets within, the State of Israel. Primarily due to the global
economic downturn in recent years and Israels security and political
situation, the Israeli economy slipped into recession. During 2003 the rate of
unemployment rose, consumer spending decreased and many businesses experienced
financial difficulties. A continuing deterioration in the economic conditions
in Israel may adversely affect usage patterns of our services and the ability
of our customers to pay for our services, which would adversely affect our
financial condition and results of operations. Our business, financial condition and results of operations could be adversely
affected if we have underestimated future capital requirements or overestimated
anticipated revenue and profits. We expect to incur substantial capital expenditures in building out our
UMTS third generation network and increasing the capacity of our existing
network. We began build-out of our network at the end of 2003. We estimate that
capital expenditures in connection with building out our UMTS third generation
network will be approximately $250 million over the three years from the
beginning of the network build-out, with approximately $90 million in capital
expenditures required in the first twelve months of the build-out. Although at
present we believe we have a fully funded business plan, we may have
underestimated our future capital requirements or overestimated our future
revenues and operating profits in the build-out and operation of a third
generation network. For example, testing UMTS third generation networks in live
environments has been limited, and it is not yet clear how Page 23




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large-scale usage will affect the capacity and functionality of UMTS third
generation networks and therefore what the optimal network density, which
determines the cost of our network roll-out, will be. If we have underestimated
our future capital requirements or overestimated our future revenues and
operating profits, our future business, financial condition and results of
operations could be materially adversely affected. Our credit facility and our indenture each contain a number of restrictions and
obligations that limit our operating and financial flexibility. Our credit facility and the indenture governing our 13% senior
subordinated notes due 2010 each contain a number of financial, operating and
other covenants that limit our operating and financial flexibility. These
covenants, among other things, restrict our ability to pledge our assets, enter
into certain types of lease financing, dispose of assets, make loans or give
guarantees, make certain acquisitions or engage in mergers or consolidations,
incur borrowing (other than permitted borrowings, as defined), make any
substantial change to the nature of our business or engage in any other
business. In addition, under our credit facility, we may not pay dividends or
similar payments on our ordinary shares or repay principal or interest on
shareholders loans or principal on subordinated debt, or make payments to
shareholders generally by way of return or repurchase of capital, other than by
way of a permitted distribution. A permitted distribution means an amount not
exceeding, in the aggregate, 50% of the excess cash flow arising in the
previous financial year, and is subject to our compliance with additional
conditions, including that an actual or potential event of default does not
exist, that we are able to meet outstanding operating expenditure requirements,
that we have repaid (and cannot re-borrow) at least 50% of the total bank
commitments under the credit facility, that such distribution is made no
earlier than December 31, 2005, and that we comply with certain minimum
coverage ratios. Payments of interest on our notes are restricted in the event
amounts due under the credit facility are unpaid or an event of default has
occurred. Our credit facility also contains covenants regarding achieving
certain levels of financial ratios during each of the ratio periods
(semi-annual or annual periods) during the term of the credit facility. Our ability to continue to comply with these and other obligations depends
in part on the future performance of our business. There can be no assurance
that such obligations will not materially adversely affect our ability to
finance our future operations or the manner in which we operate our business.
In particular, any non-compliance with performance-related covenants and other
undertakings of our credit facility or indenture could result in an
acceleration of our outstanding debt Page 24




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under the credit facility and the indenture and restrict our ability to draw
additional funds, which could have a material adverse effect on our business,
financial condition or results of operations. Our substantial leverage could adversely affect our financial health. We are highly leveraged. At December 31, 2003, our total long-term
indebtedness was approximately NIS 2,454 million ($560 million). This debt represents approximately 69.5% of our total capitalization (bank
loans plus notes payable plus shareholders equity) at December 31, 2003. Our
credit facility and the indenture governing our notes permit us to incur
additional indebtedness subject to some limitations. The indenture does not
place a limit on the amount of indebtedness that we may incur in financing the
acquisition of network assets, including licenses, equipment and inventory, or
for capital expenditures and working capital for our business. Our substantial debt could adversely affect our financial health by, among other things:  
    
    increasing our vulnerability to adverse economic conditions or increases in prevailing interest rates, particularly because
currently a substantial portion of our borrowings are at variable interest rates;  
    
    limiting our ability to obtain the additional finance we need to operate, develop and expand our business;  
    
    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  
    
    exposing us to the effects of foreign exchange fluctuations on our obligations under our notes, which are denominated in US
dollars. We may not be able to make our debt payments in the future. Our ability to meet our debt obligations will depend on whether we can
successfully implement our strategy, as well as on financial, competitive,
legal and technical factors, including some factors that are beyond our
control. If we are unable to generate sufficient cash flow from operations to
meet principal and interest payments on our debt, we may have to refinance all
or part of our indebtedness. We cannot ensure that any such refinancing would be possible on terms that
we could accept or that we could obtain additional financing. If refinancing
will not be possible or if additional financing will not be available, we may
have to sell our assets under circumstances that might not yield the Page 25




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highest prices, or default on our debt obligations, including the notes, which
would permit our noteholders and holders of other outstanding indebtedness to
accelerate their maturity dates. Our business may be impacted by the shekel exchange rate fluctuations and
inflation. Substantially all of our revenues and a majority of our operating expenses
are denominated in shekels. However, through December 31, 2003, a substantial
amount of our operating expenses were linked to non-shekel currencies. These
expenses related mainly to the acquisition of handsets where the price paid by
us is based on various foreign currencies. In addition, a substantial majority
of our capital expenditures (including with respect to our UMTS third
generation network) are incurred in, or linked to, non-shekel currencies, and
our notes are denominated in US dollars and require US dollar interest and
principal payments. Thus, any devaluation of the shekel against the dollar (or
other foreign currencies), will increase the shekel cost of our non-shekel
denominated or linked expenses and capital expenditures. Such an increase may
have an adverse impact on our results, which may be material. Material changes
in exchange rates may cause the amounts that we must invest to increase
materially in shekel terms. We hedge some of our foreign currency commitments, but we do not currently
hedge the principal payable on our notes. As of December 31, 2003, the notional
amounts of our foreign currency derivatives were approximately $208 million.
Our derivative transactions are mainly designed to hedge the cash flows related
to the payments of dollar interest on our notes and those related to
anticipated payments in respect of purchases of handsets and capital
expenditures in foreign currency. The transactions are primarily foreign
currency transactions and purchases and sales of currency options. Our bank credit facility borrowings are currently in shekels, some of
which are linked to the Israeli consumer price index, or CPI. We may not be
permitted to raise our tariffs pursuant to our license in a manner that would
fully compensate for any increase in the Israeli CPI. Therefore, an increase in
the rate of inflation may also have a material adverse impact upon us by
increasing our financial expenses without an offsetting increase in revenue. Operating a mobile telecommunications network involves the inherent risk of
fraudulent activities and potential abuse of our services, which may cause loss
of revenues and non-recoverable expenses. There is an inherent risk of potential abuse by individuals, groups,
businesses or other organizations that use our mobile telecommunications
services and avoid paying for them. The effects of such fraudulent activities
may be, among others, a loss of revenue and out of pocket expenses Page 26




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which we will have to pay to third parties in connection with those services,
such as interconnect fees, payments to international operators or to operators
overseas and payments to content providers. Such payments may be
non-recoverable. Although we are taking measures in order to prevent fraudulent
activities, we have suffered in the past, and may suffer in the future, from
these activities. The financial impact of fraudulent activities that have
occurred in the past has not been material. However, we cannot assure you that
fraudulent activities, if they occur in the future, will not materially affect
our financial condition and results of operations. We are dependent upon our ability to interconnect with other telecommunications
carriers. We also depend on Bezeq and other suppliers for transmission
services. The failure of these carriers to provide these services on a
consistent basis could have a material adverse effect on us. Our ability to provide commercially viable mobile telephone services
depends upon our ability to interconnect with the telecommunications networks
of existing and future fixed-line, mobile telephone and international operators
in Israel in order to complete calls between our customers and parties on the
fixed-line or other mobile telephone networks. All fixed-line, mobile telephone
and international operators in Israel are legally required to provide
interconnection to, and not to discriminate against, any other licensed
telecommunications operator in Israel. We have signed interconnection
agreements with Pelephone, Cellcom and MIRS, the other mobile telephone network
operators in Israel, and with Bezeq International and Barak, two of the three
international operators in Israel, and we have an operating arrangement with
the third Israeli international operator, Golden Lines. We have no control over
the quality and timing of the investment and maintenance activities that are
necessary for these entities to provide us with interconnection to their
respective telecommunications networks. The failure of these or other
telecommunications providers to provide reliable interconnections to us on a
consistent basis could have a material adverse effect on our business,
financial condition or results of operations. We currently lease most of our transmission capacity from Bezeq, and we
lease additional capacity from other suppliers, primarily Cellcom. We have no
control over the quality and timing of the investment and maintenance
activities that are necessary for these suppliers to provide us with
transmission services. Disruptions, stoppages, strikes and slowdowns
experienced by them may significantly affect our ability to provide mobile
telephone services. In particular, Bezeq has experienced labor disputes with
its employees, including stoppages, notably in recent years as the
privatization of Bezeq and liberalization of the telecommunications market in
Israel have developed. The failure by our suppliers to provide reliable
transmission services to us on a consistent basis could have a material adverse
effect on our business, financial condition or results of operations. Page 27




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We can only operate our business for as long as we have a license from the
Ministry of Communications. We conduct our operations pursuant to a general license granted to us by
the Ministry of Communications on April 7, 1998. Our license is valid until
February 2022. Our license may be extended for an additional six-year period
upon our request to the Ministry of Communications and confirmation from the
Ministry that we have met certain performance requirements. We may request
renewal of our license for successive six-year periods thereafter, subject to
regulatory approval. We cannot be certain that our license will not be revoked,
will be extended when necessary, or, if extended, on what terms an extension
may be granted. Additionally, although we believe that we are currently in compliance with
all material requirements of our license, the interpretation and application of
the technical standards used to measure these requirements, including the
requirements regarding population coverage and minimum quality standards, and
other license provisions may not be certain, and disagreements have arisen and
may arise in the future between us and the Ministry of Communications. We have
provided a bank guarantee to the Ministry of Communications in the amount of
$10 million to guarantee our performance under our license. For more
information, see Item 5B. Operating and Financial Review and
ProspectsLiquidity and Capital Resources. If we are found to be in material
breach of our license, the guarantee may be forfeited and our license may be
revoked. Our marketing strategy is based upon the international Orange Brand. If our
license agreement terminates or is revoked, we will lose one of our main
competitive strengths. Our marketing strategy is based upon the international Orange Brand. We
can operate our business under the Orange Brand only if we have the right to
use it under the brand license agreement with Orange International Developments
Limited, a subsidiary of Orange plc. Under this license agreement, we are
required to comply with the Orange Brand guidelines established by Orange
International. We have the right to use the Orange Brand as long as we are able
and legally eligible under the laws of Israel to offer telecommunications
services to the public in Israel. However, the brand license agreement may be
terminated by mutual agreement, or at our discretion, or by Orange
International if a court determines that we have materially misused the brand
and we continue to materially misuse the brand after such determination of
material misuse. If we lose the right to use the Orange Brand, our financial
condition and results of operations may be materially adversely affected. Page 28




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We depend on a limited number of suppliers for our network equipment. Our
results of operations could be adversely affected if our suppliers fail to
provide us with adequate supplies of network equipment or maintenance support
on a timely basis. We purchase our network equipment, such as switching equipment, base
station controllers and base transceiver stations and network software, from
Nortel, Ericsson and Nokia. Although our network utilizes standard equipment
that is produced by several suppliers, we cannot be certain that we will be
able to obtain equipment from one or more alternative suppliers on a timely
basis in the event that any of these suppliers is unable to satisfy our
equipment requirements. Our results of operations could be adversely affected
if Nortel, Ericsson, Nokia or an alternative supplier fails to provide us with
adequate supplies of equipment, as well as ongoing maintenance support, in a
timely manner. In addition, our results of operations could be adversely
affected if the price of network equipment rises significantly. In our
experience, suppliers from time to time extend delivery times, limit supplies
and increase the prices of supplies due to their supply limitations and other
factors. Our share price has been and may continue to be volatile in response to general
conditions in the global securities markets, developments in Israels
securities market and in the communications and technology sectors in
particular. Our share price has been subject to significant volatility, in part due to
highly volatile securities markets generally, particularly for communications
and technology companies shares. Factors other than our results of operations
that may affect our share price include low trading volume, market expectations
of our performance and projected growth in the mobile communications market. In
addition, our share price may be affected by factors such as the Israeli
economy and the political situation and the level of business activity or
perceived growth (or the lack thereof) in the market in general, the
performance of other mobile telecommunications companies, announcements by or
the results of operations of our competitors, customers and suppliers,
potential litigation and regulation involving ourselves or our industry, and
announcements concerning the success of UMTS third generation mobile networks,
products and services, as well as general market volatility. Our telecommunications license imposes certain restrictions on who can own our
shares. If these restrictions are breached, we could lose our license. As with other companies engaged in the telecommunications business in
Israel, our license requires that, at a minimum, 20% of the economic and voting
interest, and certain other defined means of control, of our company be owned
by Israeli citizens and residents. In addition, no transfer or acquisition of
10% or more of any of such means of control, or the acquisition of control of
our company, may be made without the consent of the Ministry of Communications.
Our license also Page 29




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restricts cross-ownership and cross-control among competing mobile telephone
operators, including the ownership of 5% or more of the means of control of
both our company and of a competing operator, without the consent of the
Ministry of Communications, which may limit certain persons from acquiring our
shares. Shareholdings in breach of these limits could have two consequences.
First, the shares that are in excess of the limits will be converted into
dormant shares, with no rights other than the right to receive dividends or
other distributions to shareholders, and to participate in rights offerings.
Second, the breach of the limits could be the basis for revoking our license
unless our principal shareholders, who currently hold an aggregate of
approximately 66% of our ordinary shares, continue to hold an aggregate of at
least 51% of our ordinary shares. There is a risk that our
investment in Matav may not happen or that it will be on different
terms than currently proposed. On March 15, 2004, we announced that we had entered into a non-binding
memorandum of agreement with Matav Cable Systems Media Ltd., or Matav, and its
shareholders, Dankner Investments Ltd., or Dankner, and Delek Investments and
Properties Ltd., or Delek, to invest $137 million in Matav for approximately
40% share of Matavs equity. The memorandum of agreement is subject to approval of the parties respective boards
of directors, as stipulated in the memorandum
of agreement, and other necessary
corporate approvals. As well, the memorandum of agreement provides that it will expire
after 60 days or upon the execution of a detailed, definitive investment
agreement, whichever is earlier. We are currently conducting a due
diligence review and are in negotiations regarding the terms of the
investment. The memorandum of agreement further provides that the transaction is subject to
a number of significant conditions precedent (many of which are outside the
control of the parties) which include, among others:  
    
    distribution to the Matav shareholders of our shares currently held indirectly by Matav;  
    
    an agreement for a transaction whereby Matav will acquire cable assets from existing operators that will bring Matavs
subscribers to 500,000;  
    
    receipt of all required corporate and regulatory approvals;  
    
    an agreement for commercial cooperation between Partner and Matav;  
    
    satisfactory agreements with the lenders of each of the companies;  
    
    approval by the Matav shareholders of an amendment of the articles of association of Matav; and  
    
    confirmation that Dankner, Delek and Partner will not be deemed a group of borrowers for purposes of Israeli banking
regulations, as a result of the transaction. There can be no assurance that the parties boards of directors will approve
the memorandum of agreement, or that the parties will execute a definitive
agreement by the deadline set out in Page 30




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the memorandum of agreement or at all. In that event, or in the event that the
conditions to the transaction are not satisfied, the transaction may not be
completed, and the anticipated benefits of the transaction will not be
realized and we may be at a competitive disadvantage to any competitor that is able to offer both mobile telephone and fixed line services. Further, the terms of the definitive agreement, if signed,
may be materially different from those set out in the memorandum of
agreement. Benefits from our investment in, and cooperation with, Matav may not
be achieved to the extent or within the time period that is currently
anticipated. Following our proposed investment in Matav and the commencing of commercial
cooperation with Matav, we intend to leverage our distribution network and
customer base to offer Matavs services to our customers and, possibly, to
bundle their services with our own. We may encounter unanticipated costs and
difficulties as we do this, or the bundling of Matavs services
may not achieve
as broad customer acceptance as we expect. We understand that Matav intends to
provide new services, including fixed telephony over cable
networks, using a technology that is not yet mature, and as a result, it may
encounter unforeseen difficulties. In addition, we cannot assure you that we
will not encounter unanticipated costs or delays, or that we will achieve the
cost synergies that we anticipate or that we will be able to exercise
effective control over Matavs business. Further, the process of integrating Matavs
business with our existing business could also divert managements attention
from our day-to-day business. We expect that our
investment in Matav will be substantially dilutive to our earnings, at
least in the short term, and may result in additional leverage. The cable television industry in Israel has experienced significant financial
difficulties, characterized by operating losses from the provision of cable
television services. If our investment in Matav is completed, we will account
for our interest in Matav either on a consolidated or equity
accounting basis, depending on the ultimate terms of the investment. We expect that Matavs
results will have a substantially dilutive impact on our earnings at least in the short term.
In addition, Matav will incur or assume substantial additional indebtedness to
acquire the cash assets necessary to attain 500,000 subscribers and satisfy one
of the conditions precedent for our investment in Matav. Although we anticipate
that some indebtedness will be non-recourse to Partner, we expect
that our investment in Matav will increase the amount of
our consolidated indebtedness. Further, we may choose to fund our investment in Matav through additional
indebtedness incurred by us. Page 31




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ITEM 4. INFORMATION ON THE COMPANY 4A. History and Development of the Company We were incorporated in Israel under the laws of the State of Israel on
September 29, 1997 as Partner Communications Company Ltd. Our products and
services are marketed under the Orange Brand. Our principal executive offices
are located at 8 Amal Street, Afeq Industrial Park, Rosh Haayin 48103, Israel
(telephone: 972-67-814-888). Our website address is www.orange.co.il.
Information contained on our website does not constitute a part of this annual
report. Our agent for service in the United States is CT Corporation, 111
Eighth Avenue, New York, New York 10011. In our short history, we have achieved a number of important milestones:  
    
    In April 1998, we received our license to establish and operate a mobile telephone network in Israel.  
    
    In August 1998, we finalized our long-term credit facility to support our network and business roll out.  
    
    By October 1998, we completed our initial network roll out with approximately 77% coverage of the Israeli population,
enabling us to commence the soft launch of our services to a test market of targeted customers.  
    
    By January 1999, we had launched full commercial operations with approximately 88% population coverage, established a
nationwide distribution network and were offering full services with an extensive media campaign.  
    
    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 May 2000, we introduced post-paid tariff plans, branded orange to go, which allowed subscribers to pay only for
airtime usage without a minimum subscription period and without any minimum usage commitment. At December 31, 2003, we had
approximately 1,000,000 subscribers to our orange to go plans, or approximately 48% of our total subscriber base. Page 32




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
    
    In June 2000, we introduced our pre-paid subscriber plan, known as Big Talk. At December 31, 2003, we had 639,000
subscribers, or approximately 30% of our total subscriber base, in this plan.  
    
    In July 2000, we amended our long-term credit facility, increasing the amount available to up to $750 million.  
    
    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.  
    
    In January 2001, we received accreditation for the ISO 9002 standard from the Israeli Institute of Quality and Control.  
    
    In March 2001, we received a special license issued by the Ministry of Communications, allowing us to provide internet
services.  
    
    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 an auction process completed on December 18, 2001, the Ministry of Communications awarded us the two bands of spectrum
for which we had submitted bids: one band of GSM 1800 spectrum and one band of UMTS third generation spectrum.  
    
    On December 26, 2001, we filed a shelf registration statement under the US Securities Act of 1933, as amended, registering
$400 million of debt securities and ordinary shares for possible offer and sale.  
    
    On January 28, 2002, we had over 1,500,000 subscribers.  
    
    In June 2002, our license was extended until February 2022.  
    
    In June 2002, we launched orange obox services, which enable the downloading of rich applications and content. These
services are based on the virtual machine platforms, Java to microeditions (J2ME) and proprietary General Virtual Machine
(GVM).  
    
    In December 2002, we entered into an amending agreement
to our senior credit facility in order to further tailor it to our business
plan.  
    
    In November 2003, we entered into a frame agreement with Nortel Networks to supply what is expected to be Israels first
third generation UMTS wireless network.  
    
    By August 2003, we had over 2 million subscribers. Page 33




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For information on our capital expenditures, see Item 5B Liquidity and
Capital ResourcesCommitments and Contractual Obligations. Proposed Investment in Matav On March 15, 2004, we announced that we had entered into a memorandum of
agreement with Matav Cable Systems Media Ltd., or Matav, and its shareholders,
Dankner Investments Ltd., or Dankner, and Delek Investments and Properties
Ltd., or Delek, to invest $137 million in Matav for approximately 40% share of
Matavs equity. Matav is one of three operators of broadband cable television services in
Israel, which according to its public filings had 267,000 subscribers as of
December 31, 2003, revenues in 2003 of NIS 545 million and a net loss in 2003
of NIS 5 million (with Matav revenue and net loss figures presented under
Israeli GAAP). Matav is also one of Partners principal shareholders. As of
December 31, 2003, Matav held approximately 5.3% of Partners ordinary shares. If
we consummate our investment in Matav, we intend,
subject to regulatory and other approval procedures to enhance our competitive
position by leveraging synergies in marketing, sales, technology and other
areas and by offering a variety of services to customers, including
multi-channel cable television, broadband internet transmission, fixed line
telephony and cellular telephony. The acquisition is subject to a number of significant conditions precedent
described below. We intend to finance the transaction from external sources. Description of Matav Memorandum of Agreement As noted above, Partner entered into a memorandum of agreement on March
15, 2004 with Matav and its shareholders, Dankner and Delek, to invest $137
million in Matav for approximately 40% share of Matavs equity. The memorandum of agreement will not be binding until
approved by the parties respective boards of directors, as
stipulated in the memorandum of agreement, and other necessary
corporate approvals. As well, the
memorandum of agreement provides that it will expire after 60 days or upon the
execution of a detailed, definitive investment agreement, whichever is earlier.
There can be no assurance that the parties will execute a definitive agreement,
and the terms of the definitive agreement, if signed, may be materially
different from those set out in the memorandum of agreement. Under the memorandum of agreement, upon the closing of Partners proposed
investment in Matav, the holdings of Delek and Dankner will each be diluted to
approximately 12%. Each of Delek Page 34




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and Dankner will have an option during the two years following the closing to
purchase up to an additional 6% of Matav shares from Partner at a price to be
determined on the basis of the price of Matavs shares and the price of the
Partner shares to be received by Matavs shareholders as a distribution from
Matav during the option exercise period. In addition, we will have the option
at the end of the option exercise period to repurchase Matav shares from Delek
and Dankner at a material premium over the Delek and Dankner option price, so
that our holding in Matav will be at least 2% greater than that of Delek and
Dankner together, should they exercise their options. Additionally, under the memorandum of agreement, during the two years
following the closing, for as long as Delek and Dankner hold Matav shares and
subject to certain additional conditions, we will receive from Delek and
Dankner limited proxies that will grant us voting power over 50.01% of the
voting shares of Matav. As a result, we will have the voting power to appoint
all of the directors of Matav, and have agreed to vote in favor of two
directors designated on behalf of each of Delek and Dankner for as long as each
holds at least 5% of Matav. In the memorandum of agreement, Matav and Partner agree that they will act
in good faith to ensure (i) the signing of a detailed, definitive investment
agreement in accordance with the conditions and principles set out in the
memorandum of agreement within 60 days of the date of the memorandum of
agreement and (ii) the completion of due diligence by Partner no later than the
signing of the definitive investment agreement. The memorandum of agreement
further provides that the transaction is subject to a number of significant
conditions precedent (many of which are outside the control of the parties)
which include, among others:  
    
    Distribution to the Matav shareholders of the Partner shares currently held by Matav;  
    
    An agreement for a transaction whereby Matav will acquire cable assets from existing cable operators that will bring
Matavs subscribers to 500,000;  
    
    Receipt of all required corporate and regulatory approvals;  
    
    An agreement for commercial cooperation between Partner and Matav;  
    
    Satisfactory agreements with the lenders of each of the companies;  
    
    Approval by the Matav shareholders of an amendment of the articles of association of Matav; and  
    
    Confirmation that Dankner, Delek and Partner will not be deemed a group of borrowers for purposes of Israeli banking
regulations, as a result of the transaction. We have not yet completed our due diligence review, and our board has not
approved the memorandum of agreement. Partner, Matav, Dankner and Delek are
currently in the process of Page 35




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negotiating the definitive investment and ancillary agreements. We
understand that Matav is in discussions to acquire the cable and communications
assets of Tevel Israel International Communications Ltd. If this transaction
were completed, Matav would have over 500,000 cable subscribers, representing
approximately 60% of the Israeli cable market. In addition, if this transaction
were completed, Matav will incur or assume substantial additional indebtedness.
However, we can provide no assurance as to whether this transaction will be
completed or, if completed, on what timeframe or on what terms and conditions,
including price. 4B. Business Overview We were the first GSM mobile telephone network operator in Israel. We
received our mobile telephone license in April 1998 and commenced full
commercial operations of our digital GSM 900 mobile telephone network in
January 1999. Since then we have expanded rapidly and on December 31, 2003 we
had 2,103,000 subscribers, representing an estimated 31% of total Israeli
mobile telephone subscribers at that date. During 2003, we increased our
customer base by approximately 14%, an increase of approximately 266,000
subscribers. At December 31, 2003 our network covered approximately 97% of the
Israeli population. We had constructed and installed 2,138 base transceiver
stations (including microsites) by December 31, 2003, with 103 of those
stations installed in 2003. At December 31, 2003, most of our subscribers had
post-paid tariff plan contracts with us, approximately 30% of our subscribers
were in pre-paid subscriber plans, and approximately 16% of our subscribers
were business subscribers. We market our services by capitalizing on the strong international Orange
Brand and the experience of our principal shareholders and their affiliates,
primarily Hutchison Whampoa Limited. The Orange Brand, which is licensed to us,
has been used successfully in other markets to promote mobile telephone
services. Market surveys show that we have achieved strong brand awareness in
Israel. We currently operate in the 900 MHz and 1800 MHz bands. Our services
include standard and enhanced GSM services, as well as value added services and
products such as voice mail, voice messaging, color picture messaging, icon,
ringtone and game downloads, information services, High Speed Circuit Switched
Data or HSCSD, General Packet Radio Services, or GPRS, which enables the packet
transfer of data in an always on mode at a speed of up to 20-30 Kbps,
personal numbering and data and fax transmission services. We also offer our
subscribers the ability to roam using their mobile phones outside Israel. At
December 31, 2003, we offered international roaming through 281 operators
covering 126 countries. Page 36




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We have set forth in the following table an estimate of each operators
share of total subscribers in the Israeli cellular market at December 31, 1999,
2000, 2001, 2002 and 2003: Market Share*
    
    1999
    
    2000
    
    2001
    
    2002
    
    2003Partner
    
    
    13
    %
    
    
    21
    %
    
    
    27
    %
    
    
    29
    %
    
    
    31
    %Cellcom
    
    
    48
    %
    
    
    46
    %
    
    
    41
    %
    
    
    39
    %
    
    
    35
    %Pelephone
    
    
    39
    %
    
    
    33
    %
    
    
    28
    %
    
    
    28
    %
    
    
    30
    %MIRS**
    
    
    
    
    
    
    
    
    
    
    4
    %
    
    
    4
    %
    
    
    4
    %
   *
    
    Based on information contained in published reports issued by, and public
statements made by, Pelephone and Cellcom or by their shareholders and
from Partner subscriber data at December 31, 1999, 2000, 2001, 2002 and
2003. The figures for MIRS in 2001, 2002 and 2003 are our estimates.**
    
    As MIRS received a general license at February 5, 2001 its subscribers
have not been included in the Israeli subscriber count in prior years.
MIRSs entire subscriber base has been included in the Israeli subscriber
count from the date on which MIRS received its license. We operate in one business segment, GSM mobile telephony and related
services, and one geographic segment, Israel. Overview of Mobile Telecommunications Industry in Israel There are currently four mobile telephone network operators in Israel:
Partner, Pelephone, Cellcom and MIRS. Pelephone is an Israeli corporation owned
by Bezeq, the public fixed-line operator in Israel (50%) and by Pelephone
Holdings, LLC (50%), a Delaware corporation owned by Shamrock Holdings. In
February 2004, Bezeq announced that its Board of Directors had approved the
exercise of its option to purchase the shares of Pelephone owned by Shamrock
Holdings. According to the announcement, Bezeq has until August 2004 to give a
notice of exercise of the option. Pelephone currently operates nationwide
mobile telephone networks in Israel using both the N-AMPS analog and the CDMA
digital system and recently upgraded its network to CDMA1x. The major
beneficial shareholders of Cellcom are BellSouth, the Safra Group and Discount
Investment Corporation Ltd. Cellcom operates a nationwide mobile telephone
network based on D-AMPS digital technology, and it began providing GSM services
in the DCS 1800 band in the second half of 2002. Published reports state that
Cellcom will launch EDGE technology during 2004. MIRS is an Enhanced
Specialized Mobile Radio, or trunking, iDEN network. MIRSs major
shareholders are Motorola Communications (Israel) Ltd. (66.7%) and Ampal Israel
Ltd. (25%). Page 37




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In addition, the Palestine Telecommunication Co. Ltd., or Paltel, operates
a GSM mobile telephone network under the name Jawwal in the Palestinian
Authority administered areas of the West Bank and Gaza Strip, as well as a
fixed-line network. Paltels GSM network competes with our network in some
border coverage overlap areas. Mobile telephones were first introduced in Israel in 1986. For the first
eight years of operation the growth of mobile telephone services in Israel was
slow. There was a single operator, Pelephone, offering analog service, and
prices were relatively high. It was not until the end of 1994, and the launch
of the second mobile telephone operator, Cellcom, that growth in mobile phone
usage in Israel increased significantly. Within two years, subscriber numbers
had increased by more than seven times. Since the end of 1996, there has been continued strong growth in the
Israeli mobile telephone market. Market data from industry sources indicates
that the total market size was approximately 6.7 million subscribers at
December 31, 2003, representing nearly 99% of the Israeli population. In an auction process completed in December 2001, the Ministry of
Communications awarded us the two additional bands of spectrum for which we had
submitted bids: one band of GSM 1800 spectrum and one band of UMTS third
generation spectrum. Cellcom was also awarded a band of GSM 1800 spectrum in
the auction and began providing GSM 1800 services in the second half of 2002.
Cellcom and Pelephone were also each awarded one band of UMTS third generation
spectrum in the auction. The following are some of the special characteristics that we believe
differentiate the Israeli market from other developed mobile telecommunications
markets:  
    
    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, 2003 of 99%, representing approximately 6.7
million subscribers, although this may include dormant subscribers and
subscribers to multiple networks Page 38




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as well as other subscribers who are not included in the Israeli population
figures, such as Palestinians, new immigrants, and foreign workers.
    
    Six Different Mobile Telephone Technologies. The four
mobile telephone licensees in Israel have systems
based on six technologies. Pelephone uses both the
N-AMPS analog and the CDMA and CDMA1x digital systems
and Cellcom uses both D-AMPS and GSM systems. MIRS
uses an iDEN system. We are currently one of two
network operators using a GSM digital system. GSM is
an advanced, internationally accepted technology used
by over approximately 1 billion people worldwide as
of December 31, 2003.
    
    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 Our mission is to continue and maintain our position as a leading provider
of quality and innovative mobile communications solutions in Israel and to
promote the Orange Brand into a leading consumer brand in Israel. In order to
achieve our mission, we are implementing strategies designed to:  
    
    Provide high quality customer service to subscribers.  
    
    Ensure that our subscribers enjoy high quality network with nationwide coverage.  
    
    Further enhance our technological leadership through the deployment of a UMTS third generation network and services.  
    
    Promote the Orange Brand through a broad-based marketing campaign.  
    
    Offer packages of innovative voice and data services and unique tariff structures that are responsive to the needs of the
various target customer segments in Israel.  
    
    Develop applications tailored to the needs of various subscriber segments.  
    
    Deliver content and information services to subscribers through our network, taking into consideration the different
segments in the market. Page 39




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
    
    Further develop dedicated, wide-reaching sales and distribution channels for all targeted market segments.  
    
    Leverage our distribution network and customer base to offer new services, such as digital cable services to our customers
and, possibly, to bundle these new services with our own, through the
proposed investment in Matav and through
other strategic acquisitions 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:  
    
    High Quality Network. We believe that we set high standards for
network quality. We also believe that our EFR voice coding technology
produces high sound quality. In addition, we believe 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. Moreover, the additional spectrum granted to us as a
result of our success in the December 2001 spectrum auction in Israel
will further improve the capacity and quality of our network.  
    
    Data Services and Applications Leadership. We believe that we are a
leader in the development and provision of mobile data and content
services in Israel. Our content services may be viewed in three ways:  o
    
    First, we provide our subscribers with a wide range of
information services under the brand orange obox that can be accessed
from their handsets. The combination of services available to a
subscriber depends upon the subscribers handset type and tariff plan.o
    
    Second, our present and planned content services may be divided
along applications lines: entertainment; location-based; information
services and community services.o
    
    Third, we presently provide our services using the following
interfaces: interactive voice response, or IVR; short messages service,
or SMS; and Wireless Application Protocol, or WAP. We have rolled out
WAP-enabled services and GPRS services, orange obox services and orange
oklik services. In addition, we have signed agreements with several
content providers to expand the variety of content services available
to our subscribers.  
    
    International Roaming. We believe that we provide a convenient and
comprehensive roaming services available to Israelis traveling abroad
and to visitors to Israel using their own GSM phones.  
    
    Strong and Experienced Shareholder. One of our principal shareholders,
Hutchison Whampoa Limited, is a global leader in the mobile
telecommunications market. It has a substantial interest in Page 40




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3G operating companies in Austria, Australia, Denmark, Hong Kong, Ireland,
Italy, Sweden and the United Kingdom. We benefit highly from the knowledge and
experience of Hutchison Whampoa Limited. In addition, we have signed a cost
sharing agreement with Hutchison Telecommunications Limited and certain of its
subsidiaries, for the joint acquisition and development of information
technology platforms and software solutions, hardware, content and other
services in connection with the 3G business. For more information see Item 7B.
Related Party Transactions  Transactions with Affiliates.  
    
    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 broad-based domestic marketing campaign has
resulted in a rapid wide-scale recognition of the
Orange Brand in Israel. The Orange Brand is currently
used in the UK, Hong Kong, Australia, France, India,
Switzerland and Denmark.  
    
    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. We believe that the
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, innovation and customer service. In carrying out this strategy
we have made a substantial effort in promoting the Orange Brand in Israel as a
vehicle for differentiating our services from those of our competitors. We
believe the brand, which is licensed to us, has been a significant factor in
our success. Our marketing strategy is based on the concept of high value for money and
introducing advanced services for subscribers. In order to carry out our
strategy, we offer our subscribers tariffs which are generally at the level of
those charged by our competitors, and technologies and services that we believe
are advanced, such as our information and content services. We offer WAP mobile
services, HSCSD and GPRS services. In addition, during 2002 we launched orange obox services and orange oklik
services. We consider both orange obox services and orange oklik services as
our major platforms for future growth in usage. Page 41




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In November 2003 we rearranged our content services marketing, uniting
them under a content cellular portal branded orange obox. This portal is
divided into 8 content groups: obox music, obox gamez, obox love, obox mystic,
obox sport, obox entertainment, obox news and obox business. In order to promote our advanced new services and to increase awareness of
these services, we are taking many promotional steps, using a broad range of
advertising media. We also intend to maintain our advertising presence in the
media in order to maintain high exposure for our brand and advanced
technologies. Our marketing also focuses on promoting our services to the various
segments of the Israeli population. We advertise our services in several
languages. We also target campaigns to the large Orthodox Jewish community. In
addition to traditional media, we promote our services by sponsoring cultural
and community programs, including the International Film Festival which takes
place every year in Jerusalem, and which is a major cultural event in Israel,
attracting interest both in Israel and abroad. We use the distinctive Orange
Brand logo in all our promotional activities and advertising and all mobile
phones sold to our subscribers bear the logo. On December 31, 2003, approximately 16% of our subscribers were business
subscribers. We are continually developing tailored value added services to
meet the special needs of business subscribers. We have a license to use the Orange Brand. Under the brand license
agreement, we have the right to use the Orange Brand in connection with
promoting our network services in Israel for as long as we hold a license to
operate a mobile telephone system in Israel. See Item 4B. Information on the
CompanyBusiness OverviewIntellectual Property. Services and Products Our principal business is the provision of mobile telephone services in
Israel. Our goal is to offer our subscribers a wide range of sophisticated and
easy to use services based upon the latest proven technology. In addition to
our standard and enhanced GSM services, including international dialing and
roaming, we offer our customers value added services, including voice mail,
short message services, intelligent network services, content based on our
mobile portal, data and fax transmission and other services. Our use of HSCSD
and GPRS Technologies enables high speed data transmission. Our orange obox
services enable the downloading of rich applications and content, and our
orange oklik services enable subscribers to send photos, multimedia and
animation from handset to handset and from handset to web, using our MMS
platform. We also offer 24-hour, seven Page 42




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days a week customer service, as well as handset repair and replacement
services, to subscribers who acquire these services. In January 2001, we received the accreditation of the ISO 9002 Standard
from the Israeli Institute of Quality and Control. ISO 9002 is a quality
management system specification whose requirements are aimed primarily at
achieving customer satisfaction by preserving standardization at all stages,
and throughout company processes. Tariff Plans Since the beginning of our full commercial operations, we introduced
tariff plans aimed at bringing innovation to the Israeli mobile communications
market. Our original tariff plans were based on one or more of the following
basic elements:  
    
    Initial airtime package for a specified tariff each month.  
    
    Rewarding high usage with decreasing marginal airtime charges as more airtime is used each month. The per minute tariff
rates paid by a subscriber under these tariff plans decline as the number of minutes used in a month by that customer
increases.  
    
    Charging fees based on airtime usage. These tariff plans do not include interconnect charges imposed by other mobile and
fixed-line providers for calls made by our subscribers that terminate on third party networks.  
    
    Charging for value added services on a usage basis with no fixed monthly fee.  
    
    Providing discounts for calls to designated numbers within a subscribers calling circle.  
    
    Some of our rates are related to the time of day that a call is placed, if the subscriber joined a specific rate plan or
bought a special rate discount package. Most of the above elements existed in the private market since the
beginning of our full commercial operations and still exist primarily in the
business market. In May 2000, we introduced the post-paid tariff plans without a minimum
monthly fee, which we branded orange to go. Most of our orange to go plans
are based on the following basic elements:  
    
    No monthly payment charge.  
    
    No commitment for minimum usage.  
    
    No contractual obligations for a minimum subscription period. Page 43




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
    
    Limited handset subsidies.  
    
    Fixed rate per minute in addition to call termination tariff. The elements of the orange to go tariff plans are applied, packaged and
marketed in various ways to create tariff packages designed to appeal primarily
to the private sector and target markets, including families, soldiers,
Orthodox Jewish, Arab and Russian communities, young adults (b.u.) and
students. Many of our subscribers sign up to the orange family plan. Under this
plan, two to five individuals, who subscribe as a group are given large
discounts on calls made to each of the other family members orange phones. For
our orange family subscribers under the orange to go tariff plan, we offer a
fixed rate for calls made to other family members orange phones. Until September 2003, we offered our orange b.u. subscribers who are under
the orange to go tariff plan a monthly refund, which could be used towards
voice and SMS usage. Since September 2003, each b.u. subscriber can choose
three out of six tariff bundles:  (1)
    
    family tariff  a discounted tariff for calls made to each of the other
family members orange phones;(2)
    
    off peak tariff  a monthly amount of orange airtime minutes given for
free (excluding call termination tariffs) during off peak hours;(3)
    
    discounted SMS tariff (excluding call termination tariff);(4)
    
    a monthly credit for content services;(5)
    
    a monthly credit for SMS and calls; and(6)
    
    a 50% discount for two destinations (interconnect not included). From 2002, our new orange soldiers and orange students tariff plans, as
well as our main tariff plan for the Jewish Orthodox community (from 2001),
include a uniform airtime tariff for all calls made in Israel, both for calls
within our network and for calls originating on our network and terminating on
a Bezeq fixed-line network or other cellular networks. Since December 2003 we
have offered our orange student subscribers a new plan which includes:  (1)
    
    a basic fixed tariff to all destinations, and(2)
    
    a choice between two tariff packages: Page 44




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(a)
    
    a family tariff  a discounted tariff for calls made to each of
the other family members orange phones; or(b)
    
    a discounted SMS tariff. Under our original tariff plans for business customers, which are still
available, we offer lower airtime tariffs, which vary according to the size of
the business, and extra discounts for calls between employees of the business. To date, we have a wide range of tariff plans for our business customers,
based on one or more of the following elements:  
    
    Monthly minimum payment including a bundle of minutes.  
    
    Discounts on airtime tariffs between users who are registered under one business customer.  
    
    Monthly minimum payment for unlimited calls between users who are registered under one business customer.  
    
    Uniform tariff for all calls in Israel, both for calls within our network and for calls originating on our network and
terminating on Bezeq fixed-line network or other cellular networks.  
    
    Rewarding high usage with a decreasing marginal airtime charge as more airtime is used each month. The per minute tariff
rates decline as the number of minutes used in a month by a customer increases. Our pre-paid plan, known as Big Talk, was launched in June 2000. Under
the plan, our subscribers purchase a handset and a nationally distributed phone
charge card, available in fixed denominations. Upon purchase of the phone card
or prepaying by credit card, customers can use our network, including some of
our value added services, without the need to register with us or enter into
any contract. Under this plan, there are some reduced tariffs for certain hours
with no obligation to use our network for a minimum period of time and no
monthly subscription fee or monthly bill. Since December 2002, we offer our
pre-paid customers a limited roaming service, which includes incoming calls and
SMS only, provided that the customer is registered for this service. Our
pre-paid plan enables us to compete in the growing pre-paid mobile services
market. Certain pre-paid customers receive handset subsidies. These subsidies
are usually lower than those received by other subscribers. In addition, we have some GPRS, WAP and orange obox services packages,
which include a monthly payment for these services. Page 45




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We developed several retention and churn prevention plans to retain our
subscribers. Some of these plans are based on a subscribers ranking according
to financial and economic parameters. In addition, we have developed tools to
predict a subscribers potential to churn from our network, thus enabling us to
proactively approach the subscriber with an attractive offering. We believe that the combination of our tariff plans and our advanced
technology and content services provides attractive value in the Israeli mobile
telephone market and that our pricing strategy has facilitated subscriber
growth. International Roaming Israelis are frequent travelers. According to the Israel Central Bureau of
Statistics, in 2003, more than three million overseas departures of Israelis
were recorded, and more than one million people visited Israel during 2003.
Roaming allows a mobile phone subscriber to place and to receive calls while in
the coverage area of a network to which he or she does not subscribe and to be
billed for such service by his home network. Unique among mobile telephone
technologies, facilitating international roaming was a primary design goal of
the GSM system from its inception. A GSM roamer can therefore expect to enjoy
substantially the same services, features and security while traveling as he
does at home. We consider international roaming to be a significant source of
revenue. At December 31, 2003, we had open commercial roaming relationships with
281 operators in 126 countries or jurisdictions. We also have agreements with
satellite operators, providing global coverage, requiring the use of unique
handsets, some of which can be used with the standard customer SIM card.
Creating roaming relationships with multiple operators in each country
increases potential incoming roaming revenue for us and gives our subscribers
more choice in coverage, services and prices in that country. Since we operate on the 900 MHz band, which is the most widely-used among
GSM operators worldwide in terms of handsets, and also on the 1800 MHz band,
all of our roaming enabled subscribers may roam to most countries where we have
roaming capability using their own handsets without modification. In some
countries GSM networks use either the 1900 MHz band of GSM or other
technologies (GSM 850, CDMA or UMTS) with which we have established
international roaming. Our subscribers who own dual- or tri-band handsets that
work on GSM 1900 as well as GSM 900 may also use their own handsets in those
countries with networks using GSM 1900. Other subscribers who advise us of
their intention to visit those countries are lent free-of-charge a compatible
handset into which they insert their SIM, thus retaining their own phone
number, phone book and all other regular features. Page 46




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900 MHz is the most widely-used GSM band, and most GSM handsets in the
world are already compatible with our network. Since we also operate in the
1800 MHz band, most GSM subscribers worldwide who roam are therefore capable of
using our network immediately upon their arrival in Israel. Value Added Services In addition to standard GSM value added services, including voice mail,
Short Message Service (SMS), voice messaging, fax mail, call waiting, call
forwarding, caller identification and conference calling, we currently offer
and are developing a variety of additional value added services. Value added
network services are important to our business as they create differentiating
factors and increase customer usage and satisfaction. We follow all major
market developments regarding value added network services, and we intend to
implement and offer those services that are likely to be popular with customers
and which would add value to our business. Some of the value added services
that we offer are available only to subscribers who have certain handset
models. The value added services we currently offer include the following:  
    
    World Wide Web-SMS Gateway. This service enables subscribers to
receive messages on their handset from people who visit our web site.  
    
    Account Balance. All subscribers can request and receive current
information on their Partner account balance and air time usage
directly on their handset display.  
    
    High Speed Circuit Switched Data (HSCSD). This infrastructure
development enables the transmission of data at a speed of up to 43.2
Kbps, which is higher than the 14.4 Kbps speed previously available on
GSM networks.  
    
    Electronic Bill Presentation. This service enables our subscribers to
view, analyze and compare their private Partner accounts.  
    
    Information and Content Services. We provide voice and text-based
information and content services. The voice-based information services
are provided through IVR platforms, which include interactive
information services and radio programs. Text based information
services are provided through our current SMS and WAP technologies.
Interactive information services include services such as: news
headlines, sport news and results, weather reports in Israel and
abroad and daily horoscopes. For purposes of these services we have
relationships with content providers.  
    
    General Packet Radio Service (GPRS). This technology enables the
packet transfer of data in an always on mode, at speeds of up to
20-30 KBps. Page 47




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
    
    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 oklik. 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.
    
    Content downloading. This service enables the
downloading of rich applications and content,
including games, interactive screensavers, karaoke
and polyphonic ringtones, combined with a unique
range of handsets. This service is based on the
virtual machine platforms, Java to Micro Editions
(J2ME) and proprietary General Virtual Machine (GVM).
    
    Double Ring. Double Ring enables our subscribers to
receive calls made to their mobile telephone on
either their mobile or their fixed-line telephone.
    
    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.
    
    Short Code Dialing for Roamers. This service allows
foreign GSM users roaming in Israel to use their home
services dialing codes during their stay in Israel
and allows our subscribers while roaming abroad to
use the short dialing codes available on our network.
    
    Field Personnel Management. This service provides a
comprehensive system for businesses to manage their
field personnel via our network, including
dispatching, scheduling, task assignment by real time
location and confirmation back to the customer.
    
    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 drivertime, cutting fuel
costs and improving efficiency. In addition, it
provides the option to communicate with drivers via
text messages.
    
    Business Text Messaging Service. This service enables
business customers to send SMS messages to
individuals and groups through an Internet
application. By using this service, businesses can
keep in touch with internal employees and/or
customers either individually or as a group.
    
    Personal Voice Mail Greetings. This service enables
subscribers to personalize their voice mailbox
greetings by easily applying professional,
customizable pre-recorded messages. Page 48




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
    
    Graphic Products. This service enables subscribers to
download wallpapers, screen savers and icons from our
website and save them on their handsets. Subscribers
can also compose their own graphic products and
upload their own pictures, using a WEB based graphic
composer. Subscribers can also send them to friends.
    
    Ring Tones. This service enables subscribers to
personalize the ring tones heard upon receiving an
incoming call. Subscribers can also compose their own
ringtones and send them to friends. We also offer our
subscribers an innovative extension to this service,
which enables them to receive a whole song as a ring
tone.
    
    4 U. This service enables subscribers to send a recorded greeting,
accompanied by a song or a joke selected by the subscriber, to another
subscriber (on any Israeli network) at a predetermined time.
    
    Picture and Video Messaging. This service enables subscribers to send
and receive pictures and short video clips.
    
    Orange Gamez. This service is a games platform which enables
subscribers to play various interactive games via WAP, the internet,
SMS and IVR.
    
    One on One Games. Game arena in which 2 persons who play one of the
games (Trivia, Checkers, etc.), via wap and IVR and can also bet on
the results of each match. The amount of the bet is transferred from
one customers bill to another.
    
    Fun Tone. Personal ring back tone which is subject to the customer
preferance, 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.
    
    Omail. Mobile e-mail services that enable access via wap, web and
native clients to personal e-mail accounts (private or corporate
accounts) and PIM data (i.e. calendar, contacts, tasks and notes).
    
    Orange Promo. This service enables cell broadcasting in various
topics: news, entertainment, sports, etc. This service is available
only to subscribers who have a 64K SIM card.
    
    Orange Memo. This service enables sending voice and textual reminders
from the handset to the personal e-mail address. Handsets We provide handsets to our contract subscribers at discounts of up to 100%
when they first become subscribers. The price at which the handset is provided
depends upon the tariff package and special promotions. When subscribers under
our orange to go and Big Talk plans receive handset Page 49




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subsidies, such subsidies are significantly lower than those received by our
subscribers who sign 36-month contracts. Since October 2001, subscribers who
return the handset of a competing network are entitled to discounts, depending
on their actual monthly bill and the type of handset purchased. We currently offer a range of different handset models supplied by a
number of manufacturers, all of which are branded with the Orange logo. We
offer handsets to satisfy our subscribers roaming needs in the 900 MHz, 1800
MHz and 1900 MHz bands. We evaluate the technical features of every new mobile
handset and, if we decide to make it available to subscribers, we obtain a type
approval from the Ministry of Communications for such handset. We advise our
sales representatives and dealers on compatibility and technical issues. All
our handsets are EFR compatible to provide high voice quality. Most of our
handset models have Hebrew language displays. Because of the wide international
acceptance of GSM technology, handset manufacturers generally make their latest
model handsets available for use on GSM networks before networks based on other
technology. We have begun selling some innovative handsets with enhanced
applications, including multicolor screens, 16 poly ringtones and MMS
capabilities. Customer Division Our Customer Division consists of Customer Service and Sales and
Distribution: Customer Service We aim to provide high quality customer service in Israel through quick,
simple and reliable handling of all customer needs and interactions. We invest
in both state of the art technology and training of customer service skills in
order to achieve this goal. At December 31, 2003, approximately 1,564
employees, on a full-time equivalent basis, worked in our customer service
division. Our customer service division consists of both call center services
and face-to-face service centers. Call center services are divided into
different centersgeneral, finance, network, international roaming, business,
data and pre-paidin order to provide focused and professional responses to our
customer inquiries in four languages 24 hours a day, seven days a week. Our face-to-face customer service consists of 34 service points serving
the customer as a one-stop-shop in both sales and service areas. In addition, we give our customers various self-service channels, such as
IVR, Web-Based service and service via SMS. Page 50




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Sales and Distribution We have developed a multi-channel approach to target the various segments
of the market and to coordinate our sales strategy. We distribute our services
primarily through:  
    
    direct sales through Partner-owned sales centers and business sales representatives; and
    
    indirect sales through traditional networks of specialist dealers and non-traditional networks of retail chains and stores,
which account for a majority of our sales. Direct Sales Orange Sales and Service
Centers. We currently operate six Orange Brand stores which focus on sales to
individual customers. These stores are sales and service centers with a uniform
design, typically 1,100 square feet (100 square meters) in size, and offer high
service standards. The Orange Brand stores are conveniently located in highly
visible locations, such as shopping malls, in the Tel Aviv area, Jerusalem,
Haifa and Beer Sheva. These stores serve as flagship stores to help introduce
the Orange Brand and our services to the Israeli market and to generate a high
level of repeat business and referrals. In the future, we also expect these
stores to become involved in the sale of advanced data services and other
technologically sophisticated applications. In addition, we have opened 27
service centers, each approximately 3,000-6,000 square feet (300-600 square
meters) in size. These centers serve as one-stop shops for direct customer
service, in which our representatives will demonstrate the use of new products
and services, including handset maintenance services. Direct Sales Force. Our sales force is comprised of sales representatives, account managers
and area managers, targeting business clients. We primarily focus on small- and
medium-sized enterprises which tend to use more airtime and yield higher
margins. Small to medium-sized businesses are serviced by a team of regional
representatives and customer account managers located in five regional offices.
Large corporate customers are serviced by a team of national representatives
and customer account managers. Prominent individuals are served by national VIP
representatives. We provide our sales force with regular training to ensure
that they are capable of selling advanced solutions such as mobile data,
intranet extension and connectivity, virtual private networks and other value
added services that appeal to corporate customers. Our direct sales force is
supported by a telemarketing department which makes initial contact with
prospective customers and makes appointments for the sales representatives. The
telemarketing department is another channel for direct sales by phone. Page 51




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Indirect Sales Traditional Dealer
Networks. On December 31, 2003, we had agreements with 43 traditional dealers
providing 66 points of sale, consisting of specialists selling a range of our
products. The private dealer network is an important distribution channel
because of its ability to attract existing cellular users to our network. Our
dealer network focuses primarily on sales to individual customers and, to a
lesser extent, small business customers. Our dealers are highly professional
and some of them have previous experience selling cellular services in Israel.
One of our dealers has a workforce of approximately 100 salesmen for
door-to-door sales. In addition, we have specific dealers that target different segments of the
Israeli population with the appropriate style, language and locations. We
provide regular training to employees of our dealers to update them on our
products and services. We believe that the ongoing sales success of our
existing distribution channels will continue to attract dealers to our network.
Our dealer managers visit dealers on a regular basis to provide information and
training, answer questions and solve any problems that may arise in the
activation process. We pay our dealers competitive commissions and provide
handset subsidies to them. However, dealers are not entitled to commissions for
any customers that terminate their service within 60 days of activation. Non-Traditional Dealer
Networks. Non-traditional dealers consist of generalist retailers or specialist
stores that sell related products. This distribution channel is not common in
the Israeli cellular market today, and we believe that it provides us with a
competitive advantage over and differentiates us from our competitors. We have a contract with Super-Pharm, the largest drug store chain in
Israel, to sell our network services in their stores. At December 31, 2003, our
services were sold in 107 Super-Pharm stores nationwide in a variety of
formats, including Partner shop-in-shops, kiosks, wall-unit displays and at
front counters. In 2003, approximately 18% of our new subscribers were
recruited through sales by Super-Pharm. Under our agreement with Super-Pharm,
in addition to Super-Pharm continuing to sell our network services in their
stores, we are cooperating with them in a new chain of stores that Super-Pharm
has established, called Super-Link, and that is dedicated to selling
communications services and equipment. Six such stores have been opened to
date, and the intention is to open 10 more. The agreement was
amended on
February 12, 2004, effective as of January 1, 2004, subject to the necessary corporate approvals and to
obtaining an exemption from approval for
arrangements in restraint of trade under the Restrictive Trade Practices Law,
5748-1988, from the Commissioner for Restrictive Trade Practices. Such an
exemption was granted with respect to the previous agreement and is effective
until June 2004 or the termination of the agreement, whichever
is earlier. If
it receives the necessary corporate approvals, the term of the amended
agreement will be until December 31, 2005, renewable for an additional one year
unless one of the parties provides the other party 180 days prior notice of
termination Page 52




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The
amended agreement amends, among other things, the rate of commissions and
other remuneration to which Super-Pharm is entitled. In
the event that the necessary corporate approvals are not obtained,
the parties have agreed to resume their cooperation in accordance with the
previous agreement, until no later than December 31, 2004. In addition, we are developing our distribution network with other
non-traditional dealers, such as the Ituran chain, which sells, installs and
maintains car security and tracking systems in approximately 46 locations
throughout Israel. They also sell and install our car kits in these sites.
Another non-traditional dealer is Eurocom Communications Ltd. See Item 7.
Major Shareholders and Related Party Transactions. We provide regular training
to the employees of our non-traditional dealers to update them on our products
and services. Customer Contracts, Credit Policy, Billing Bad Debt and Disconnection Part of our subscriber contracts for customers on our original tariff
plans provide for a 36-month term. Under the terms of these contracts,
customers who terminate their contracts prior to the expiration of the 36-month
term and have purchased their handset from us or our dealers can be charged by
us for payment of the residual price of their handset. This charge reflects the
difference between the price they paid for the handset, if any, and the list
price, adjusted for the number of months that the customer has been a
subscriber. Subscribers are billed monthly in arrears for airtime charges and
charges per services. We outsource the printing and sending of bills to third
parties. Most of our business customers have signed 36-month contracts. Most of our individual subscribers subscribe and pay for their services by
credit card. All credit card accounts are subject to an initial maximum credit
limit each month, which varies depending upon the type of credit card and for
which we obtain prior approval from the card issuer. When a subscriber account
reaches this limit, we may seek approval from the card issuer. If the approval
is not granted by the card issuer, we may require the customer to provide other
means of payment or arrange an increase in the approved limit from his credit
card issuer. If this does not occur, the customers usage may be limited or
suspended until we receive a cash deposit or guarantee from the customer. All business subscribers and some of our individual subscribers can
subscribe and pay for their services by credit card or direct debit. Customers
acquiring more than fifteen handsets (or eight Page 53




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through our dealers) are subject to a credit scoring review performed by
outside credit agencies. All customers are subject to a monthly maximum credit
limit. When the monthly limit is exceeded, usage may be limited. Roaming access
for direct debit subscribers is subject to credit scoring by outside credit
agencies and may require additional guarantees or credit checks. Subscribers are subject to periodic credit risk reviews, taking into
consideration payment history, disconnection history and new circumstances. If
payment for a subscribers monthly bill is not received within 27 days of the
issue of the bill, roaming and international call service is suspended. After
31 to 36 days, all outgoing call service is suspended. After 45 days, all
services are suspended, after 60 days, we begin legal proceeding regarding the
debt collection and ultimately, after 150 days, all services are disconnected.
If the subscriber does not reinstate service after being disconnected, we may
require him to pay the residual value of his handset. Our Network We have built an extensive, resilient and advanced mobile network system
in Israel, allowing us to offer our services with extensive coverage and
consistent high quality. Through December 31, 2003, we have made net capital
expenditures of NIS 2,565 million ($586 million) in our network infrastructure
and other related fixed assets. Overview The first generation of wireless communications, based on analog
technology, provides simple voice telephony. The second generation of
wireless communications, such as the digital GSM standard, provides additional
data facilities ranging from short messaging services to narrow band data,
which is sufficient for the basic data services offered by network operators,
but cannot support high resolution video or multimedia applications. New types of services are made possible by the roll out of technological
developments that increase the speed and efficiency of existing GSM networks
such as GPRS, which is a 2.5G technology. 2.5G technology network operators are
able to deliver multimedia and high speed services before third generation
services are introduced. Packet data rates vary from 20 Kbps-44 Kbps, depending
mainly on handset capabilities. Approximately 50% of our customers who have
GPRS enabled handsets use and pay for GPRS services. Third generation wireless communications, which are expected to offer full
interactive multimedia capabilities at data rates of up to 2 Mbits per second,
are expected to bring wirefree networks significantly closer to the
capabilities of fixed line networks or sometimes even better. Page 54




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Improvements in coding and data compression technology will provide better
voice quality and more reliable data transmission. UMTS is the global standard
adopted for the implementation of third generation wirefree telecommunications. Infrastructure On December 31, 2003, our GSM network consisted of 1,409 macrobase
transceiver stations and 729 microbase transceiver stations, all linked to 30
base station controllers. The base station subsystem is controlled by 11 mobile
switching centers. Base transceiver stations, mobile switching centers and base
station controllers are interconnected by approximately 3,600 transmission
links. In addition, our network is interconnected with the public switched
telephone network operated by Bezeq in several locations across Israel. Our
network is also directly connected to the mobile networks of Pelephone, Cellcom
and the three Israeli international operators, Bezeq International, Barak and
Golden Lines, and indirectly to MIRS and the fixed and mobile telephone
networks of Paltel. During 2002, our network was directly connected to the
mobile networks of Pelephone and Cellcom for the purpose of bilateral transfer
of SMSs. In February 2003, we added an SMS direct connection to MIRS. See
Item 4B. Information on the CompanyBusiness OverviewInterconnection.
Ericsson and Nokia supply our base station controller and base transceiver
station sites for our 2G and 2.5G network in Israel. Our transmission network is made up of leased lines from Bezeq, Cellcom
and Pelephone and our own microwave links. Currently most of our transmission
network consists of leased lines. As our network currently covers more than 98%
of the Israeli population, we are now selectively expanding the capacity and
quality of our network primarily in urban areas by adding infrastructure to
improve outdoor and indoor coverage. We plan to continue increasing the
capacity and quality of our network due to the growth of voice and data in the
GPRS traffic and in order to accommodate the anticipated growth in the number
of our customers. Network Design Our primary design objective is to build a mobile telephone network
engineered to provide excellent voice quality, call reliability, high capacity
and high coverage quality and to maintain technical advantages over our
competitors. In formulating our network design objectives, we have been guided
by our business strategy to build the highest quality network. We work to
quality standards which exceed those set forth in our license. The quality
parameters that we seek to satisfy are those that we believe are important to
mobile phone users: voice quality, low blocked call rate, low dropped call
rate and deep indoor penetration, especially in densely populated areas or
areas of Page 55




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special commercial interest. Blocked calls are calls that fail because access
to the network is not possible due to insufficient network resources. Dropped
calls are calls that are involuntarily terminated. With these quality parameters in mind, we have rolled out an advanced
radio network, using macrocellular and microcellular base transceiver stations
and advanced frequency planning software in very high density metropolitan
areas in order to provide deep indoor coverage and sufficient capacity for
latent demand. This technology is designed to maximize spectrum utilization and
enhance service quality. Our transmission network design confers the following
benefits: (i) necessary bandwidth for GSM services; (ii) resilience; (iii) use
of high transmission rate back-bone routes based on Synchronous Digital
Hierarchy; and (iv) the ability to utilize a new generation of sophisticated
technology to optimize the system and increase capacity where necessary. Our
switching architecture is based on two transit switches connected to all of our
systems and platforms, which improves reliability and facilitates expansion. We
are optimizing our network with an advanced radio method called Synthesized
Frequency Hopping. This method increases the capacity of our network and
improves the quality of the performance we supply to our subscribers. Because
our network was planned with our key quality parameters in mind, we believe
that we will be able to continually upgrade the quality of our network as our
business develops. Spectrum Allocation and Capacity Spectrum availability is limited and is allocated by the Ministry of
Communications through a licensing process. Pursuant to the terms of our
license and subsequent allocations, we were allocated 2x10.4 MHz in the 900 MHz
frequency band, of which 2x2.4 MHz are shared with Paltel in the West Bank and
the Gaza Strip. We also have an agreement to use an additional 2x2.4 MHz of
spectrum in the 900 MHz frequency band on a shared basis with Paltel. Under
this agreement, which has been endorsed by the Ministry of Communications, we
are permitted to use this additional spectrum in Israel so long as we do not
cause interference in areas where Paltel operates. In the December 2001 spectrum auction in Israel, the Ministry of
Communications awarded us the two bands of spectrum for which we had submitted
bids: 2 x 10 MHz of GSM 1800 spectrum and 2 x 10 MHz and 1 x 5 MHz of UMTS
third generation spectrum. During 2002, we started deploying GSM 1800 MHz band
base transceiver stations to enhance the capacity of our GSM 900 MHz network,
and to further improve our GSM 900 MHz networks quality. We are the sole
operator which has one network operating both in the 900 MHz frequency band and
in the 1800 MHz frequency band. As a result, our networks capacity is larger
than that of other cellular networks in Israel. Page 56




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We seek to optimize the use of our current spectrum allocation by adding
more base transceiver stations in combination with advanced design and
operation techniques. We have experienced in the past, and may experience in
the future, interference in the GSM 900 spectrum allocated to us. We intend to
continually enhance the quality of our coverage and capacity in response to
changing consumer demands. Dropped Calls Dropped calls are calls that fail to complete when dialed or are
terminated involuntarily. Since the launch of full commercial operations, our
dropped call rate has steadily improved. Our monthly dropped call rate has
declined from 3.50% for January 1999 to 1.71% for December 1999, to 1.44% for
December 2000, to 1.3% for December 2001 to 1.15% for December 2002, and to
less than 0.9% for December 2003. Other Systems Our Home Location Register, or HLR, stores details of our subscribers and
their location. We have installed a special purpose HLR which prevents a single
point of failure in our network from affecting the service to all our
subscribers. Our Authentication Center automatically verifies each SIMs
authenticity by performing an encrypted transaction when the mobile telephone
is switched on. Our Short Message Service Center handles short messages sent by
our subscribers to other mobile telephones. The Voice Mail System takes
messages for subscribers and allows them to retrieve and forward messages and
faxes after being notified by short message of the receipt and source of the
voice message. The Partner Information Hub that we launched in January 2000
enables all our subscribers to receive data information services on their
handsets using SMS technology. During 2000, we increased our SMS Center
capacity four-fold. The system is used for mobile originated, SMS information
services and other monitor and control systems based on SMS. We also extended
our information services with an IVR system by CTware Ltd., which allows voice
access to many information services. Dozens of such services are currently
available including news, games, entertainment, jokes, radio and others. We
have purchased Ericssons Mobile Positioning System (MPS) platform. This is a
technology platform which enables us to provide location-based services to a
large number of subscribers. A system which enables location-based services has
been launched in 2001. During 2002, we launched orange oklik services, which
are based on Multimedia Messaging Service Center (MMSC), an Ericsson platform.
In addition, we have developed with Samsung (Korea) a system which enables the
downloading of rich applications and content. These services, which are branded
orange obox, are based on GVM, a technology which was originally developed in
Korea on CDMA-1x technology and has been implemented on our GSM network. Our
test bed laboratory Page 57




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enables start-up companies to develop and evaluate new GSM services without
interfering with the operation of our network. Since September 2000, we have
also offered foreign GSM users roaming in Israel, and our subscribers while
roaming abroad, the ability to use some of their home services dialing codes
during their stay in Israel with a system developed by star*home. We have also enhanced the authentication ability in our network, in order
to strengthen the protection of our network against fraud and interception. In June 2000, we installed and launched an Ericsson pre-paid system. In
May 2002, we upgraded the Ericsson platform in order to support our larger
pre-paid subscriber base and to allow us to offer a wider range of services.
Also in June 2000, we launched WAP services based on a platform designed by
Exalink (now Comverse), an Israeli provider of internet-based services over
wireless devices. We have chosen Ericsson to provide us with a GPRS system that
enables the high speed packet transfer of data in an always on mode. The WAP
over GPRS system allows our subscribers to have mobile internet services on
line. We have completed the national deployment of our GPRS network and have
launched a variety of supported services in 2002. As part of our GPRS service,
we are using mainly Ciscos IP Core System. The IP Core System is the first
step towards new advanced services, and can be used on third generation UMTS
networks as well. Site Procurement Once a new coverage area has been identified, our technical staff
determines the optimal base station location and the required coverage
characteristics. The area is then surveyed to identify antenna sites. In urban
areas, typical sites are building rooftops. In rural areas, masts are usually
constructed. Technical staff also identify the best means of connecting the
base station to the network, for example, via leased or owned and operated
microwave links or wired links leased from Bezeq. Once a preferred site has
been identified and the exact equipment configuration for that site decided, we
begin the process of obtaining necessary approvals. The erection of most of these antennas require building permits from local
or regional authorities, as well as a number of additional permits from
governmental and regulatory authorities, such as:  
    
    erection and operating permits from the Ministry of the Environment;
    
    permits from the Civil Aviation Authority, in certain cases; and Page 58




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
    
    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. Suppliers Our network utilizes standard equipment, which is available from a limited
number of suppliers. One of our major GSM equipment suppliers is Ericsson and
its affiliates, which supply us with mobile switching centers, base station
controllers, base transceiver stations, transit transmission centers, operation
support systems and transmission systems equipment. Ericsson is also our major
supplier of GPRS network equipment, including GPRS support nodes and gateway
GPRS support nodes. Nokia also supplies us base station controllers, base
transceiver stations and network management system equipment. See Item 3D. Key
InformationRisk FactorsWe depend on a limited number of suppliers for our
network equipment. Our results of operations could be adversely affected if our
suppliers fail to provide us with adequate supplies of network equipment or
maintenance support on a timely basis. We have agreements with Baran Raviv,
Bintech and H. Mer, all Israeli engineering companies, for the construction of
our sites. We continue to purchase certain network components from various
other key suppliers. We believe that our network suppliers price structure is
competitive with industry standards. In November 2003, we entered into a frame agreement with Nortel Networks
to supply what is expected to be Israels first third generation UMTS wireless
network. The cost of the network under the frame agreement is expected to be
$93 million. Interconnection All telecommunications providers with general licenses in Israel have
provisions in their licenses requiring them to allow interconnection of their
networks with all other telecommunications networks in Israel. Currently, our
network is connected to all other telecommunications networks operating with
general licenses in Israel. Our network is directly interconnected to the
networks of Bezeq, Cellcom, Pelephone, MIRS, Bezeq International, Barak and
Golden Lines. Our network is indirectly interconnected to the network of Paltel
through the Bezeq network for the purpose of bilateral transfer of calls.
During 2002, our network was connected to the networks of Cellcom and Pelephone
for the purpose of bilateral transfer of SMSs, and in February 2003, we
connected our network to the network of MIRS for the same purpose. Page 59




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We are currently operating without any formal interconnection agreements
with Bezeq. We are not aware of any interconnect agreement that Cellcom,
Pelephone or MIRS has signed with Bezeq. Our day-to-day arrangements with Bezeq
substantially conform to a draft interconnect agreement negotiated with Bezeq.
The interconnect rates charged by Bezeq are set by Israeli legislation and
Bezeq is required by law not to discriminate against any licensed
telecommunications operator in Israel with respect to the provision of
interconnect services. As of March 1, 2000, Bezeq began calculating
interconnect (call termination) fees due to us based on fees actually collected
by Bezeq from its subscribers and imposing an additional collection fee on us.
Until that time, interconnect fees were calculated on the basis of actual
usage. In October 2000, a new Interconnect Regulation became effective, stating
that interconnect fees among cellular and fixed line operators should be based
upon actual usage. Nevertheless, Bezeq continued calculating interconnect fees due to us
based on fees actually collected from its subscribers and imposing an
additional collection fee on us. From the end of 2001 until July 2003, several
proceedings took place, in which the Minister of Communication reviewed the
issue. On July 15, 2003, the Ministry of Communications gave its final decision
in the matter, according to which Bezeq must pay mobile operators based on
traffic, not collection from its subscribers. However, with respect to the
period from October 2, 2000 until August 31, 2003, the Ministry permitted Bezeq
to deduct a 1.1% fee. As of September 1, 2003, Bezeq may no longer deduct any
fees from the traffic-based interconnect tariffs it pays the mobile operators.
The Ministry made no decision concerning the period from March 1, 2000 until
October 1, 2000 (which was subject to legal proceedings which we initiated, and
which ended in a settlement whereby the 1.1% deduction would apply). Bezeq
appealed the Ministry of Communications final decision. The outcome of this
appeal would also apply to the period from March 1, 2000 until October 1, 2000. We currently pay Bezeq an interconnection fee based on a tariff structure
that came into force on May 1, 2000. We have formal interconnection agreements with Cellcom, Pelephone and
MIRS. The agreements have one-year terms and are renewable for an unlimited
number of additional one-year terms. The agreements can be terminated on 90
days written notice by either party. The interconnection agreements with
Cellcom, Pelephone and MIRS do not contain any pricing terms. The
interconnection tariffs charged by Cellcom, Pelephone and MIRS are set by a
Ministry of Communications regulation that, coupled with a change to the mobile
telephone operators licenses, imposes a uniform call termination tariff for
all mobile telephone operators. The uniform tariff is currently NIS 0.45 per
minute. The uniform call termination tariff for incoming international calls to
cellular networks is NIS 0.25 per minute. Because we transfer and receive all
traffic to and from Page 60




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Paltels network through the Bezeq network, we pay Bezeq a transit fee for each
call. In January 2004, the Ministry of Communications appointed an
international telecommunications consultancy firm to study both SMS and SMS
termination tariffs of the mobile networks in Israel. In addition, the Ministry
of Communications recently amended our license and the relevant regulations,
reducing SMS termination tariffs from NIS 0.38 to NIS 0.285 effective May 1,
2004. The Ministry of Communications indicated that this reduction is only an
interim tariff until the international telecommunications consultancy firm,
which was appointed by it, completes its study. We have a written interconnection agreement with Bezeq International and
with Barak. We currently have an operating arrangement with the other
international operator, Golden Lines. As noted already, the Ministry of
Communications regulation and the change to the mobile telephone operators
licenses discussed above also impose a uniform call termination tariff for
incoming international calls of NIS 0.25 per minute. Competition There are currently four mobile telephone network operators in Israel:
Partner, Cellcom, Pelephone and MIRS. The major beneficial shareholders of
Cellcom are BellSouth, the Safra Group and Discount Investment Corporation Ltd.
Cellcom operates a nationwide mobile telephone network based on D-AMPS digital
technology. Cellcom was awarded spectrum in the DCS 1800 band in the December
2001 spectrum auction in Israel and began providing GSM services in the second
half of 2002. For more information, see Item 3D. Risk FactorsCompetition from
existing competitors may require us to continue to reduce our tariffs, increase
our subscriber acquisition costs and customer retention costs and increase our
churn rate. Our second competitor is Pelephone. Pelephone is an Israeli
corporation owned by Bezeq, the public fixed-line operator in Israel (50%) and
by Pelephone Holdings, LLC (50%), a Delaware corporation owned by Shamrock
Holdings. In February 2004, Bezeq announced that its Board of Directos had
approved the exercise of its option to purchase the shares of Pelephone owned
by Shamrock Holdings. According to the announcement, Bezeq has until August
2004 to give a notice of exercise of the option. Pelephone currently operates
nationwide mobile telephone networks in Israel using both the N-AMPS analog and
the CDMA digital system and recently upgraded its network to CDMA1X. Our third
competitor is MIRS, an Enhanced Specialized Mobile Radio, or trunking,
network, which was granted a general license to operate as a mobile telephone
operator on February 5, 2001. MIRSs major shareholders are Motorola
Communications (Israel) Ltd. (66.7%) and Ampal Israel Ltd. (25%). According to the Companys estimate, at December 31, 2003 Cellcom had an
estimated 2,325,000 customers, representing approximately 35% of the Israeli
mobile telecommunications Page 61




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market. Pelephone had approximately 1,986,000 paying
customers at December 31, 2003, representing approximately 30% of the Israeli
mobile telecommunications market. MIRS is estimated to have had over 260,000
users at December 31, 2003, representing approximately 4% of the Israeli mobile
telecommunications market. We compete with Cellcom, Pelephone and MIRS
principally on the basis of telecommunications service quality, brand identity,
variety of handsets, tariffs, value added services and the quality of customer
services. To the extent that mobile telephones are used in lieu of fixed telephones,
we also compete with Bezeq. In addition, the Palestine Telecommunication Co. Ltd., or Paltel, operates
a GSM mobile telephone network under the name Jawwal in the Palestinian
Authority administered areas of the West Bank and Gaza Strip, as well as a
fixed-line network. Paltels GSM network competes with our network in some
border coverage overlap areas. Information Technology We depend upon a wide range of information technology systems to support
network management, subscriber registration and billing, customer service and
marketing and management functions. These systems execute critical tasks for
our business, from rating and billing of calls, to monitoring our points of
sale and antenna sites, to managing highly segmented marketing campaigns. As
our subscriber base has grown, we have devoted significant resources to
expanding and enhancing our information technology systems, adopting and
implementing new systems, including Customer Relations Management, or CRM,
systems, which have contributed to our customers satisfaction with our
service, as well as updating our financial management and accounting system. We
believe these systems have been an important factor in our achievements since
our commercial launch. While many of our systems have been developed by third-party vendors, all
of them have been modified and refined to suit our particular needs. In certain
instances, we have developed critical information technology systems internally
to meet our specific requirements. For example, significant segments of our CRM
and business information infrastructure were developed internally and were
designed to integrate our customer service outreach with our overall sales and
marketing effort. In other cases, conversely, we have outsourced responsibility
for certain systems to third parties. We have completed upgrading our
billing system to increase our flexibility to offer new tariff packages and to
support data packet switching services for 2.5 generation and for third
generation in the future. Page 62




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Intellectual Property We are the registered owners of the trademark Partner in Israel with
respect to telecommunications-related devices and services as well as
additional trademarks. We have also registered several internet Web domain
names, including, among others: www.partner.co.il, www.orange.co.il and
www.partnergsm.co.il. We have entered into a brand license agreement with Orange International
Developments Limited, a subsidiary of Orange plc. Under this agreement, Orange
International appointed us as a permitted user of its trademarks in Israel.
Under this license agreement, we have the exclusive right to use the Orange
Brand in advertising and promotional materials in Israel. The term of the brand
license began on July 1, 1998. The trademark license is royalty-free for the
first 15 years of its term. In 2012, the parties are to discuss the royalties
to be paid for a five-year term beginning July 1, 2013. In 2017, the parties
are to again consider the royalties to be paid for an additional five-year term
beginning July 1, 2018. Under this license agreement, we are required to comply
with the Orange Brand guidelines established by Orange International. We have
the right to use the Orange Brand as long as we are able and legally eligible
under the laws of Israel to offer telecommunications services to the public in
Israel. However, the license agreement may be terminated by mutual agreement,
or at our discretion, or by Orange International if a court determines that we
have materially misused the brand and we continue to materially misuse the
brand after such determination of material misuse. We have also entered into a brand support/technology transfer agreement
with Orange Personal Communications Services Limited. Under this agreement,
Orange Personal will provide us with information and expertise to support the
Orange Brand in Israel at an agreed cost for a minimum of five years beginning
December 1, 1998. We may also request additional, optional support from Orange
Personal at a daily rate. From May 2003, either party may terminate the
agreement effective as of November 30 of a particular year by giving written
notice in May of that year. See Item 3D. Risk FactorsOur marketing strategy
is based upon the international Orange Brand. If our license agreement
terminates or is revoked, we will lose one of our main competitive strengths. In addition, we are a full member of the GSM Association. In conjunction
with the promotion and operation of our GSM network, we have the right to use
their relevant intellectual property, such as the GSM trademark and logo,
security algorithms, roaming agreement templates, and billing transfer
information file formats. We are eligible to remain a member of the GSM
Association for as long as we are licensed to provide GSM service. Page 63




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Regulation Overview We operate within Israel primarily under the Communications Law
(Telecommunications and Broadcasting), 1982 (the Telecommunications Law), the
Wireless Telegraphy Ordinance (New Version), 1972 (the Wireless Telegraphy
Ordinance), the regulations promulgated by the Ministry of Communications and
our license. The Ministry of Communications issues the licenses which grant the
right to establish and operate mobile telephone service in Israel, and sets the
terms by which such mobile telephone service is provided. The regulatory
framework under which we operate consists also of the Planning and Building
Law, 1965 and the Consumer Protection Law, 1981. Additional areas of Israeli
law may be relevant to our operations, including antitrust law, specifically
the Restrictive Trade Practices Law, 1988, and administrative law. The Israeli
telecommunications market is in a state of transition, moving to a more
liberalized environment in which various markets, such as the mobile,
international services, and domestic markets and infrastructure, are gradually
being opened to competition and in which government-owned monopolies are being
privatized. As a result, there is a possibility that changes may take place in
the regulatory framework described below. Telecommunications Law The principal law governing telecommunications in Israel is the
Telecommunications Law and related regulations. The Telecommunications Law
prohibits any person, other than the State of Israel, from providing public
telecommunications services without a license issued by the Ministry of
Communications. General licenses, which relate to telecommunications activities over a
public network or for the granting of nationwide services or international
telecommunications services, have been awarded to Bezeq, and to a company
jointly owned by the three cable television operators in Israel, to the four
mobile telephone operators, Pelephone, Cellcom, Partner and MIRS, and to the
three international operators, Barak, Bezeq International and Golden Lines. In
addition, the Ministry of Communications may issue additional mobile telephone
operator and other licenses in the future. Recently,
the Ministry of Communications decided to open the international call
market to new competitors. However, the Ministry notified that it will not allow mobile operators to enter the international call
market. The Ministry of Communications has the authority to amend the terms of any
license. The grounds to be considered in connection with such an amendment are
government telecommunications policy, public interest, the suitability of the
licensee to perform the relevant services, the promotion of competition in the
telecommunications market, the level of service and changes in technology. The
Ministry of Communications may also make the award of certain benefits, such as
new spectrum, conditional upon the licensees consent to a license amendment.
The Ministry of Communications also Page 64




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has the authority to revoke, limit or
suspend a license at the request of the licensee or when the licensee is in
breach of a fundamental condition of the license, when the licensee is not
granting services under the license or is not granting services at the
appropriate grade of service or when the licensee has been declared bankrupt or
an order of liquidation has been issued with respect to the licensee. Public
interest may also be grounds for the rescission or suspension of a license. The Ministry of Communications, with the consent of the Minister of
Finance, may also promulgate regulations to determine interconnect tariffs, or
formulae for calculating such tariffs. Moreover, the Ministry of Communications
may, if interconnecting parties fail to agree on tariffs, or if regulations
have not been promulgated, set the interconnect tariff based on cost plus a
reasonable profit, or based on each of the interconnecting networks bearing its
own costs. The Ministry of Communications has promulgated regulations that, coupled
with a change effected in the mobile telephone operators licenses, impose a
uniform call termination tariff. The Ministry of Communications has recently
amended the mobile telephone operators licenses, reducing SMS termination
tariffs. For more information, see Interconnection. The Telecommunications Law also includes certain provisions which may be
applied by the Ministry of Communications to general licensees, including
rights of way which may be accorded to general licensees to facilitate the
building of telecommunications networks or systems and a partial immunity
against civil liability which may be granted to a general licensee, exempting
the licensee, inter alia, from tort liability with the exception of direct
damage caused by the suspension of a telecommunications service and damage
stemming from intentional or grossly negligent acts or omissions of the
licensee. The Ministry of Communications has applied the partial immunity
provisions to us, including immunity in the event that we cause a mistake or
change in a telecommunication message, unless resulting from our intentional
act or gross negligence. Royalties. Pursuant to the Telecommunication (Royalties) Regulations,
2001, we must pay royalties to the State of Israel every quarter based on our
chargeable revenues, as defined in the regulation, from mobile telephone
services (including, among other, airtime, monthly subscription fees, roaming
services and non-recurring), on a cumulative basis, excluding value added tax.
Revenues for purposes of royalty calculation also exclude revenues transferred
to other telecommunications license holders, bad debts, payments for roaming
services to foreign mobile telephone operators and certain other revenues. The
regulation provided a rate of 4% in 2003 and currently provides a rate of
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Fair Competition and Antitrust Law Provisions protecting Partner from anti-competitive practices can be found
in our license and in the licenses of the other telecommunications operators,
in the various telecommunications regulations and in the Restrictive Trade
Practices Law. Our license emphasizes the principle of granting users equal
access to the systems of each of the operators upon equitable terms. The
Telecommunications Law also provides certain protection against disruption of
service by Bezeq, whose interconnection and transmission services are necessary
in order for us to be able to provide certain services. The Restrictive Trade Practices Law is the principal statute concerning
restrictive practices, mergers and monopolies. This law prohibits a monopoly
from abusing its market position in a manner that might reduce competition in
the market or negatively affect the public. The law empowers the Commissioner
of Restrictive Trade Practices to instruct a monopoly abusing its market power
to perform certain acts or to refrain from certain acts in order to prevent the
abuse. Bezeq has been declared a monopoly in certain markets, a ruling it is
challenging. For more information see Item 3D. Risk FactorsWe operate in a
highly regulated telecommunications market which limits our flexibility to
manage our business. In particular, the regulators decisions, including those
relating to tariffs, may materially adversely affect our results of
operations. Our License On April 7, 1998, the Ministry of Communications granted to us a general
license to establish and operate a mobile telephone network in Israel for which
we paid a license fee and associated costs totaling approximately NIS 1,571
million, including an amount of approximately NIS 12 million as a license fee
adjustment to reflect changes in the Israeli CPI from the time we submitted a
bid for our license until the time our license was granted by the Ministry of
Communications. We paid this additional fee under protest and requested a
refund of the fee from the Ministry of Communications. As a result of the
rejection of our request by the Ministry of Communications, we filed a suit in
the Jerusalem District court. In the December 2001 spectrum auction in Israel, we were awarded
additional spectrum (GSM (1800 MHz) spectrum and UMTS third generation (1900
MHz and 2100 MHz) spectrum). Following the award of this spectrum, the Minister
of Communications amended and extended the license through 2022. The cost of the license fees is NIS 180 million (approximately $41
million) for the GSM 1800 spectrum, payable in two installments and NIS 220
million (approximately $50 million) for the UMTS third generation spectrum,
payable in six installments. To date, we have paid NIS 180 million and NIS Page 66




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131
million for the GSM 1800 spectrum and the UMTS third generation spectrum,
respectively. For more information, see Item 5B. Operating and Financial
Review and ProspectsLiquidity and Capital Resources. Under the terms of the amended license, we have provided a $10 million
guarantee to the State of Israel to secure the Companys adherence to the terms
of the license. For more information, see Item 5B. Operating and Financial
Review and ProspectsLiquidity and Capital Resources. On February 18, 2004, the Minister of Communications appointed a tender
committee for allocating additional spectrum bands to existing and new mobile
network operators. The committee will be responsible for the process of holding
a tender in which the Ministry of Communications will extend the licenses of
the existing mobile network operators in order to enable them to offer their
services in the additional spectrum bands that will be offered and allocated in
the tender. In addition, the tender will include the possibility of granting a
general license to a new mobile network operator. Under the tender, the
Ministry of Communications will offer GSM 1800 MHz bands and third generation
UMTS bands. Term.Our license authorizes us on a non-exclusive basis to establish and
operate a mobile telephone network in Israel. A mobile telephone network is a
wireless telephone network through which mobile telephone service is provided
to the public. Our license allocates to us specified frequencies and telephone
numbers. Our license was originally valid for a period of ten years (until
April 2008). As described above, we were granted an amended license as a result
of our success in the December 2001 auction for additional spectrum in Israel.
Among other changes, the amendment extended our license until 2022. The license may be extended for an additional six-year period upon our
request to the Ministry of Communications, and a confirmation from the Ministry
of Communications that we have met the following performance requirements:  
    
    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 Page 67




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
    
    efficient use of the spectrum allocated to us, 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 Ministry of Communications approval. We
have submitted our standard agreement to the Ministry of Communications for
approval pursuant to our license. The agreement is still under review by the
Ministry of Communications. Tariffs. Our license requires us to submit to the Ministry of
Communications our tariffs (and any changes in our tariffs) before they enter
into effect. Our license allows us to set and change our tariffs for outgoing
calls without approval of the Ministry of Communications. However, the Ministry
of Communications may intervene in our tariffs if it finds that our tariffs
unreasonably harm consumers or competition. Payments. Our license specifies the payments we may charge our
subscribers. These include one-time installation fees, fixed monthly payments,
airtime fees, payments for the use of other telecommunication systems, payments
for handset maintenance and payments for additional services. In most of our
tariff plans we have chosen to charge only for airtime and use of services. See
Item 4B. Information on the CompanyBusiness OverviewServices and
ProductsTariff Plans. Interconnection. Like the licenses of Pelephone, Cellcom and MIRS, our
license requires that we interconnect our mobile telephone network to other
telecommunications networks operating in Israel, including that of Bezeq, the
other mobile telephone operators and the international operators. Conversely, Partner must allow other network operators to interconnect to
its network. See Item 4B. Information on the CompanyBusiness
OverviewInterconnection. Service Approval. The Ministry of Communications has the authority to
require us to submit for approval details of any of our services (including
details concerning tariffs). In addition, we are required to inform the
Ministry of Communications 30 days prior to the activation of any service on a
specified list of services. Access to Infrastructure. The Ministry of Communications has the power to
require us, like the other telephone operators in Israel, to offer access to
our network infrastructure to other operators. We may also be required to
permit other operators to provide value-added services using our network. Page 68




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Universal Service. We are required to provide any third generation service
with the same coverage as our existing network within 24 months from the
commercial launch of each such service. Territory of License. Our license authorizes us to provide mobile
telephone services within the State of Israel. In May 2000, we were also
granted a license from the Israeli Civil Administration, which is responsible
for administering the territories of the West Bank and Gaza that are not under
the administration of the Palestine Authority. License Conditions. Our license imposes many conditions on our conduct. We
must at all times be a company registered in Israel. Our license may not be
transferred, mortgaged or attached without the prior approval of the Ministry
of Communications. We may not sell, lease or mortgage any of the assets which
serve for the implementation of our license without the prior approval of the
Ministry of Communications, other than in favor of a banking corporation which
is legally active in Israel, and in accordance with the conditions of our
license. Our license provides that no direct or indirect control of Partner may be
acquired, at one time or through a series of transactions, and no means of
control may be transferred in a manner which results in a transfer of control,
without the consent of the Ministry of Communications. Furthermore, no direct
or indirect holding of 10% or more of any means of control may be transferred
or acquired at one time or through a series of transactions, without the
consent of the Ministry of Communications. In addition, no shareholder of
Partner may permit a lien to be placed on shares of Partner if the foreclosure
on such lien would cause a change in the ownership of 10% or more of any of
Partners means of control unless such foreclosure is made subject to the
consent of the Ministry of Communications. For purposes of our license, means
of control means any of:  
    
    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 grants its holder 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. Page 69




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Our license also provides that a foreign mobile radio telephone operator,
as defined below, or its controlling corporation, must hold during the five
year period commencing on the date our license was granted by the Ministry of
Communications, 25% of the voting rights and of the rights to appoint directors
or the general manager of Partner. The foreign mobile radio telephone operator
must also provide us all with the information in its possession required for
the establishment of a mobile telecommunications system and for the provision,
marketing and sale of mobile telecommunications services. Accordingly, no
transfer may occur if as a result the foreign mobile radio telephone operator,
or a controlling corporation, will hold less than 25% of the voting rights or
the right to appoint directors or the general manager in Partner. After such
five-year period, this holding may be reduced with the approval of the Ministry
of Communications. On September 14, 2003, the Ministry of Communications
notified us that the undertaking to provide information as mentioned above need
no longer remain in force. In connection with our initial public offering, our license was amended to
provide that our entering into an underwriting agreement for the offering and
sale of shares to the public, listing the shares for trading, and depositing
shares with the depositary or custodian will not be considered a transfer of
any means of control, as defined below. Pursuant to the amendment, if the ADSs
(or other traded means of control, that is, means of control which have been
listed for trade or offered through a prospectus and are held by the public)
are transferred or acquired in breach of the restrictions imposed by the
license with respect to transfer or acquisition of 10% or more of any means of
control, we must notify the Ministry of Communications and request the
Ministers consent within 21 days of learning of the breach. In addition,
should a shareholder, other than a founding shareholder, breach these ownership
restrictions, or provisions regarding acquisition of control or cross-ownership
or cross-control with other mobile telephone operators or shareholdings or
agreements which may reduce or harm competition, its shareholdings will be
converted into dormant shares, as long as the Ministers consent is required
but not obtained, with no rights other than the right to receive dividends and
other distributions to shareholders, and to participate in rights offerings. The dormant shares must be registered as dormant shares in our share
registry. Any shareholder seeking to vote at a general meeting of our
shareholders must notify us prior to the vote, or, if the vote is by deed of
vote, must so indicate on the deed of vote, whether or not the shareholders
holdings in Partner or the shareholders vote requires the consent of the
Ministry of Communications due to the restrictions on transfer or acquisition
of means of control, or provisions regarding cross-ownership or cross-control
with other mobile telephone operators or shareholders. If the shareholder does
not provide such certification, his instructions shall be invalid and his vote
not counted. Page 70




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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 principal shareholders of Partner continue to hold in the aggregate at least 51% 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. The amendment of our license providing for the dormant share mechanism
does not apply to our principal shareholders. The provisions contained in the amendment to our license are also
contained in our Articles of Association. In addition, our Articles of
Association contain similar provisions in the event the holdings of shares by a
shareholder breaches the Israeli and foreign mobile radio telephone operator
ownership limits contained in our license. The principal shareholders have
informed us that they intend to seek a change to the 51% ownership threshold. Revoking, limiting or altering our license. Our license contains several
qualifications that we are required to meet. These conditions are designed
primarily to ensure that we maintain at least a specified minimum connection to
Israel and that we benefit from the experience of a foreign mobile radio
telephone operator. Other eligibility requirements address potential conflicts
of interest and cross-ownership with other Israeli telecommunications
operators. The major eligibility requirements are set forth below. A failure to
meet these eligibility requirements may lead the Ministry of Communications to
revoke, limit or alter our license, after we have been given an opportunity and
have failed to remedy it.  
    
    Citizens and residents of Israel, as determined by Israeli law, must hold at least 20% of each of Partners means of
control.  
    
    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. Page 71




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
    
    The foreign mobile radio telephone operator, or a controlling corporation, must hold at least 25% of the voting rights and
of the right to appoint directors or the General Manager of Partner, during at least the five year period commencing on the
date our license was granted by the Ministry of Communications.  
    
    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. 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; Page 72




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
    
    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.   Page 73




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
    
    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.  
    
    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. Page 74




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Our Permit Regarding Cross Ownership Our license generally prohibits cross-control or cross-ownership among
competing mobile telephone operators without a permit from the Ministry of
Communications. In particular, Partner, an Office Holder or an Interested Party
in Partner, as well as an Office Holder in an Interested Party in Partner may
not control or hold, directly or indirectly, 5% or more of any means of control
of a competing mobile radio telephone operator. Our license also prohibits any
competing mobile radio telephone operator or an Office Holder or an Interested
Party in a competing mobile radio telephone operator, or an Office Holder in an
Interested party in a competing mobile radio telephone operator or a person or
corporation that controls a competing mobile radio telephone operator from
either controlling, or being an Interested Party in us. However, our license, as amended on April 14, 2002 also provides that the
Ministry of Communications may permit an Interested Party in Partner to hold,
either directly or indirectly, 5% or more in any of the means of control of a
competing mobile radio telephone operator if the Ministry of Communications is
satisfied that competition will not be harmed, and on the condition that the
Interested Party is an Interested Party in Partner only by virtue of a special
calculation described in the license and relating to attributed holdings of
shareholders deemed to be in control of a corporation. An indirect shareholder of Elbit, Discount Investment Company Ltd., is
deemed to be an Interested Party in both Partner and Cellcom by virtue of the
special calculation described above. Accordingly, we applied for and received a
permit from the Ministry of Communications which authorized Discounts indirect
ownership of equity in both Partner and Cellcom. Our permit was also amended on
April 14, 2002 and on June 2, 2002. Our permit contains certain guidelines
which apply to Discount and the related companies PEC Israel Economic
Corporation, Elron Electronic Industries Ltd., the parent of Elbit, Elbit and
IDB Development Company Ltd., the parent of Discount, and persons who control
any one of them (collectively, the IDB Group). Our permit establishes limits
on the holdings of the IDB Group in the equity of Cellcom and Partner. Changes
in these holdings require a permit from the Ministry of Communications, and may
require Elbit to significantly reduce its holdings in Partner. In addition, our
permit limits the number of directors of Partner that may be appointed by the
IDB Group. Our permit also limits the exchange of information regarding Partner
within the IDB Group and its subsidiaries, limits the involvement of the three
directors and office holders of Discount Investment Company Ltd. who are also
directors of Cellcom in matters relating to Partner, and prohibits these
directors from certain activities within the IDB Group which would provide them
with access to information about Partner. Page 75




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ISP License In March 2001, we received a special license issued by the Ministry of
Communications, allowing us through our own facilities to provide internet
access to both mobile and fixed network customers. The license is valid until
March 2008. Other Licenses The Ministry of Communications has granted us a trade license pursuant to the
Wireless Telegraphy Ordinance. This license regulates issues of servicing and
trading in equipment, infrastructure and auxiliary equipment for our network. We have also been granted a number of encryption licenses that permit us to
deal with means of encryption, as provided in the aforementioned licenses,
within the framework of providing mobile radio telephone services to the
public. Antenna Site Permits Permits of the Ministry of Environment Pursuant to the Pharmacists (Radioactive Elements and Products)
Regulations, 1980 (the Pharmacists Regulations) issued under the
Pharmaceutics Ordinance, the Ministry of the Environment is empowered to grant
erection permits and operation permits for our antennas. The granting of such
permits is subject to the satisfaction of conditions to which we are subject
under the Pharmacists Regulations. The application to the Ministry of
Environment must include a discussion of the type of device, its impact on the
environment both during ordinary operation and in maximum level of operation,
and details of the possible dangers posed by the device and the manner in which
these dangers may be prevented or neutralized. In addition, the application
includes an engineers sketch of the device and its related equipment. The Ministry of the Environment has adopted the International Radiation
Protection Agencys standard as a basis for the consents it gives for the
erection and operation of our antennas. This standard is an international
standard based upon a number of years of scientific study. Page 76




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In addition, a new bill was recently proposed by the Ministry of the
Environment that defines the Ministrys powers and would replace the
Pharmacists Regulations. Local Building Permits The Planning and Building Law requires that we receive a building permit
for the construction of most of our antennas. The local committee or local
licensing authority in each local authority is authorized to grant building
permits, provided such permits are in accordance with National Building Plan
No. 36 which came into effect on June 15, 2002. The local committee is made up
of members of the local municipal council. The local committee is authorized to
delegate certain of its powers to subcommittees on which senior members of the
local authority may sit. The local committee examines the manner in which an application for a
building permit conforms to the plans applying to the parcel of land that is
the subject of the application, and the extent to which the applicant meets the
requirements set forth in the Planning and Building Law. The local committee is
authorized to employ technical, vista, and aesthetic considerations in its
decision-making process. The local committee may grant building permits that
are conditioned upon the quality of the construction of the structure, the
safety of flight over the structure, and the external appearance of the
structure. Every structure located on a certain parcel of land must satisfy the
requirements and definitions set forth in the building plan applicable to such
parcel. A decision by a local committee not to grant a building permit may be
appealed to the District Appeals Committee. A person harmed by the ruling of
the District Appeals Committee may have such ruling examined judicially by
means of an administrative petition to the District Court sitting as an
Administrative Affairs Tribunal. National Building Plan No. 36 National Building Plan No. 36 which came into effect on June 15, 2002
regulates the growth of telecommunications infrastructure in Israel. Chapter A
of National Building Plan No. 36 sets forth the licensing, view, flight safety
and electromagnetic radiation requirements for the construction of mobile radio
telephone infrastructure. National Building Plan No. 36 also adopts the
radiation emission standards set by the International Radiation Protection
Agency which were also previously adopted by the Ministry of the Environment.
We believe that we currently comply with these standards. Page 77




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Other Approvals The construction of our antennas may be subject to the approval of the Civil
Aviation Administration which is authorized to ensure that the construction of
our antennas does not interfere with air traffic, depending on the height and
location of such antennas. The approval of the Israeli Defense Forces is
required in order to coordinate site frequencies so that our transmissions do
not interfere with the communications of the Israel Defense Forces. We, like other mobile telephone operators in Israel, provide repeaters,
also known as bi-directional amplifiers, to subscribers seeking an interim
solution to weak signal reception within specific indoor locations. These
repeaters, which we install at the subscribers premises upon their request,
consist of an indoor box attached to a small outdoor antenna of between 40 and
70 cm (approximately one to two feet), receive signals from a network antenna
site and amplify them within a specific room or rooms. The radiation emission
from these outdoor antennas is comparable to that of the handset whose signal
it is transmitting. In light of the lack of a clear policy of the local
planning and building authorities, and in light of the practice of the other
mobile telephone operators, we have not requested permits under the Planning
and Building Law for the repeaters. However, we have received from the Ministry
of Communications a type approval for the repeaters. We have also approached
the Ministry of the Environment, asserting that no permits are necessary for
the repeaters, based on the Ministrys previous advice that permits are not
necessary for devices with comparable levels of emission called Fixed Cellular
Terminals. We have received type approval from the Ministry of Communications for all
of the handsets and other terminal equipment we sell. The Ministry of the
Environment also has authority to regulate the sale of handsets in Israel.
However, in accordance with the current practice among mobile telephone
operators in Israel, we have not obtained approvals or exemptions from the
Ministry of the Environment for the handsets we provide because, to date,
neither the Ministry of the Environment nor the Ministry of Health has issued
standards for the permitted level of radiation emissions from handsets. Since
June 15, 2002, we have been required to provide information to purchasers of
handsets on the Specific Absorption Rate, or SAR, of the handsets as well as
its compliance with certain standards pursuant to a regulation promulgated by
the Ministry of Industry and Trade under the Consumer Protection Law. 4C. Organizational Structure We have one wholly-owned subsidiary, Partner Future Communications 2000
Ltd., an Israeli corporation. Page 78




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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 five to fifteen 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. The lease agreement is for a 16 year period commencing in
November 2002. We have an option to shorten the lease period by five to
ten years. We lease a call center at 5 Kornas St. in Haifaa building of 2,525
square meters. The lease agreement is for a 5 year period commencing in
November 2001. We have the option to extend the lease period for 6 years. Network Sites We lease most of the sites where our mobile telecommunications network
equipment is installed throughout Israel. At December 31, 2003, we had 2,138
antenna sites (including micro-sites). The lease agreements relating to our
cell sites are generally for periods of two to three years. We have the option
to extend the lease periods to ten years (including the original lease period). Service Centers and Points of Sale Lease agreements for our retail stores and service centers are for periods
of two to five years. We have the option to extend the lease periods to twenty
additional years (including the original lease period). The average size of our
retail stores and service center is approximately 230 square meters. See also
Note 8a(2)(b) to our consolidated financial statements. Page 79




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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following operating and financial review and prospects are based upon
and should be read in conjunction with our financial statements and selected
financial data, which appear elsewhere in this report. You should also read the
risk factors appearing in this annual report for a discussion of a number of
factors that affect and could affect our financial condition and results of
operations. Overview We were formed in September 1997. We submitted our bid to the Ministry of
Communications for our license on October 28, 1997. The Ministry of
Communications awarded us our license on April 7, 1998, and we began full
commercial operations to the general public in January 1999. In December 2001 we were awarded additional spectrum: second generation
(2G) band (1800 MHz) and third generation (3G) UMTS band (1900 MHz and 2100
MHz). We intend to commercially launch our 3G network towards the end of 2004.
See Item 4A. Information on the CompanyHistory and Development of the
Company for significant events since we commenced commercial operations and
Item 5B. Liquidity and Capital Resources for information on the costs
required to build and expand our network and services. The attached table is a summary of selected financial and operating data
for each of the years ended December 31, 2003, 2002, 2001, 2000 and 1999: 2003
    
    2002
    
    2001
    
    2000
    
    1999Revenues (NIS million)
    
    
    4,468
    
    
    
    4,055
    
    
    
    3,249
    
    
    
    2,104
    
    
    
    899Operating Profit (loss) (NIS million)
    
    
    855
    
    
    
    533
    
    
    
    103
    
    
    
    (540
    )
    
    
    (1,008
    )Income (loss) Before Taxes (NIS million)
    
    
    530
    
    
    
    84
    
    
    
    (303
    )
    
    
    (769
    )
    
    
    (1,298
    )Net income (loss) (NIS million)
    
    
    1,163
    
    
    
    84
    
    
    
    (303
    )
    
    
    (769
    )
    
    
    (1,298
    )Capital expenditures, net (NIS million)
    
    
    232
    
    
    
    556
    
    
    
    599
    
    
    
    545
    
    
    
    824Cash flow provided by (used in) operating
activities net of investment activities (NIS
million)
    
    
    655
    
    
    
    (134
    )
    
    
    (207
    )
    
    
    (1,163
    )
    
    
    (1,526
    )Subscribers (thousands)
    
    
    2,103
    
    
    
    1,837
    
    
    
    1,458
    
    
    
    834
    
    
    
    355Annual Churn Rate (%)
    
    
    13.6
    %
    
    
    10.9
    %
    
    
    5.8
    %
    
    
    5.5
    %
    
    
    6.8
    %Average Monthly Usage per Subscriber (in minutes)
    
    
    277
    
    
    
    280
    
    
    
    318
    
    
    
    392
    
    
    
    456Average Monthly Revenue per Subscriber (NIS)
    
    
    171
    
    
    
    183
    
    
    
    214
    
    
    
    306
    
    
    
    393Average Subscriber Acquisition Costs (NIS)
    
    
    362
    
    
    
    470
    
    
    
    458
    
    
    
    819
    
    
    
    1,464
 Page 80




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Revenues Our principal source of revenues is from the sale of network services,
primarily network airtime usage fees, and is denominated primarily in shekels.
In 2003, as in each of 2002 and 2001, over 50% of network airtime usage fees
were derived from outgoing calls, with the remainder generated from incoming
calls, roaming and value-added services. We also derive revenues from sales of
handsets, car kits, accessories and handset maintenance services to subscribers
as well as other services. Network airtime usage fees are derived from
subscribers originating calls on our network and payments received from other
telecommunications network operators, both local and international, for
delivering calls originating on their networks and terminating on our network.
We recognize revenues from airtime usage and other services at the time we
provide the service to the subscriber. We recognize revenues from handset
sales, car kits and other equipment only upon delivery and the transfer of
ownership to the subscriber. Cost of Revenues
     Our principal components of cost of revenues are:  
    
    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. 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. Page 81




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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 bank loans and senior subordinated notes;  
    
    net hedging costs on foreign currency exposure;  
    
    exchange rate and linkage differences; and  
    
    factoring costs on long term receivables. Taxes on Income Because we had experienced seven consecutive quarters of net income by the
end of 2003, and based on our estimations of our future earnings and
profitability, our assessment relating to the cellular market and trends, and
our receipt of final tax assessments for the tax years through December 31,
2001, which validated the amount of our previously incurred carryforward tax
loses, we recorded a tax benefit of NIS 633.0 million ($ 144.6 million) in
2003. Key Business Indicators (Operating Data) Our primary key business indicators are described below. These indicators
are widely used in the cellular telephone service industry to evaluate
performance:  
    
    number of subscribers;  
    
    average monthly revenue per subscriber (ARPU);  
    
    average monthly minutes of usage per subscriber (MOU);  
    
    churn rate; and Page 82




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
    
    subscriber acquisition costs (SAC). Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with US GAAP. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses during the reporting
period. We also evaluate our estimates, on an ongoing basis. We base our
estimates on historical experience and on various other assumptions and
information that we believe are reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. Please refer to Note 1 to our consolidated financial statements included
in this annual report for a summary of all of our significant accounting
policies. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements: Revenue Recognition As described in Note 1j to our consolidated financial statements, we
recognize service revenues as services are rendered, and revenues from sale of
handsets and other equipment are recognized upon delivery. We recognize service
revenues based upon minutes used, net of credits and adjustments for service
discounts. Because our billing cycles use cut-off dates, which for the most
part do not coincide with our reporting periods, we are required to make
estimates for service revenues earned but not yet billed at the end of each
reporting period. These estimates are based primarily upon historical data and
trends. Actual billing cycle results and related revenue may vary, depending on
subscriber usage and rate plan mix, from the results estimated at the end of
each period. Income Taxes We account for income taxes in accordance with FAS 109, Accounting for
Income Taxes. Under FAS 109, an asset and liability approach is required. This
approach results in the recognition of a deferred tax asset and liability for
the expected future tax consequences of carryforward tax losses Page 83




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and temporary
differences between the amounts presented in our financial statements and those
taken into account for tax purposes, in accordance with the related tax laws. FAS 109 also requires that deferred tax assets be reduced by a valuation
allowance if it is more likely than not that some portion or all of such assets
will not be realized. In assessing a valuation allowance for a deferred tax
asset, the company estimates future taxable income and provides a valuation
allowance when it appears more likely than not that the tax asset will not be
recovered. We evaluate our deferred tax asset with regard to potential realization.
Our determination as to our ability to realize of our deferred tax asset
considers all available evidence from sources within the company and external
to the company, both positive and negative, regarding the likelihood of
sufficient future income. The methodology we use involves estimates of future
income, which assumes ongoing profitability. These estimates of future income
are projected through the life of the related deferred tax asset, using
assumptions which we believe are reasonable. As of December 31, 2002, we had carryforward tax losses of approximately
NIS 2,000 million and net timing differences (an asset) of approximately NIS
300 million. We began to generate net profits and utilize carryforward tax
losses (in insignificant amounts) only in 2002. At the end of 2002, we did not
have sufficient confidence that the net income realized in 2002 constituted a
trend that would continue in the future. In addition, we had not been assessed
for income tax purposes since incorporation and therefore we were unable to
assess, with any degree of certainty, the tax authoritys position concerning a
number of significant topics, which, at that time, might have had a major
affect on the amount of our accumulated losses for tax purposes. Due to the
uncertainty at the end of 2002 as to validation of those carryforward tax
losses, we provided a full valuation allowance to reduce our deferred tax
asset. During December 2003, following negotiations with the Income Tax
Authorities, we reached an agreement on final assessments through the year
ended December 31, 2001. These final income tax assessments validated and
determined the amount of our carryforward tax losses. In addition our current
forecasts indicate that we can sustain significant levels of profitability in
the coming 4 -5 years. In order to validate the reversal of most of the valuation allowance, we
examined our forecasted earnings under various scenarios that might cause a
deterioration in our anticipated results, such as: regulatory changes; more
competition than expected that could result in, loss of customers, reduction of
tariffs and an increase in SAC; failure to achieve revenue forecasts in respect
of content and data services; and impairment of our 3G operations. After
analyzing the various scenarios and including sensitivity analyses of these
scenarios included in our multi-year forecasts, we Page 84




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concluded that it is more
likely than not that the tax asset will be almost fully utilized within a
maximum period of 4-5 years. We believe that our income before taxes for the year ended December 31,
2003 along with our forecasts based on the methodology described above, our
updated estimates of future earnings and profitability, our assessments
relating to the future cellular market growth and trends, and our receipt of
final income tax assessments (as described above), that a valuation allowance
is no longer necessary. Our carryforward tax losses are linked to the Israeli CPI and can be
utilized indefinitely. In the event that we will determined in the future that we will be unable
to realize all or part of our net deferred tax assets, an adjustment (valuation
allowance) to the deferred tax assets would be charged to earnings in the
period that such determination is made. Long-Lived Assets We have substantial investments in tangible and intangible long-lived
assets, primarily our communications network, our license and spectrum. Changes
in technology or changes in our intended use of these assets can cause the
estimated period of use or the value of these assets to change. We amortize our
communications network by the straight-line method mainly over 6.7 years (15%
per year). We amortize our license by the straight-line method mainly over the
utilization period of the license, which is based upon the license period. Long
lived assets relating to 3G, both network equipment and spectrum, are not
amortized since the utilization period has not yet commenced. During 2002, our
license was extended by 14 years to 2022. Consequently, the amortized balance
of our license is amortized as of 2002 over the period ending in 2022. We
review our communications network, license and spectrum for impairment annually
or whenever events or changes in circumstances indicate that the carrying
amounts may not be recoverable through undiscounted future cash flows. If
necessary, we write down the assets to their estimated fair values. No
write-downs of our long-lived assets have been recorded since incorporation. Allowance for Doubtful Accounts We maintain allowance for doubtful accounts for estimated losses resulting
from the inability of our subscribers to make required payments. We base our
allowance on the likelihood of recoverability of accounts receivable based on
the aging of the balances, our historical write-off experience net of
recoveries, changes in the credit worthiness of our customers, and collection
trends. The allowance is periodically reviewed. The allowance charged to
expenses is determined in respect of specific debts Page 85




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doubtful of collection,
calculated as a specified percentage of the outstanding balance in each debt
age group, with the percentage of the allowance increasing as the age of the
debt increases. For example, a debt that is between 1 to 1.5 years overdue is
reserved for at the rate of 94%. The debt becomes fully reserved once it is at
least 1.5 years overdue. Actual customer collections could differ from our
estimates. For example, if the financial condition or our customers were to
deteriorate, additional allowances may be required. Our bad debt expenses as a
percentage of revenues were 0.5%, 0.4% and 0.3% for the years ended December
31, 2001, 2002 and 2003, respectively. Results of Operations for the Year Ended December 31, 2003 Compared to the Year
Ended December 31, 2002 Our total revenues in 2003 increased to NIS 4,467.7 million (US$ 1,020.3
million), up 10.2% from NIS 4,054.6 million in 2002. Our services revenues in
2003, driven primarily by subscriber growth of 14.5%, but offset in part by
lower ARPU primarily from the decline in interconnect rates, increased to NIS
4,117.9 million (US$ 940.4 million), up 9.0% from NIS 3,776.6 million in 2002.
Data and content revenues, which include SMS and value added services,
continued to grow faster than voice revenues, and in 2003 were 7.3% of total
service revenues, compared to 6.3% of service revenues in 2002. Most of the
growth in data and content revenues as compared to 2002 was from SMS services.
Our equipment revenue in 2003 increased to NIS 349.8 million (US$ 80.0
million), up 21.5% from NIS 288.0 million in 2002. Primarily higher levels of
handset sales derived from increased retention and upgrade activities and
higher sales prices drove this increase. Our cost of revenues increased marginally in 2003 to NIS 3,136.5 million
(US$ 716.2 million) up 2.2% from NIS 3,069.5 million in 2002. Our cost of
service revenues for 2003 was NIS 2,586.7 million (US$ 590.7 million), up 3.5%
from NIS 2,499.5 million in 2002. In 2003, as compared to 2002, despite the
decrease in the interconnect tariffs, we incurred higher interconnect charges
due to the increased level of subscribers and usage. The increased interconnect
charges were offset by cost efficiencies, primarily relating to handset and
network maintenance and transmission costs. Our cost of equipment revenues in
2003 was NIS 549.7 million, down 3.5% from NIS 569.9 million in 2002. The
decrease was the result of lower handset costs. Even with subscriber growth of 14.5%, selling and marketing expenses
remained relatively stable in 2003 and were NIS 314.0 million (US$ 71.7
million), up 1.9% from NIS 308.1 million in 2002. General and administrative expenses for 2003 were NIS 162.4 million (US$
37.1 million), compared to NIS 143.6 million in 2002, an increase of 13.1%. The
increase in general and Page 86




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administrative expenses for 2003 resulted primarily
from increased insurance costs, rental expenses and depreciation. Operating profit for 2003 increased to NIS 854.9 million (US$ 195.2
million) from NIS 533.4 million in 2002, an increase of 60.3%. Operating profit
as a percentage of revenues increased to 19.1% in 2003 from 13.2% in 2002. Financial expenses in 2003 were NIS 321.7 million (US$ 73.5 million), down
27.7% from NIS 445.2 million in 2002. Financial expenses were lower in 2003 as
compared to 2002, primarily due to our lower levels of average debt, declining
interest rates and a stronger Shekel versus the US Dollar. Nevertheless,
financial income from the 7.6% increase in the value of the Shekel versus the
US Dollar in 2003 was almost completely offset by hedging transactions. In 2003, as a result of the factors described above, we recorded net income before taxes of NIS 529.6 million (US$
120.9 million), as compared to net income before taxes in 2002 of NIS 84.2
million, an increase of 529.0%. Based on these results and our estimates of
our future earnings and profitability, assessments relating to the cellular
market and trends, and the receipt of final tax assessments for the tax years
through December 31, 2001 which validated the amount of the carryforward tax
losses, we recorded a tax benefit of NIS 633.0 million in Q4 2003 (US$ 144.6
million). As of December 31, 2003 we would require approximately NIS 1,760
million of future taxable income in order to fully realize our deferred tax
asset. As of December 31, 2003, our net active subscribers increased to
2,103,000, an increase of 14.5% from our net active subscriber base of
1,837,000 as of December 31, 2002. Our subscriber base as of December 31, 2003
accounted for an approximate market share of 31%, up from 29% at the end of
2002. Our subscriber base comprises 1,117,000 post-paid private subscribers
(53% of the base), 639,000 prepaid subscribers (30% of the base) and 347,000
business subscribers (17% of the base). At the end of 2002, our subscriber
base consisted of 1,004,000 post-paid private subscribers (55% of the base),
541,000 prepaid subscribers (29% of the base) and 293,000 business subscribers
(16% of the base). Our annual churn rate for 2003 was 13.6%, compared to 10.9%
in 2002. The increase in churn was driven primarily by increased churn in
prepaid subscribers, rotational churn (rotational churn occurs when an
existing customer purchases a new handset and a SIM card, and then ceases to
use either the new or the old SIM card) and increasing competition. Our MOU remained
relatively stable and declined by only 1.0% in 2003 as compared to 2002. MOU in
2003 was 277, compared to 280 in 2002. The stability in MOU was driven
primarily by stability in the percentage breakdown of our subscriber base
between business, post-paid private and prepaid subscribers as compared to
prior years. In prior Page 87




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years, prepaid subscribers, with substantially lower MOU,
grew faster than business and post-paid private subscribers with higher MOU. Our ARPU declined by 7.0% in
2003 as compared to 2002. The decline was driven primarily by the 10% decrease,
on January 1, 2003, of the interconnect rates as mandated by the Israel
Ministry of Communications. ARPU for 2003 was NIS 171, compared to NIS 183 in
2002. In 2003, lower handset subsidies caused the average cost of acquiring a
new subscriber, or SAC, to decline by 23% from 2002. 2003 SAC was NIS 362 (US$
82.7), compared to NIS 470 for 2002. Trends We expect the rate of revenue growth in 2004 to decrease primarily due to
a lower rate of subscriber growth, resulting from higher levels of penetration
in the market, compared to what we achieved in 2003. In addition, we anticipate
slightly lower average MOU and ARPU. SAC levels should be lower in 2004 than
they were in 2003. However SAC should rise towards the end of the year due to
more expensive 3G handsets, requiring higher handset subsidies than before,
which we expect to introduce towards year-end. Even though we expect to incur
some incremental expenses in ramping up our 3G effort, we expect to maintain
approximately the same levels of operating margins in 2004 as in 2003. If
we succeed in investing in Matav, we expect that this will have
a substantially dilutive impact on our earnings at least in the short term. For more
information, see Item 3D. Risk Factors  We expect that our investment in
Matav will be substantially dilutive to our earnings, at least in the short term, and may
result in additional leverage. Results of Operations for the Year Ended December 31, 2002 Compared to the Year
Ended December 31, 2001 Our total revenues in 2002 increased to NIS 4,055 million from NIS 3,249
million in 2001. Our services revenues in 2002, driven primarily by subscriber
growth increased to NIS 3,766.6 million from NIS 2,972.1 million in 2001. Our
equipment revenue in 2002 increased slightly to NIS 288.0 million from NIS
277.3 million in 2001. Our cost of revenues for 2002 was NIS 3,069 million, compared to NIS 2,719
million in 2001. Our cost of services revenue for 2002 was NIS 2,499.5 million
compared to NIS 2,187.6 million in Page 88




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2001. The increase in our cost of services
revenues in 2002 over 2001 was driven primarily by interconnect and other
network expenses related to higher subscriber numbers and usage, offset by a
decrease of NIS 113 million in our license amortization expenses as a result of
the extension of our license until 2022. Our cost of equipment revenue for 2002
was NIS 569.9 million compared to NIS 531.6 million in 2001. The increase in
cost of equipment revenue was driven primarily by lower handsets costs. Our selling and marketing expenses in 2002 were NIS 308 million compared
to NIS 293 million in 2001. The slight increase in selling and marketing
expenses was due to increased marketing efforts in response to increased
competition. General and administrative expenses in 2002 were NIS 144 million compared
to NIS 134 million in 2001. The increase in these expenses was driven primarily
by insurance costs and also resulted from the fact that in 2001, we received a
refund in the amount of approximately NIS 24 million from Bezeq following the
Ministry of Communications interim settlement regarding our dispute on bad
debt collection. We had an operating profit for the year ended December 31, 2002 of NIS 533
million compared to NIS 103 million in 2001. Operating profit as a percentage
of revenues increased to 13.2% in 2002 from 3.2% in 2001. We had net financial expenses in 2002 of NIS 445 million compared to NIS
401 million in 2001, an increase of NIS 44 million. The increase in net
financial expenses is attributed mainly to an increase of NIS 222 million in
our average total debt outstanding, higher interest rates set by the Central
Bank of Israel and the effect of the shekel devaluation on our US $175 million
senior subordinated notes. Our net income in 2002 was NIS 84 million compared to a net loss of NIS
303 million in 2001. We had 1,837,000 subscribers as of December 31, 2002 compared to 1,458,000
subscribers as of December 31, 2001, an increase of 26%. Our churn rate in 2002
was 10.9% as compared to 5.8% in 2001. The increase in the churn rate in 2002
was attributed predominately to increased churn among prepaid subscribers and
churn from those subscribers who joined our network in 1999 with three year
commitment periods, as well as increasing competition. Our MOU declined by 11.9% in
2002 as compared to 2001. The primary cause of this reduction was the
increasing percentage of prepaid subscribers in our subscriber base, which have
historically provided below-average MOU. Page 89




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Our subscriber acquisition costs per subscriber, for 2002 were NIS 470
compared to NIS 458 in 2001. This slight increase was attributed primarily to
the increasing percentage of business subscribers amongst our new subscribers
for whom we have traditionally incurred higher subscriber acquisition costs
compared to other new subscribers, and higher prices of more sophisticated
handsets resulting in higher handset subsidies. ARPU for the year ended
December 31, 2002 was NIS 183, compared to NIS 214 in 2001. The primary cause
of this reduction was the increasing percentage of prepaid subscribers in our
subscriber base, which have historically provided below-average ARPU. Impact of Inflation and Exchange Rate Fluctuations Substantially all of our revenues and a majority of our operating expenses
are denominated in shekels. However, through December 31, 2003, a substantial
amount of our operating expenses were linked to non-shekel currencies. These
expenses related mainly to the acquisition of handsets where the price paid by
us is based on various foreign currencies. In addition, most of our capital
expenditures are incurred in, or linked to, non-shekel currencies, and our
notes are denominated in US dollars and require US dollar interest payments.
Thus, any devaluation of the shekel against the non-shekel currencies will
increase the shekel cost of our non-shekel denominated or linked expenses. Such
an increase may have an adverse impact on our results, which may be material.
We hedge some of our foreign currency commitments, but we do not currently
hedge the principal payable on our notes due 2010. In 2003 financial income
from the 7.6% increase in the value of the shekel versus the US Dollar in 2003
was almost completely offset by hedging transactions. Although we have the ability to borrow under our bank credit facility in
US dollars and Euro, our borrowings are in shekels, and part of our shekel
bank borrowings are linked to the Israeli CPI. We may not be permitted to raise
our tariffs pursuant to our license in a manner that would fully compensate for
any increase in the Israeli CPI. Therefore, an increase in the rate of
inflation may also have a material adverse impact upon us by increasing our
financial expenses without an offsetting increase in revenue. Page 90




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Liquidity and Capital Resources Liquidity The mobile telephone business is highly capital intensive, requiring
significant capital to acquire a license, construct mobile telecommunications
networks and in the start up phases fund operating losses. The capital
requirements of our network are determined by the coverage desired, the
expected call traffic and the desired quality and variety of services. Network
construction costs are mainly related to the number of cells in the service
area, the number of radio channels in the cell and the switching equipment
required. In July 2000, we entered into an Amending and Rescheduling Agreement,
which amended our credit facility, increasing the amount available to $750
million, subject to the meeting of defined milestones. In August 2000, we
completed an offering of $175 million aggregate principal amount of unsecured
senior subordinated notes due 2010. The net proceeds from that offering
(approximately $170.5 million after deducting commissions and offering
expenses) were used mainly to repay a portion of the outstanding indebtedness
under our credit facility. On December 31, 2002, we entered into an Amending Agreement to the
Facility Agreement, which amended our credit facility, decreasing the amount
available to $710 million. Our credit facility is divided into three tranches:
a $410 million multicurrency term loan facility (facility A), a $150 million
revolving multicurrency loan facility (facility B), and a $150 million shekel
term loan facility (facility C). All facilities are provided by Israeli banks
and Citibank N.A., with Bank Leumi Le-Israel B.M. as facility agent and Bank
Hapoalim as a coordinating agent. Facilities A and B of our credit facility may be drawn in shekels, US
dollars or Euro, provided that not less than 60% of the outstanding advances
under facilities A and B, at any time, must be in shekels and that not more
than 40% of the outstanding advances under facilities A and B may be drawn in
US dollars or euros. Facility C may be drawn only in shekels. It is our
intention to draw amounts under the credit facility primarily in shekels. Under
the amended credit facility, facility A was available for drawing through March
31, 2003, and $383 million had been drawn as of December 31, 2003; facility B
is available for drawing until June 30, 2008, and $18 million had been drawn as
of December 31, 2003; and facility C is available for drawing until December
31, 2004, and none had been drawn as of December 31, 2003. At December 31,
2003, the balances available for drawing were approximately $132 million under
facility B, and $150 million under facility C, and at January 31, 2004 the
balances available for drawing were approximately $150 million under facility
B, and $150 million under facility C. Page 91




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Repayment under facility A will begin on June 30, 2004 and will continue
until June 30, 2008, repayment under facility B will be on June 30, 2008, and
repayment under facility C will begin on March 31, 2005 and will continue until
June 30, 2009. See also Note 5e to our consolidated financial statements. Another source of our liquidity results from our factoring on a
non-recourse basis most of our long-term trade receivables resulting from sales
of handsets. We record the transfer of accounts receivable as a sales
transaction under the provisions of Statement of Financial Accounting Standards
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. During the years ended December 31, 2002 and
2003, we factored approximately NIS 210 million and NIS 296 million ($68
million), respectively, from long-term trade receivables. The resulting costs
amounted to approximately NIS 10 million and NIS 17 million ($ 4 million) for
the years ended December 31, 2002 and 2003, respectively, and are charged to
Financial expenses-net, as incurred. Currently, our main sources of liquidity are:  
    
    our operating cashflows;  
    
    our credit facility; and  
    
    factoring long-term trade receivables. We generated positive cashflow from operations amounting to NIS 1,031.5
million ($235.6 million) in 2003, compared to NIS 682.2 million in 2002. The
difference was primarily due to increased operating profits in 2003 as compared
to 2002. Cashflow used in investing activities was NIS 376.8 million ($86.0
million) in 2003, compared to NIS 816.0 million in 2002. The decrease was
mainly due to reductions in payments for fixed assets and spectrum in the
amount of NIS 335.7 million (US$ 76.7 million) and the proceeds from withdrawal
of the NIS 98.9 million (US$ 22.6 million) security deposit for the interest on
our US Dollar denominated notes. Cash used in financing activities was NIS 652.3 million ($149.0 million)
in 2003, compared to NIS 129.9 million cash provided in 2002. The change was
primarily due to repayments of borrowings under our long-term loans. We expect cash flows from operations net of cash flows from investing
activities in 2004 to be stronger and expect to use the net cash flows to
reduce our bank debt. We are also contemplating, subject to market conditions,
calling our 13% US dollar denominated notes due in 2010 at their first call
date, in August 2005, in order to refinance them with lower cost debt, if
possible. Page 92




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We have entered into a memorandum of agreement with Matav and
its shareholders, to invest $137 million in Matav for approximately 40% share
of Matavs equity, subject to certain conditions. We will finance this
investment with additional debt or by issuing equity. As a result of obtaining GSM 1800 and UMTS third generation spectrum bands
in the December 2001 spectrum auction in Israel, we have payment obligations
with respect to each of those spectrum bands. We paid NIS 180 million
(approximately $41 million) for the GSM 1800 spectrum. We are also committed to
pay NIS 220 million (approximately $50 million) for the UMTS third generation
spectrum, in six installments. The first three installments, totaling NIS 130
million (approximately $30 million), were paid in February and June 2002, and
June 2003 and the remaining three installments are payable no later than June
1, 2004, 2005 and 2006 in amounts equal to NIS 35 million, NIS 33 million and
NIS 22 million, respectively. The remaining three installments will be paid
plus interest at the rate set by the Accountant General of the Israeli Ministry
of Finance. From January 1, 2001 to December 31, 2003, we made cumulative net capital
expenditures of approximately NIS 789 million, of which NIS 232 million ($53
million) was incurred in 2003. We expect that capital expenditures for our
network will continue to represent the largest portion of our total capital
expenditures over the next few years. We expect to incur approximately NIS 650
million ($ 150 million) of capital expenditures in 2004, primarily in order to
increase the capacity of our GSM network through the installation of GSM 1800
antennas. We expect that capital expenditures in connection with building out
the 3G network will cost $250 million over the next three years. The UMTS third
generation network build-out is expected to begin towards the middle of 2004. We believe that funds from our operations, together with funds available
under the credit facility, will provide us with enough liquidity and resources
to fund our expected capital expenditure needs, including our plans to increase
the capacity of our existing network and capital expenditures associated with
our UMTS third generation network build-out, as well as our obligations under
our financing agreements, our license payments and our other material
commitments. However, the actual amount and timing of our future requirements
may differ materially from our estimates. Page 93




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Research and Development, Patents and Licenses We are primarily a user rather than a developer of technology.
Accordingly, we did not engage in any significant research and development
activities during the past three years. Off-Balance Sheet Arrangements There are no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors. Aggregate Contractual
Obligations Set forth below are our contractual obligations and other commercial
commitments as of December 31, 2003: Payments Due by Period (NIS in thousands)Contractual Obligations
    
    Total
    
    2004
    
    2005-2006
    
    2007-2008
    
    2009 and afterLong-Term Debt
    
    
    2,573,393
    
    
    
    119,853
    
    
    
    832,775
    
    
    
    854,440
    
    
    
    766,325Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Leases
    
    
    354,415
    
    
    
    140,028
    
    
    
    119,035
    
    
    
    49,909
    
    
    
    45,443Unconditional Purchase Obligations:UMTS third generation spectrum
    
    
    107,000
    
    
    
    42,000
    
    
    
    65,000
    
    
    
    
    
    
    
    Handsets
    
    
    162,000
    
    
    
    162,000
    
    
    
    
    
    
    
    
    
    
    
    Fixed Assets
    
    
    160,000
    
    
    
    121,000
    
    
    
    39,000
    
    
    
    
    
    
    
    Other Long-Term Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Contractual Cash Obligations
    
    
    3,356,808
    
    
    
    584,881
    
    
    
    1,055,810
    
    
    
    904,349
    
    
    
    811,768
 Page 94




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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 6A. Directors and Senior Management Directors Name of Director
    
    Age
    
    PositionFok Kin-ning, Canning
    
    
    52
    
    
    Chairman of the Board of DirectorsKhoo Chek Ngee
    
    
    61
    
    
    DirectorTal Raz(1)(4)
    
    
    42
    
    
    DirectorChan Ting Yu(1)(4)
    
    
    53
    
    
    DirectorChow Woo Mo Fong, Susan
    
    
    50
    
    
    DirectorDori Dankner(1)
    
    
    43
    
    
    DirectorShmuel Dankner
    
    
    73
    
    
    DirectorRobert Donald Fullerton(2)(3)
    
    
    72
    
    
    DirectorUzia Galil
    
    
    78
    
    
    DirectorLui
Pok Man, Dennis(1)(4)
    
    
    53
    
    
    DirectorErez Gissin(1)
    
    
    45
    
    
    DirectorMordechai
Keret
    
    
    46
    
    
    DirectorPesach Shachar(1)
    
    
    70
    
    
    DirectorFrank John Sixt
    
    
    52
    
    
    DirectorDr. Colin Tucker
    
    
    55
    
    
    DirectorProf. Ben-Zion Zilberfarb(1)(2)(3)
    
    
    54
    
    
    DirectorMoshe Vidman (1)(2)(3)(4)
    
    
    60
    
    
    Director
  (1)
    
    Member of the Executive Committee of the Board of Directors(2)
    
    Independent Director(3)
    
    Member of the Audit Committee(4)
    
    Member of the Compensation Committee Fok Kin-ning, Canninghas 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 (Australia) Limited,
Hutchison Global Communications Holdings Limited and 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., the Deputy Chairman of Cheung Kong
Infrastructure Holdings Limited Page 95




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and Hongkong Electric 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 pursuant to the relationship agreement described in Item
7B. Major shareholders and Related Party TransactionsRelated Party
TransactionsRelationship Agreement. Khoo Chek Ngeehas been a director of Partner since October 1997. He is a consultant of Hutchison Whampoa Limited and has been a
director of Hutchison Telecommunications Limited since 1993. From 1993 to 2003,
he was the Group Managing Director of Hutchison Telecommunications Limited.
From 1966 to 1993, he was with Singapore Telecommunications Pte. Ltd., rising
to the position of Vice President of Mobile Communications in 1991. Mr Khoo
holds a Bachelor of Science degree in Engineering from the London University
Imperial College of Science and Technology, and he participated in the Advanced
Telecommunications Management Program at the Center of Telecommunication
Management, University of Southern California. Mr. Khoo was nominated as a
director by Advent, pursuant to
the relationship agreement described in Item 7B. Major shareholders and
Related Party TransactionsRelated Party TransactionsRelationship Agreement. Tal Razhas been a director of Partner since November 2001 and is a member
of the Executive Committee and the Compensation Committee. Mr. Raz is serving
as Vice President Finance and Chief Financial Officer of Elron Electronic
Industries Ltd. since May 2002. Prior to joining Elron, Mr. Raz was the acting
President and Chief Executive Officer of Elbit Ltd. from October 2001. Mr. Raz
was appointed Vice President of Elbit in June 1998, and served as Chief
Financial Officer of Elbit since he joined Elbit in April 1997, having
previously served in the same capacity at Agentsoft Ltd., Jerusalem, and Paul
Winston Corporation, New York. Prior thereto he was a senior auditor at
Deloitte & Touches New York office. He also serves as Chairman of CellAct and
as a board member of Elron Telesoft, A.M.T.  Advanced Metal Technologies Ltd.,
RDC  Rafael Development Corporation Ltd. and KIT-e-Learning BV. Mr. Raz is a
certified public accountant, and holds Bachelor of Arts and Master of Arts
degrees in accounting and business administration from Baruch College, New
York. Mr. Raz was nominated as a director, and as a member of the Executive
Committee, by Elbit.COM, pursuant to the relationship agreement described in
Item 7B. Major shareholders and Related Party TransactionsRelated Party
TransactionsRelationship Agreement. Page 96




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Chan Ting Yuwas 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 a director of Hutchison
Telecommunications (Australia) Limited and Deputy Group Managing 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, pursuant to the relationship agreement described in Item
7B. Major shareholders and Related Party TransactionsRelated Party
TransactionsRelationship Agreement. Chow Woo Mo Fong, Susanhas 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. She is a solicitor and
holds a Bachelors degree in Business Administration. Mrs. Chow is also an
Executive Director of Cheung Kong Infrastructure Holdings Limited, Hutchison
Harbour Ring Limited and Hutchison Global Communications Holdings Limited and a
Director of Hongkong Electric Holdings Limited, TOM Group Limited and Hutchison
Telecommunications Limited. Mrs. Chow was nominated as a director by Advent,
pursuant to the relationship agreement described in Item 7B. Major
shareholders and Related Party TransactionsRelated Party
TransactionsRelationship Agreement. Dori Danknerhas been a director of Partner since October 1997 and is a
member of the Executive Committee. He is the chairman of Elran (D.D.)
Investments, a company whose shares are traded on the Tel Aviv Stock Exchange,
and the Chief Executive Officer of D.S.D. Investments Ltd. Mr. Dankner is also
a director of Cable Systems Media Haifa-Hadera Ltd., Matav, Matav Assets Ltd.,
Matav Investments Ltd., Dankner Investments Ltd., Carmel Assets Ltd., Israel
Salt Industries Ltd., Shachaf Dan Investments Ltd., Elran-Gmul Power Station
Ltd., Elran (D.D.) Holdings Ltd., Elran (D.D.) Infrastructure Ltd., Elran
(D.D.) Managements & Holdings Ltd. and Elran (D.D.) Technologies Ltd. He holds
a Bachelor of Science degree in Industrial Engineering from Tel Aviv University
and a Master of Business Administration degree in Finance and International
Business from New York University. Dori Dankner is the son of Shmuel Dankner.
Mr. Dankner was nominated as a director, and as a member of the Executive
Committee, by Matav, pursuant to the relationship agreement described in Item
7B. Major shareholders and Related Party TransactionsRelated Party
TransactionsRelationship Agreement. Shmuel Danknerhas been a director of Partner since October 1997. Mr.
Dankner has been Chairman of the Board of Directors of Matav since 1988. He is
the Chairman of the Board of Dankner Page 97




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Investments Ltd. The Dankner Group, which
he co-founded in 1957, includes enterprises involved in banking;
telecommunications; cable television; salt production and export; petrochemical
and plastic production; and real estate development. Mr. Dankner holds a
Bachelor of Science degree with highest honors in Chemical Engineering from the
University of CaliforniaBerkeley and a Master of Science in Chemical
Engineering from Columbia University, New York. In 1977, he received the
Industry Prize from the Israel Association of Manufacturers for managerial
achievements and initiative in developing the private industry. Shmuel Dankner
is the father of Dori Dankner. Mr. Dankner was nominated as a director by
Matav, pursuant to the relationship agreement described in Item 7B. Major
shareholders and Related Party TransactionsRelated Party
TransactionsRelationship Agreement. Robert Donald Fullertonhas been a director of Partner since February
2003. He became director of Canadian Imperial Bank of Commerce (CIBC) (formerly
The Canadian Bank Of Commerce) in 1974. He joined the Bank in 1953 and served
in a variety of positions in the branch system and the International Division,
including New York. He served in the following senior executive positions prior
to becoming Chairman, President and Chief Executive Officer in 1985, Regional
General Manager International, Regional General Manager Saskatchewan, Chief
General Manager and President. During this period, he chaired many of the board
committees including the Executive Committee and the Audit Committee. Mr.
Fullerton retired as an Executive Officer in 1992 but remained on the board and
continued to chair the Executive Committee until 1999. He also retired as a
director of CIBC in February 2004. Mr. Fullerton Chairs the Audit Committee of
George Weston Limited and is a member of the Audit Committees of CIBC, Husky
Energy Inc. and Asia Satellite Telecommunications Holdings Ltd. During his
career he has served on the board of directors of a large number of both
Canadian and international companies including I.B.M. Canada, Honeywell Inc.,
Amoco Petroleum Canada, Orange plc, Ontario Hydro, Westcoast Energy, as well as
many cultural and educational entities. He received a Bachelors degree in Arts
from the University of Toronto in 1953. Uzia Galilhas been a director of Partner since August 1999. Mr. Galil
currently serves as President 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. 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 Page 98




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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 Weizman
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. Mr.
Galil was nominated as a director by Elbit.COM, pursuant to the relationship
agreement described in Item 7B. Major shareholders and Related Party
TransactionsRelated Party TransactionsRelationship Agreement. Lui
Pok Man, Dennis has been a director of Partner since
April 2004 and is
the Chairman of the Executive Committee and the Chairman of the Compensation
Committee. He first joined the Hutchison Whampoa Limited group in
1986 and was the managing director in charge of the mobile
telecommunications, fixed-line, multi-media, internet business, and
paging business in Hong Kong, China, Taiwan and Macau from January
1989 until 2000. Mr. Lui  rejoined the Hutchison Whampoa Limited group
in May 2001 as group managing director of Hutchison
Telecommunications International Limited (HTI) overseeing
all the operations and new business development of the HTI group. He
is also a director of Hutchison Telecommunications (Australia)
Limited. 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,
pursuant to the relationship agreement described in Item 7B. Major
shareholders and Related Party TransactionsRelated Party
TransactionsRelationship Agreement. Erez Gissinhas been a director of Partner since August 1998 and is a
member of the Executive Committee. For the last two 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. Mr. Gissin was nominated as a director, and as a member
of the Executive Committee, by Eurocom, pursuant to the relationship agreement
described in Item 7B. Major shareholders and Related Party
TransactionsRelated Party TransactionsRelationship Agreement. Mordechai
Keret has been a director of Partner since April 2004. He has
also been an Executive Vice President at Arison Holdings (1998) Ltd.,
an Israeli investment company, since 1993. Mr. Keret currently serves
as a director at a number of companies in which Arison Holdings or
its affiliates are a shareholder, including Housing and Construction
Holdings Ltd., Eurocom Communication Ltd., Eurocom Cellular
Communications Ltd., Internet Gold  Golden Lines Ltd., D.B.S
Satellite Services (1988) Ltd., Gaon Holdings Ltd., Ham-Let Ltd. and
other companies in the Arison Group and Priortech Ltd. Mr. Keret is
an Israeli CPA and holds a B.A. degree in accounting and economics
from the Tel-Aviv University. Page 99




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Mr. Keret was nominated as a director by Eurocom,
pursuant to the relationship agreement described in Item 7B. Major
shareholders and Related Party TransactionsRelated Party
TransactionsRelationship Agreement. Pesach Shacharhas 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 Hutchinson 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, pursuant to the relationship
agreement described in Item 7B. Major shareholders and Related Party
TransactionsRelated Party TransactionsRelationship Agreement. Frank John Sixthas 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, Hongkong Electric Holdings Limited and Hutchison Global
Communications Holdings Limited and a Director of Cheung Kong (Holdings)
Limited, Hutchison Telecommunications (Australia) Limited, Husky Energy Inc.,
and 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, pursuant to the relationship agreement
described in Item 7B. Major shareholders and Related Party
TransactionsRelated Party TransactionsRelationship Agreement. Dr. Colin Tuckerhas been a director of Partner since July 2003. He is
Deputy Chairman of Hutchison 3G. Dr. Tucker was previously a Managing Director
of Hutchison 3G UK Limited and the Chief Operating Officer  International
Operations for Orange plc. He also served as the Technical Director of Orange
plc. Dr. Tucker served as the Director and General Manager of Telepoint systems
at GPT Limited, and as Director of Engineering for Plessey Telecommunication
Products Ltd. He was also an Industrial Professor at Loughborough University.
Dr. Tucker was nominated as a director by Advent, pursuant to the relationship
agreement described in Item 7B. Major shareholders and Related Party
TransactionsRelated Party TransactionsRelationship Agreement. Page 100




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Prof. Ben-Zion Zilberfarbhas been a director of Partner since February
2000. Professor Zilberfarb is currently a professor of economics and chairman
of the A. Meir Center for Banking at Bar-Ilan University. He is a member of the
board of directors of Fundtech Ltd. and of Clal Finance-Providential and Study
Funds, where he serves also as the chairman of the Investment Committee. He was
the chairman of the board of directors of Euro-Trade Bank during 2000-2001 and
of Karnit Insurance Company during 1998-2002. He also served as the Director
General of the Israeli Ministry of Finance from 1998 to 1999. For many years,
he served as a member of several governmental committees. He also served as the
Chairman of the Investment Committee, of Bank Leumi Provident Funds and
consultant to several financial institutions and several governmental and
regulatory authorities including the Israel Securities Authority and the Bank
of Israel. He received a Ph.D. in Economics from the University of Pennsylvania
and a Bachelors degree and Master of Arts degree, both in Economics, from
Bar-Ilan University. Moshe Vidmanserves as a member of the Board of Directors and a member of
Executive Committee of the Jerusalem Foundation and of Beit Lessin (public
theatre). 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. Since 2000 Mr. Vidman is the Revlon Representative in Israel
and serves as a director of the following companies: Israel Corporation Ltd.,
ICL  Israel Chemical Ltd., Dead Sea Works Ltd., Jafora-Tabori ltd., Rosebud
Medical Ltd. And Ex-Libris Ltd. 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 Afrika-Israel Hotels. Senior Management Name of Officer
    
    Age
    
    PositionAmikam Cohen
Iris Beck
Chaim Beker**
Adi Biran
Dan Eldar
Alan Gelman
    
    55
37
59
60
50
48
    
    Chief Executive Officer
Vice President, Marketing
Vice President, Operations
Vice President, Regulation and New Business Development
Vice President, Carrier, International and Investor Relations
Chief Financial Officer
 Page 101




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##### Table of Contents



Name of Officer
    
    Age
    
    PositionAmnon Gideon
Yacov Kedmi
Roly Klinger
Haim Romano*
Edith Shih
Menahem Tirosh
    
    51
52
44
49
51
52
    
    Vice President, Human Resources and Operations
Vice President
General Counsel and Joint Company Secretary
Vice President, Customers
Joint Company Secretary
Vice President, Network Engineering and Operation
  *
    
    Mr. Romano was nominated, in January 2004, to the post of Deputy CEO,
responsible for sales, customer service, operations and coordination of
cross organizational projects and activities.**
    
    Mr. Beker was nominated in January 2004 as Vice President Operations. Adi Biranjoined 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. Mr. Biran
continued till October 2003 to be an employee of Elbit in connection with
matters unrelated to Partner on which he worked prior to joining Partner. 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. Alan Gelmanwas appointed Chief Financial Officer of Partner in January
2001. For the three years prior to joining Partner, Mr. Gelman served as Chief
Financial Officer and Vice President of Barak ITC, one of Israels providers of
international voice, data and internet services. From 1994 to 1997, Mr. Gelman
served as the Controller for Cellcom Israel Ltd. Mr Gelman holds a Bachelors
degree in Accounting from Queens College in New York and an MBA from Hofstra
University in New York. Mr. Gelman is licensed as a Certified Public Accountant
in the USA (New York) and in Israel. Mr. Gelman was nominated as Chief
Financial officer by Advent, with the approval of our Board, pursuant to the
relationship agreement described in Item 7B. Major shareholders and Related
Party TransactionsRelated Party TransactionsRelationship Agreement. Amikam Cohenjoined Partner in April 1998 as Chief Executive Officer. From
1996 to 1998, he was Chief Executive Officer of Elite Industries Ltd., one of
Israels largest confectionery and coffee producers and marketers. From 1991 to
1996, Mr. Cohen was Managing Director of Strauss Dairies Ltd. From 1987 to
1990, he was General Manager of the Refrigerator and Air Conditioner Division
of Tadiran Home Appliances Ltd. From 1978 to 1986, Mr. Cohen served in numerous
capacities at the Page 102




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Tadiran Telecommunications Group, including General Manager
of the Public Switching Division, General Manager of the Microelectronics
Section, and Director of the entire groups purchasing department. He holds a
Bachelor of Science degree in Industrial Management Engineering from Ben Gurion
University, Beersheva, Israel. Amnon Gideonwas appointed Vice President, Human Resources in January
2001. Prior to joining the Company, Mr. Gideon served as Manager of Human
Resources at Motorola Israel Ltd. From 1991 until 1994, Mr. Gideon served as
the Executive Director of the Association for Civil Rights in Israel. Mr.
Gideon holds a Bachelors degree in Political Science and Psychology from
Bar-Ilan University and a Masters degree in Human Resource Management from the
University of Derby. Chaim Bekerwas 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. Dan Eldarserves 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 Ph.D and M.A. degrees from Harvard University and M.A.
and B.A. degrees from the Hebrew University, Jerusalem. Edith Shihhas 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 group companies. She is
also the Company Secretary of Hutchison Telecommunications 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. Page 103




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Haim Romanojoined Partner in June 1998 as Vice President, Human Resources
and Administration, in December 2000 was appointed Vice President, Customer
Services and in January 2003 was appointed Vice President, Customers Division
and in January 2004 was appointed Deputy CEO, Customers and Operation
Divisions. In that capacity he is responsible for personnel policy and
management, physical facilities, and site acquisition. From 1996 to 1998, Mr.
Romano headed the Human Resources Division in the Israel General Security
Service. Immediately prior, he had served in the Israel Defense Forces for 24
years, the last two as head of their Civil Personnel Department. Mr. Romano
holds Masters degrees from Haifa University and Tel Aviv University. Iris Beckwas 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 since 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. Menahem Tiroshhas served Partner since May 1998 as a consultant and as
Vice President, Network Engineering and Operation. From 1996 to 1998, Mr.
Tirosh was Deputy Director of the Cellular Infrastructure Division of Motorola
(Israel) Ltd. From 1969 to 1996, Mr. Tirosh served in the Israeli Defense
Forces, rising to the position of Department Head, Communication Systems. He
holds a Bachelor of Science degree in Electrical Engineering from the Israel
Institute of Technology (Technion), Haifa, Israel and a Master of Science in
Advanced Communication Engineering degree from Ben Gurian University. Mr.
Tirosh served as a full colonel in the Israeli Defense Forces Signal Corps. Roly Klingerjoined Partner in August 1998 as General Counsel and Joint
Company Secretary. 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. Yacov Kedmijoined Partner in May 1998 and served as Vice President,
Marketing and in October 2001 was appointed as Vice President, Content and
Multimedia. He served in this capacity until September 2003. From 1992 to 1994,
he had been Deputy Managing Director and Marketing Director of the Maariv
daily newspaper, and before that, Managing Director of Mei Eden, a bottled Page 104




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water producer. He also served for eleven years as Marketing Director of Tabori
Corporation, a producer of soft drinks, disposable diapers, and paper products.
In the four years immediately prior to joining us, Mr. Kedmi was the principal
in MPV Communications, providing marketing consulting services to numerous
Israeli companies, and was a partner in the launch of two businesses, one with
a direct marketing catalogue in which customers bid for the products, and
another producing premium gifts and promotional products. He studied management
at Bar Ilan University, Israel. Except as disclosed above, 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, except for the Chief Financial
Officer, as disclosed above, are selected by the CEO with the approval of the
Board for an indefinite term of office and may be removed by the Board 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, 2003 was approximately NIS
21 million ($4.8 million). In 2003 options were granted to our senior
management under the 2000 Employee Stock Option Plan to purchase up to 195,000
of our ordinary shares at an exercise price of NIS 20.45 per share. These
options will expire in December 2011, subject to earlier expiration upon the
termination of employment under certain circumstances. For more information,
see Item 6E. Directors, Senior Management and EmployeesShare Ownership2000
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, 2003 was
approximately NIS 1.1 million ($0.2 million). 6C. Board Practices Terms of Directors Directors are elected at the annual shareholders meeting to serve for
three years, in the case of independent directors, 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. 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 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 Page 105




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annual meeting. The Articles of Association also provide that
the Board, with the approval of 75% of the directors, may appoint an additional
director to fill a vacancy. The Companys Articles of Association provide that
the Board may delegate all of its powers to committees of the Board 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 subsidiary providing for
benefits upon termination of employment. Officers of Partner serve at the
discretion of the Board or until their successors are appointed. 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. Independent Directors The Companies Law requires that Partner have at least two external
directors on its Board of Directors. In the interests of good corporate
governance, our Board of Directors decided that our Audit Committee should
consist of three members, each qualified as an independent director, pursuant
to applicable US and other requirements, including, inter alia, the
requirements of Nasdaq. These independent directors are also qualified as
external directors, according to the Companies Law. 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. Mr. Ben-Zion Zilberfarb, Mr. Robert Donald Fullerton and Mr. Moshe Vidman
are currently the directors who satisfy the requirements both for independent
directors under the Nasdaq National Market and for external directors under the
Companies Law. Page 106




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Executive Committee Our Executive Committee was nominated by the Board of Directors on July
15, 1998. Our Executive Committee consists of three nominees of Advent and one
nominee of each of Elbit.COM, Matav Investments and Eurocom, the other
principal shareholders of Partner. Two of our independent directors currently
serve on our Executive Committee. 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. Audit Committee The Companies Law requires public companies, including Partner, to appoint
an audit committee. The responsibilities of our audit committee include
reviewing our financial statements, identifying irregularities in the
management of the companys business and approving related party transactions
as required by law. According to the Companies Law, an audit committee must
consist of at least three board members, and include all the companys external
directors. The chairman of the board, 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. Our audit committee consists of three board members, all
of which meet both Nasdaqs definition of independent directors, and 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. Compensation Committee Our compensation committee consists of four board members, of which one is
an external, independent director. The compensation committee is responsible
for evaluating and recommending to the board (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
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. Page 107




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Internal Auditor The Companies Law requires the board 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, 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 an arrangement 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 extraordinary
transactions, in addition to the Board approval and any approval required by
the Articles of Association, the transaction also must be approved by the
companys audit committee, and, in Page 108




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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, 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 in favor of the
arrangement 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
present at the meeting 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. 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
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, Page 109




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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 shall be entitled to
undertake in advance to indemnify an officer or director of Partner, provided
that the undertaking is restricted to the events of a kind which the Board of
Directors may anticipate at the time it makes such undertaking at an amount
which the Board of Directors determines is reasonable under the circumstances.
In addition, Partner can indemnify an officer or director for specific
occurrences retroactively. Our Articles of Association also provide that Partner may indemnify an
officer or director of Partner for liability or expense he incurs as a result
of an action taken by him in his capacity as an officer or director of Partner
as follows:  (1)
    
    any financial liability imposed on 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)
    
    within the framework of proceedings filed against him by Partner
or on Partners behalf or by a third party,(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. In no event may Partner indemnify an officer or director for:  (1)
    
    a breach of the duty of loyalty toward Partner, unless the officer or
director acted in good faith and had reasonable grounds to assume that the
action would not harm Partner;(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) 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 imposed on such
person for the benefit of a third person by a judgment, including a settlement
or arbitration decision certified by the court for an action done in the Page 110




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scope of such persons duties as our director or officer, and (b) reasonable
litigation expenses, including legal fees, that were incurred by such person or
which the court obligates such person to pay in 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, provided
that the crime for which such person was convicted does not require a finding
of criminal intent, and in each case for an act committed in the capacity as
our director or officer. We have effected a directors and officers liability insurance policy
insuring our directors and officers liability and our undertaking to
indemnify them, in respect of certain matters permitted by the Companies Law.
The policy includes coverage in respect of our and our directors and officers
liability in respect of our initial public offering and our offering of 13%
senior subordinated notes due 2010. 6D. Employees At December 31, 2003, we had 2,768 employees on a full-time or full time
equivalent basis, compared with 2,688 at December 31, 2002 and 2,523 at
December 31, 2001. The number of employees for 2003, 2002 and 2001, divided by
their activity, was as follows: December 312003
    
    2002
    
    2001Customer service*
    
    
    1,564
    
    
    
    1,421
    
    
    
    1,382Engineering
    
    
    410
    
    
    
    325
    
    
    
    333Sales and sales support
    
    
    206
    
    
    
    281
    
    
    
    282Information technology
    
    
    118
    
    
    
    160
    
    
    
    129Marketing and Content
    
    
    135
    
    
    
    75
    
    
    
    52Finance
    
    
    72
    
    
    
    72
    
    
    
    70Human resources and Security and Fraud
Management
    
    
    68
    
    
    
    68
    
    
    
    43Remaining operations
    
    
    195
    
    
    
    286
    
    
    
    232TOTAL
    
    
    2,768
    
    
    
    2,688
    
    
    
    2,523
  *
    
    including face-to-face customer service employees who were transferred to
customer service in 2001. 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 Page 111




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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. 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. Each of the participating employees 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% or 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
depends on seniority and position. Non eligible employees can participate by
their own means and receive the same prices and coverage as eligible employees. 6E. Share Ownership As of December 31, 2003, our directors and senior managers beneficially
owned an aggregate of 1,049,830 or 0.57%, of our outstanding ordinary shares.
No individual director or senior manager beneficially owns 1% or more of our
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As of December 31, 2003, our senior managers, in the aggregate, held
options to purchase up to 1,115,709 of our ordinary shares. No individual
senior manager holds options to purchase 1% or more of our outstanding ordinary
shares. Of these options, 465,001 have an exercise price of $0.343 and will
expire after the eighth anniversary date of the commencement of the vesting
schedule with respect to the options, subject to earlier expiration upon the
termination of the option-holders employment under certain circumstances. The
remaining 650,708 of these options have an exercise price of between NIS 20.45
and NIS 22.23. 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. 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 currently authorizes the issuance of options to purchase up
to 5,104,167 ordinary shares. As of December 31, 2003, options to purchase
1,376,748 ordinary shares were outstanding, with exercise prices ranging from
$0.343 per share to fair market value at the date of grant. The fair market
value was determined on the basis of the average closing sale price of our
ordinary shares during the 30 trading days prior to the date of grant. As of December 31, 2003, options to purchase 3,538,436 ordinary shares had
been exercised under the 1998 Plan. 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 exercise price, vesting schedule and expiration period.
Options to purchase 188,983 ordinary shares remained ungranted under the 1998
Plan as of December 31, 2003. 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 Page 113




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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. 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, Page 114




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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, 2003, options to
purchase 3,769,222 ordinary shares were outstanding with exercise prices
ranging from NIS 17.25  NIS 27.35, which represent the fair market value as of
the date of grant, measured on the basis of the average closing sale price of
our ordinary shares during the 30 trading days prior to the date of grant. As of December 31, 2003, options to purchase 268,250 ordinary shares had
been exercised under the 2000 Plan. Options to purchase 14,820 ordinary shares
remained ungranted under the 2000 Plan as of December 31, 2003. 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. Page 115




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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. 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. Page 116




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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
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. 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 options
under the 2003 Amended Plan, out of which options to purchase 195,000 ordinary
shares were granted at an exercise price of NIS 20.45 per share, which was less
than the market value. As of December 31, 2003, options to purchase 224,930 shares may be granted
under the 2003 Amended Plan. 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 who have 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 March 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 9(d) 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. Page 117




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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 December 31, 2003 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. Percent ofNumber of Ordinary
    
    OutstandingShares Beneficially
    
    Ordinary SharesName and Address
    
    Owned
    
    OwnedHutchison Whampoa Limited(1)
     22/F Hutchison House
     10 Harcourt Road
     Central Hong Kong
    
    
    78,940,104
    
    
    
    43.21
    %Elbit Ltd.(2)
     3 Azrieli Center
     Tel Aviv 67023 Israel
    
    
    15,856,551
    
    
    
    8.68
    %Eurocom Communications Ltd.(3)
     2 Dov Friedman Street
     Ramat Gan 52141 Israel
    
    
    11,626,616
    
    
    
    6.36
    %Matav-Cable Systems Media Ltd.(4)
     42 Pinkas Street
     Netanya 42134 Israel
    
    
    9,668,370
    
    
    
    5.29
    %
   (1)
    
    Hutchison Whampoa Limited, a company listed on the Hong Kong Stock
Exchange and traded on the London Stock Exchange, owns Partner shares
through two indirect subsidiaries, Advent Investments Pte Ltd (Advent)
and Hutchison Telecommunications (Amsterdam) B.V. (HTA) which own 34.28%
and 8.93%, respectively, of the ordinary shares of Partner. Advent,
incorporated in Singapore, is an indirect wholly-owned subsidiary of
Hutchison Whampoa Limited, owned through a chain of wholly-owned
subsidiaries as follows: Advent is owned by Amber International Holdings
Inc., which is owned by Hutchison Telecommunications Limited, which is
owned by Hutchison International Limited, which is owned by Hutchison
Whampoa Limited. HTA, incorporated in the Netherlands, is also an indirect
wholly- Page 118




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owned subsidiary of Hutchison Whampoa Limited owned through a chain of
wholly-owned subsidiaries (unless specified otherwise) as follows: HTA is
owned by Hutchison Europe Telecommunications S.a.r.l., (formerly known as
Hutchison 3G Europe Investments S.á.r.l.) which is owned by Hutchison
Whampoa Europe Investments S.á.r.l., which is 98.98%, 0.51% and 0.51% owned
by Auditorium Investments 1 S.á.r.l., Auditorium Investments 2 S.á.r.l. and
Auditorium Investments 3 S.á.r.l. respectively, all of which are owned by
New Millennium Corp., which is owned by Ommaney Limited, which is owned by
Hutchison Whampoa International (00/03) Limited, which is owned by
Hutchison Telecommunications Limited, which is owned by Hutchison
International Limited, which is owned by Hutchison Whampoa Limited. By
virtue of interests in relation to Hutchison Whampoa Limited, and, pursuant
to the provisions of the Divisions 2 and 3 of Part XV of the Hong Kong
Securities and Futures Ordinance (SFO), Cheung Kong (Holdings) Limited,
Li Ka-Shing Unity Trustee Company Limited as trustee of The Li Ka-Shing
Unity Trust, Li Ka-Shing Unity Trustee Corporation Limited as trustee of
The Li Ka-Shing Unity Discretionary Trust and Li Ka-Shing Unity Trustcorp
Limited as trustee of another discretionary trust and Li Ka-Shing being the
settlor and may being regarded as a founder of The Li Ka-Shing Unity
Discretionary Trust and another discretionary trust for the purpose of the
SFO are each taken as interested in the Partner shares held by Hutchison
Whampoa Limited.(2)
    
    Elbit Limited owns Partner shares. Elbit Limited is wholly-owned by Elron
Electronic Industries Ltd. (Elron). The principal shareholders of Elron
are Discount Investment Corporation Ltd. (DIC), mutual and/or provident
funds managed by Bank Leumi (Bank Leumi Group), mutual and/or provident
funds managed by Bank Hapoalim (Bank Hapoalim Group) and the Insurance
Group headed by Clal Insurance Enterprises Holdings Limited (Clal). As
of December 31, 2003, DIC held approximately 38.48% of the voting power of
Elron. Bank Leumi Group, Bank Hapoalim Group and the Clal Insurance Group,
held approximately 8.79%, 5.06% and 3.11%, respectively, of the voting
power of Elron.IDB Holding Corporation Ltd. (IDBH) is the parent of IDB Development
Corporation Ltd. (IDBD), which in turn, is the parent of DIC and Clal.
IDBH, IDBD, DIC and Clal are public companies traded on the Tel Aviv Stock
Exhange.Since May 19, 2003, approximately 51.7% of the outstanding share capital of
IDBH is owned by a group comprised of: (i) Ganden Investments I.D.B. Ltd.
(Ganden), a private Israeli company controlled by Nochi Dankner and his
sister, Shelly Dankner-Bergman, which holds 31.02% of the equity of and
voting power in IDBH; (ii) Manor Investments-IDB Ltd. (Manor), a private
Israeli company controlled by Ruth Manor, which holds 10.34% of the equity
of and voting power in IDBH; and (iii) Avraham Livnat Investments (2002)
Ltd., (Livnat), a private Israeli company controlled by Avraham Livnat,
which holds 10.34% of the equity of and voting power in IDBH. Ganden, Manor
and Livnat, owning in the aggregate approximately 51.7% of the equity of
and voting power in IDBH, entered into a Shareholders Agreement relating,
among other things, to their joint control of IDBH, the term of which is
until May 19, 2023. In addition, Shelly Dankner-Bergman holds approximately
4.75% of the equity of and voting power in IDBH. Page 119




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Nochi Dankner is Chairman of IDBH, IDBD and DIC, and a director of Clal.
Shelly Dankner-Bergman and Zvi Livnat (the son of Avraham Livnat) are
directors of each of IDBH, IDBD and DIC. Isaac Manor (the husband of Ruth
Manor) is a director of each of IDBH, IDBD, DIC and Clal, and Dori Manor
(the son of Isaac and Ruth Manor) is a director of each of IDBH, IDBD, DIC
and Elron.(3)
    
    Eurocom Communications Ltd. owns 6.36% of the ordinary shares of Partner,
including one ordinary share of Partner held by Tapuz Cellular Systems
Ltd., a wholly-owned subsidiary of Eurocom Communications Ltd. Eurocom
Communications Ltd. is owned by Eurocom Holdings (1979) Ltd. (50.33%),
Shaul Elovitch (0.66%) and Arison Investments Ltd. (49%). Eurocom Holdings
(1979) Ltd. is owned by Shaul Elovitch (80% of the ordinary shares and 75%
of the management shares) and Joseph Elovitch (20% of the ordinary shares
and 25% of the management shares). Arison Investments Ltd. is a
wholly-owned subsidiary of Arison Holdings (1998) Ltd. Arison Holding
(1998) Ltd. is owned by the late Ted Arison Trust for Shari Arison
(33.74%), the late Ted Arison Trust for Mickey Arison (25.3%), the late
Ted Arison Trust for Lin Arison (25.3%), Shlomo Nehama (14.88%), and by
Arison Investments Ltd. (0.77%).(4)
    
    Matav-Cable Systems Media Ltd. (Matav), a company quoted on Nasdaq and
listed in the Tel Aviv Stock Exchange, owns Partners shares through its
wholly-owned subsidiary, Matav Investments Ltd. Matav is owned by Dankner
Investments Ltd. (20.02% equity and voting), Delek Investments
Properties Ltd. (17.98% equity and voting), Maariv-Modiin Publishing
House Ltd. (5.06% equity and voting) and by its directors (as a group,
11.88% equity and voting), Bank Hapoalim Group (6.14% equity and
voting) and by Bank Leumi Group (8.12% equity and
voting). The remaining 28.79% of the shares in Matav are held by the
public. Dankner Investments is a publicly held company, whose securities
are traded on the Tel Aviv Stock Exchange, controlled by members of the
Dankner and Gineo families (who collectively hold approximately 88.25% of
Dankner Investments issued share capital). Members of the Dankner and
Gineo families are parties to the shareholders agreement in Dankner
Investments, concerning the voting of their respective shares in
coordination with the parties to the agreements. Each member of the
Dankner and Gineo families who is a party to the Dankner Investments
shareholders agreement could be deemed to be beneficial owners of all of
the shares of Matav owned by Dankner Investments, but they disclaim
beneficial ownership of such shares. On October 18, 1993,
Dankner Investments Ltd., Mr. Hanania Gibstein, Hapoalim
Electronic Communications Ltd., Maariv Electronic
Communications, Shamrock Holdings of California Inc.,
Mr. Eli Cheifetz, Mr. Shimon Cheifetz and Dr. Zvi
Dinstein entered into a shareholders agreement (Matav
Shareholders Agreement). In this agreement certain of
Matavs shareholders have agreed to vote their respective shares
in a manner that would enable each of such shareholders to appoint a
number of directors to Matavs board of directors in proportion
to each of such shareholders holdings in Matav as compared with
the original holdings of all parties to this agreement as of the date
of Matavs initial public offering. This agreement further
grants each shareholder a right of first refusal to acquire the
shares of a shareholder who offers his shares to a third party or a
shareholder who offers more than 15% of his cumulative shareholdings
(as of the date of Matavs initial public offering) in a
transaction through the Tel Aviv Stock Exchange. This agreement
remains in force as to a party so long as such party holds at least
25% of the number of shares in Matav held by such shareholder as of
the date of Matavs initial public offering. This agreement
binds these shareholders as well as any of their assignees and
transferees. On July, 1998, Dankner Investments
reached an agreement with Mr. Hanania Gibstein, Mr. Shimon Cheifetz and
Mr. Eli Cheifetz all shareholders of Matav, according to which Mr.
Gibstein and Messrs. Cheifetz agreed not to sell their shares in Matav
without the consent of Dankner Investments. Dankner Investments agreed not
to sell its shares in Matav without allowing Mr. Gibstein and Messrs.
Cheifetz to take part in the sale and Mr. Gibstein and Messrs. Cheifetz
agreed to join the sale of all or most of Dankner Investments shares of
Matav. This agreement is subject to the Matav Shareholders Agreement. In
July 2002, the parties to the Matav Shareholders Agreement entered into an
agreement amending the Matav Shareholders Agreement (the Amendment).
Under the Amendment, Maariv ceased to be a party to the Matav
Shareholders Agreement and has no right or obligation in connection with
the Matav Shareholders Agreement or the Amendment. In addition, pursuant Page 120




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to the Amendment, if Messrs. Cheifetz shall not have a right to nominate a
director to the Board of Directors of Matav, on account of the number of
original shares held by him, the parties shall act to nominate a director
to the Board of Directors of Matav designated by Messrs. Cheifetz, provided
that the number of original shares held by Messrs. Cheifetz shall be at
least 60% of the number of original shares required in order to have a
right to nominate one director of Matav. Dankner Investments shall not be
obligated to act according to the above, if as a result the number of
directors of Matav nominated by Dankner Investments shall not constitute
the majority of directors of Matav (the director designated by Messrs.
Cheifetz shall not be considered a director nominated by Dankner
Investments). In February 2004 Matavs parent company, Dankner Investments Ltd. completed its transaction with Delek Investments Properties Ltd., pursuant to which
Delek Investments purchased from Dankner Investments 17.99% of
Matavs outstanding ordinary shares. At the time of the
transactions completion, Dankner Investments waived its rights according to Matav Shareholders Agreement. On
February 2004 Dankner Investments sent Mr. Hanania Gibstein, Mr. Shimon Cheifetz and Mr. Eli
Cheifetz a twelve months prior notice of termination of the agreement that was entered between them on July 1998.
Therefore this agreement will cease to have an effect on February 15, 2005. Before our October 1999 initial public offering, the ownership of our
outstanding ordinary shares by our founding shareholders, on a percentage
basis, was as follows: Matbit Telecommunication Systems Ltd. owned 33.066%;
Matav Investments Ltd. owned 3.76%; Advent Investments Pte Ltd. owned 46.674%;
and Tapuz Cellular Systems Limited Partnership owned 16.5%. In January 2002,
Tapuz Cellular Systems Limited Partnership was dissolved and its holdings in
Partner were transferred to its partners, Eurocom Communications Ltd., Polar
Communications Ltd. and Tapuz Cellular Systems Ltd., a wholly-owned subsidiary
of Eurocom, pro rata to their previous interests in the partnership. On April
24, 2002 Matav Investments Ltd. sold to Hutchison Telecommunications
(Amsterdam) BV, an indirect wholly-owned subsidiary of Hutchison Whampoa
Limited, 5,044,667 ordinary shares of Partner and Matbit Telecommunication
Systems Ltd. sold to Hutchison Telecommunications (Amsterdam) BV 8,734,001
ordinary shares of Partner, which aggregate number of 13,778,668 ordinary
shares comprise approximately 7.7% of Partners issued share capital. On
December 2, 2002, the holdings of Matbit Telecommunication Systems Ltd. in
Partner were transferred to its shareholders, Elbit.COM Ltd. and Matav
Investments Ltd., pro rata to Page 121




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their previous interest in Matbit Telecommunication Systems Ltd. During 2002,
two of our shareholders, MFS Investments Management and T. Rowe Price
Associates, Inc., who had previously held 7.22% and 5.70% of our ordinary
shares, reduced their holdings to less than 5% each. On December 31, 2003, 10,761,403 ADSs (equivalent to 10,761,403 ordinary
shares or approximately 5.9% of the total outstanding ordinary shares) were
outstanding and held of record by 24 registered holders in the United States.
Additionally, at December 31, 2003, there were approximately 9 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. As far as we know, we are not directly or indirectly owned or controlled
by another corporation or by any government, and there are no arrangements that
might result in a change in our control. 7B. Related Party Transactions Relationship Agreement Our founding shareholders and Elbit.COM Limited entered into a
Relationship Agreement in relation to their direct and indirect holdings of our
shares and the rights associated with such holdings. When one of our founding
shareholders, Tapuz, was dissolved in January 2002 and its holdings in Partner
were distributed to its limited partners, who are Eurocom Communications Ltd.,
Polar Communications Ltd. and Tapuz Cellular Systems Ltd., these partners
became parties to, and assumed Tapuzs rights and obligations under, the
Relationship Agreement. The Relationship Agreement was amended on April 23,
2002, concurrently with the sale of shares in Partner indirectly owned by
Matav-Cable Systems Media Ltd. to Hutchison Telecommunications (Amsterdam) BV. 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 Page 122




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OverviewRegulationOur License. On September 14, 2003, the Ministry of
Communications notified us that this undertaking need no longer remain in
force. Board Composition Pursuant to the Relationship Agreement, our Board shall comprise a minimum
of seven and a maximum of sixteen directors, including at least two independent
directors. If more independent directors are required by law or by any of the
stock exchanges on which our shares are to become listed, the number of
independent directors and size of the board will be increased accordingly.
Currently our board consists of 17 directors of whom seven were nominated by
Advent, one by Hutchison Telecommunications (Amsterdam) BV, two by each of
Matav Investments Limited, Elbit.COM Limited and Eurocom Communications, plus
three independent directors. The Relationship Agreement contains detailed provisions whereby the number
of directors that each of the nominating parties, who are Advent, Hutchinson
Telecommunications (Amsterdam) BV, Matav Investments Ltd., Elbit.COM Limited,
Eurocom Communications Ltd. and Polar Communications Ltd., may nominate, may be
reduced if a nominating party disposes of some or all of its shares, depending
on the remaining percentage of shares held by the nominating party. In addition
the nominating parties may transfer some or all of their rights to nominate
directors to a strategic investor, that is, a person, including a nominating
party, who already has, or will have as a result of a simultaneous transfer of
our shares, at least 4.99% of our shares acquired from one of the nominating
parties in a single transaction. Two of our founding shareholders, Matav Investments Ltd. and Eurocom
Communications Ltd., are not currently required by the Relationship Agreement
to vote for the board nominations of the nominating parties under the
Relationship Agreement. Matav Investments Ltd. and Eurocom Communications Ltd.
will be required to vote for these nominations if and when an undertaking to do
so will not, under Bank of Israel rules, limit our ability to borrow from any
bank participating in our credit facility. In addition, if Matav Investments
Ltd. or Eurocom Communications Ltd. sells Partner shares together with the
right to nominate a director, the acquirer will be required under the
Relationship Agreement to undertake to vote for the board nominations provided
this undertaking would not subject Partner to the borrowing limitations
described above. See also Term and Termination. To the extent the operation of the above provisions results in our Board
size decreasing below 16 but not below seven, no additional directors will be
appointed. If the Board falls below seven directors then additional directors
are to be appointed to make it up to seven and none of our principal Page 123




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shareholders will have any special rights to nominate such extra directors. In
addition, to the extent the right to nominate directors is assigned from one
person to another, the assignment may only take place if the assignor can
produce evidence that the assignment will not breach our license or the terms
of our credit facility and that all necessary approvals have been obtained, and
if the assignee agrees to be bound by the Relationship Agreement and other
applicable agreements between the shareholders and, where appropriate, produces
a guarantee from a suitable parent company. There are special provisions which enable Hutchison Telecommunications
(Amsterdam) BV to assign its right to nominate one director to a person who
purchases all of the Partner shares it acquired directly from Matav Investments
Ltd. In addition, if Advent disposes of shares such that its holding differs
from the aggregate holding of the Israeli nominating parties by less than 4.99%
then Advent, if required by the Relationship Agreement, will reduce its
nominees to the board so that the number of Advent nominees is the same as the
number of nominees of the Israeli nominating parties taken together. The agreement also provides that if a party or certain affiliates of a
party become involved in a tender for, or for an interest in, a mobile cellular
telecommunications license in Israel other than the licenses held by Cellcom or
Pelephone, the rights of any directors nominated by such party to attend and
vote at Board meetings may be suspended and, if necessary, they may be removed
from our Board. These provisions do not restrict the activities of Polar
Investment Limited or Polar Communications Limited so long as these entities do
not have nominees on our Board. The existing interests of the IDB Group in
Cellcom, as these may change in the future with Ministry of Communications
approval, are also exempted. All of the above provisions are subject to compliance by our principal
shareholders with the provision of our license which conditions the agreement
of the Ministry of Communications not to cancel our license for certain
breaches upon the principal shareholders retaining at least 51% of each means
of control for so long as this condition of the Ministry of Communications
remains in effect. Chairman For so long as Advent holds at least 25% of our shares and no other party
to the Relationship Agreement holds more of our shares, Advent is entitled to
nominate the chairman of the Board, who will be one of Advents nominated
directors. Page 124




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Executive Committee In view of the size of our Board, day-to-day management is delegated to an
Executive Committee of the Directors comprised of three representatives of
Advent and one representative of each of Matav Investments Limited, Elbit.COM
Limited and Eurocom, plus two independent directors. A shareholder is not
entitled to a greater number of representatives on the Executive Committee than
it has on the Board. The current chairman of the Executive Committee is Lui Pok Man, Dennis. Chief Financial Officer For so long as Advent holds at least 25% of our shares, it is entitled to
nominate the Chief Financial Officer who will be appointed, subject only to the
approval of a majority of the directors, other than those appointed by Advent,
including at least one director representing each of the other nominating
parties. This approval will not be unreasonably withheld or delayed by the
directors nominated by nominating parties. While Advent holds at least 25% of
our shares it is also entitled to remove the CFO from office, as may the
directors, other than Advents nominees, so long as they act unanimously, on
reasonable grounds and in consultation with Advent and the Chief Executive
Officer. Restrictions on Directors The Relationship Agreement contains restrictions on any shareholder that
is an interested party, as defined in our license, which has holdings in
Cellcom (Israel) Limited, nominating or acting as one of our directors. These
restrictions are intended to ensure compliance with our license and our permit
regarding cross ownership issued to us by the Ministry of Communications. Those principal shareholders which are Israeli entities may only nominate
citizens and residents of Israel to act as their representative directors. The
representatives nominated by Advent or other non-Israeli shareholders must
include a sufficient number of citizens and residents of Israel so as to ensure
that the majority of members of the Board are citizens and residents of Israel,
for so long as this is required by our license. Transfer of Shares Other than a requirement to comply with our license and permit and the
terms of our credit facility and to obtain all necessary consents, our
principal shareholders freedom to transfer their shares is not restricted by
the Relationship Agreement. This is subject to (a) our principal shareholders
minimum 51% holding (or such other percentage as is specified in our License);
(b) special provisions in relation to transfers by Tapuz to its partners, as
occurred in January 2002; and Page 125




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(c) tag-along provisions described below in relation to transfers by Advent.
For the requirements of our license and permit, see Item 4B. Information on
the CompanyBusiness OverviewRegulationOur LicenseLicense Conditions and
Item 4B. Information on the CompanyBusiness OverviewRegulationOur Permit
Regarding Cross Ownership. For the terms of our credit facility, see Item 5B.
Operating and Financial Review and ProspectsLiquidity and Capital Resources. Minimum 51% Threshold The Ministry of Communications has notified us that it will not terminate
our license as a result of certain breaches which might otherwise be caused
when our ADSs are publicly traded, as long as our principal shareholders retain
an aggregate of 51% of the means of control of Partner. See Item 3D. Key
InformationRisk FactorsOur telecommunications license imposes certain
restrictions on who can own our shares. If these restrictions are breached, we
could lose our license and Item 4B. Information on the CompanyBusiness
OverviewRegulationOur License. In addition to the requirement noted above in
relation to Board composition, the Relationship Agreement requires that our
principal shareholders retain 51% of our shares (or such other percentage as is
specified in our License). Tag-along with Transfers by Advent If Advent disposes of 4.99% or more of our shares in one transaction or a
series of transactions within any six month period, the other principal
shareholders have the right to tag-along by requiring that some of their own
shares be bought instead of an equivalent number of Advents shares. The number
of shares which the other principal shareholders may sell shall in aggregate be
at most one half of the number of shares Advent proposes to transfer. The
tag-along rights do not apply to:  
    
    the first transfer by Advent of at least 4.99% of our shares where it also assigns the right to nominate a director,
    
    transfers within the Hutchison Whampoa Limited group provided the transferee adheres to the Relationship Agreement,
    
    transfers pursuant to the Registration Rights Agreement, or
    
    transactions effected on an investment exchange on which our securities are or may become listed. The tag-along rights expire five years after the date of the Relationship
Agreement or if Advents shareholding falls below 15% of our shares. Page 126




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Compulsory Transfer in the Event of Default If a party to the Relationship Agreement commits certain events of default

described in the agreement, then our Board, minus the representatives of the
defaulting party, may require the defaulting party 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, any voluntary or involuntary liquidation, various
insolvency-related events, a party ceasing to carry on business or a breach of
the terms of our credit facility which has a material adverse effect. In the
case of breaches of the Relationship Agreement, the offending shareholder is
penalized in that the price at which the shares are to be offered will be
market value less a 17.5% discount. Disputes in relation to events of default
are to be resolved by arbitration. Compliance with Our License The parties to the Relationship Agreement have agreed that they and we
shall at all times comply with the terms of our license. In addition, Elbit.COM
Limited has undertaken to use its best efforts to ensure that its parent,
Elbit, and its associates and any person mentioned in the cross-holdings permit
issued by the Ministry of Communications shall undertake to comply with any
applicable conditions of that permit and the relevant terms of our license.
Each Israeli party to the Relationship Agreement has undertaken to maintain
such portion of the shares as is necessary to ensure that at least 20% of the
shares are held by citizens and residents of Israel. Advent has undertaken to
maintain at least 25% or any other level required by our license for so long as
this is required by our license. See Item 4B. Information on the
CompanyBusiness OverviewRegulationOur LicenseLicense Conditions. Other Undertakings Each party has undertaken to exercise its rights as a shareholder or
through its appointees to the Board to ensure that our affairs are conducted in
accordance with the Relationship Agreement, our license and those documents
connected with the credit facility to which it is a party. In particular, the
parties have agreed to procure that we shall not issue any shares or securities
convertible into shares unless, following such issuance, we will be in
compliance with the share pledge requirement in our credit facility. Guarantees The obligations of each party to the Relationship Agreement are, unless
the party itself has net assets of $50 million or more, to be guaranteed by
their respective parent companies. Page 127




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
    
    Hutchison Telecommunications Limited guarantees the obligations of Advent Investments Pte Limited and Hutchison
Telecommunications (Amsterdam) BV;
    
    Matav-Cable Systems Media Limited guarantees the obligations of Matav Investment Limited;
    
    Elbit Limited guarantees the obligations of Elbit.COM Limited;
    
    Eurocom Communications Limited guarantees the obligations of Tapuz Cellular Systems Limited; and
    
    Eurocom Holding (1997) Limited guarantees the obligations of Eurocom Communications Limited. Term and Termination The Agreement continues in full force and effect until we are wound up.
However, the agreement may be terminated if there is an insolvency event in
relation to us. The agreement will terminate in relation to any individual
party after it ceases to hold any share beneficially. For so long as the shares
are pledged, a transfer of 50% or more of the shares held by our principal
shareholders made as part of the foreclosure of such pledges will also cause
the agreement to terminate. In addition, the undertaking of the parties to the Relationship Agreement,
other than Matav Investments Ltd. and Eurocom Communications Ltd., to vote for
the board nominations of the nominating parties under the Relationship
Agreement will terminate if those parties cease to hold, in the aggregate, (i)
more than 50% of our shares or, (ii) if we offer additional shares to the
public, shares which constitute at least that percentage of our shares which
they held immediately following such offering. The Supplemental Agreement Upon the sale of shares in Partner beneficially owned by Matav-Cable
System Media Ltd. to Hutchison Telecommunications (Amsterdam) B.V. on April 24,
2002, a Supplemental Agreement entered into between Matbit Telecommunication
Systems Ltd., Matav Investments Ltd., Elbit.COM Ltd., Advent Investments Pte
Ltd., Hutchison Telecommunications (Amsterdam) B.V., and Matav-Cable Systems
Media Ltd. took effect. Pursuant to the Supplemental Agreement, Matav Investments Ltd. undertook
that it will not, and that it will use its best efforts to procure that none of
its affiliates will, take any action or allow any event to occur, which would
cause us to become obliged, under the applicable rules of the Bank of Israel
restricting loans to related parties, to repay amounts to, or alter the terms
of any existing or subsequent credit facility with, any bank on terms
substantially different from those applicable to other Page 128




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banks participating in such facility or on terms which would not apply were it
not for the application of such rules. Matav-Cable Systems Media Ltd.
guaranteed the performance of Matav Investments Ltd.s obligations set forth in
the Supplemental Agreement or arising in connection with the Supplemental
Agreement. If Matav Investments Ltd., in breach of its undertaking, causes us to
become obliged as mentioned above under the rules of the Bank of Israel, our
Board of Directors, excluding the representatives of Matav Investments Ltd.,
may require Matav Investments Ltd. to sell the amount of shares that our Board
of Directors determines must be sold, at a price per share equal to 82.5% of
the Market Price, as determined in the Relationship Agreement, in accordance
with the provisions of the Relationship Agreement, in addition to, or as an
alternative, to take such other actions as our Board of Directors and Matav
Investments Ltd. agree will remedy the breach. Transactions with Affiliates We currently operate under an unwritten arrangement with Eurocom
Communications Ltd., one of our principal shareholders, pursuant to which
Eurocom sells our services or distributes handsets in connection with their
sale of Nokia handsets in twelve outlets. 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 also purchase a portion of our Nokia handsets from Eurocom. In the year
ended December 31, 2002, purchases from Eurocom constituted approximately 24%
of all of our handset purchases. We believe that our distribution arrangement and handset purchases from
Eurocom are on commercial, arms-length terms. In addition, we have agreements with Eurocom Cellular Communication Ltd.,
a subsidiary of Eurocom Communications Ltd., according to which Eurocom will
provide us with various content and interactive games and the right to use
certain intellectual property. We have an agreement with Cellact Ltd., a subsidiary of Elbit Ltd.,
according to which Cellact is directly connected to our SMS server so that
Cellact may send large amounts of SMSs to our subscribers and vice-versa. We have a strong relationship with Hutchison Whampoa Limited, one of our
principal shareholders, and are working with them in connection with the
development of products and services for UMTS third generation mobile
communications. Hutchison is a global leader in UMTS third Page 129




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generation technology and, in particular the deployment and development of
third generation cellular networks and products and services worldwide. In August 2002, we signed a Cost-Sharing Agreement, or the CSA, with
Hutchison Telecommunications Limited, or HTL, and certain of its subsidiaries
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 Hutchison Whampoa Limited
group, and to benefit from the combined purchasing power and resources of the
group which includes companies in Austria, Australia, Denmark, Hong Kong,
Ireland, Italy, Sweden and the United Kingdom. As of December 31, 2003, we had given notice of our participation in six
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 14(c) to our consolidated financial statements. For more information, see Item 3D. Risk FactorsRisks and uncertainties
in connection with UMTS third generation technology mean that we may not make
an economic return on investment in acquiring UMTS third generation spectrum,
establishing a UMTS third generation network, or developing UMTS third
generation services. On September 1, 2003, we entered into a supply agreement with Elron
Telesoft Ltd., a wholly-owned subsidiary of Elron Electronics Industries Ltd.
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. Certain of our directors, who are also controlling persons of our
principal shareholders, are also, indirectly, part of the controlling group of
shareholders of Bank Hapoalim B.M., which is a participating bank in our credit
facility. For a description of our credit facility, see Item 5B. Operating and
Financial Review and ProspectsLiquidity and Capital Resources. Page 130




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Foreign Mobile Radio Telephone Operator Undertaking Our license requires a foreign mobile radio telephone operator to
undertake to make available to us, if we request it, all know-how in its
possession required to establish and operate a mobile radio telephone system
for the provision of mobile radio telephone communications services, their
marketing and sale. By virtue of Advents parent corporation being the
controlling corporation of Hutchison Telephone Company Limited, this operator
provided this undertaking. On
September 14, 2003, the Ministry of Communications notified us that this
undertaking need no longer remain in force. Registration Rights We have entered into a registration rights agreement with our principal
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. Page 131




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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,
2003 are included under Item 18. Financial Statements. Legal and Arbitration 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, particularly before the signing of
the agreement in principle with the Union of Local Authorities in Israel. 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. Currently, approximately 35% of our antenna sites are
operating without local building permits. In addition, approximately 2% of the
sites (base transceiver stations and microbase transceiver stations) are
operating without permits from the Ministry of the Environment, although all
third party environmental testing necessary for those permits has been
successfully completed. 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. As of December 31, 2003, 252 criminal proceedings have been brought
against us concerning the erection of antenna sites without building permits.
131 of those proceedings have also been brought against our officers and
directors. 24 of those proceedings have been brought against us regarding
failure to comply with demolition orders, of which five have been brought
against our officers and directors and 24 have been settled. 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.
216 of the criminal proceedings brought against us have been settled, with
Partner, but not our directors or officers, admitting guilt and paying a fine,
ranging from NIS 1,000 to NIS 80,000 per Page 132




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offense. The total amount of fines paid as of December 31, 2003, is
approximately NIS 2 million, with NIS 0.3 million of that paid during 2001, NIS
0.3 million of that paid during 2002 and NIS 0.2 million of that paid during
2003. These settlements 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. 127 of the criminal proceedings involving our officers and
directors have been settled with no admission of guilt by any of the officers
and directors. In addition, currently 69 administrative demolition order
proceedings have been brought against us. Of these, 67 have been settled with
the imposition of demolition orders, the execution of which has been stayed for
a period of several months to allow us to obtain the necessary permits or to
relocate the relevant antenna. 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 which could prevent us from achieving or maintaining the
network coverage including the planned UMTS coverage and quality requirements
contained in our license and adversely affect our business. On October 28, 1999, an Israeli consumer organization lodged a claim
against us, alleging a variety of consumer complaints and requested that this
claim be recognized as a class action. On March 20, 2002, the Haifa District
Court decided to strike the claim, because the consumer organization lost, on
December 31, 2001, the special status required under Israeli law for consumer
organizations to file class action claims. Another claim, involving a substantial amount, which was filed by a
private consumer who had previously asked to join the above class action, has
been brought again before the court. The court had previously frozen the
proceedings of the private consumers claim, until a decision was made in the
case filed by the consumer organization. On May 25, 2003, the private consumer filed a request to amend his motion
to file a class action claim and the proposed claim itself, and also a draft of
the proposed amended motion and claim. The motion to amend was granted, and on
January 21, 2004, we submitted our response to the certification motion. Page 133




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While the amount of the claim is substantial, the ultimate liability
cannot be determined because of the considerable uncertainties that exist. At
this stage, unless and until the claim is certified as 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. In addition, we and our legal counsel
are of the opinion that in light of the facts known at this early stage, the
chances that a material amount would be ordered in favor of the plaintiffs are
low. See Note 8(b)1 to our consolidated financial statements. On July 8, 2001 a claim was filed against us for alleged violation of a
suppliers exclusivity agreement. For filing purposes, the claim was set at NIS
18 million; however, this amount can be increased by the claimant. At this
stage, since preliminary proceedings between the parties are yet to take place,
and the claim concerns a contract interpretation issue, we and our legal
counsel are unable to evaluate the probability of success of this litigation,
and therefore no provision has been made. See Note 8b(2) to our consolidated
financial statements. On April 8, 2002, a claim was filed against us, together with a motion to
certify this claim as a class action, alleging a variety of consumer
complaints. The amount of the claim against us is estimated at approximately
NIS 545 million plus additional significant amounts related to other alleged
damages. Only a preliminary hearing has taken place, and another preliminary
hearing is set for March 28, 2004. 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. In addition, we and our legal counsel are of the opinion that even if the
request to approve this claim as a class action is granted, and even if the
plaintiffs arguments are accepted, the outcome of the claim will be
significantly lower than the above-mentioned amount. See Note 8b(3) to our
consolidated financial statements. On April 13, 2003, a claim was filed against us and other cellular
telecommunication companies, together with a request to approve 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. We filed our response on October 1,
2003. At this stage, no hearings have taken place and unless and until the claim
is certified as a class action, the Company and its legal council are unable to
evaluate the probability of success of Page 134




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Such claim, and therefore no provision has been made. See Note 8b(4) to our consolidated financial statements. Dividend Distribution Policy We have never paid cash dividends to our shareholders, and we currently do
not anticipate paying dividends for the foreseeable future. We expect that all
available cash from operations, together with borrowings under our credit
facility and a portion of the proceeds from our initial public offering and our
August 2000 offering of 13% senior subordinated notes due 2010, will be used to
meet our projected capital and other expenditure requirements and to settle or
refinance our projected liabilities as they fall due. In addition, the terms of
our credit facility restrict the amount of dividends we may pay to our
shareholders and the timing of dividend payments. In the event we declare dividends in the future, we will pay those
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. Page 135




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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, 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. The table below sets forth, for the periods indicated, the reported high
and low closing quotations, 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**($ per ADS)
    
    ($ per ADS)
    
    (NIS per ordinary share)Year Ended December 31,
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    Low1999*Fourth Quarter (from October 27)
    
    
    25.88
    
    
    
    14.88
    
    
    
    25.00
    
    
    
    14.93
    
    
    
    
    
    
    
    2000
    
    
    23.13
    
    
    
    4.13
    
    
    
    22.50
    
    
    
    4.13
    
    
    
    
    
    
    
    First Quarter
    
    
    23.13
    
    
    
    14.25
    
    
    
    22.50
    
    
    
    14.83
    
    
    
    
    
    
    
    Second Quarter
    
    
    14.81
    
    
    
    6.26
    
    
    
    15.13
    
    
    
    7.03
    
    
    
    
    
    
    
    Third Quarter
    
    
    10.00
    
    
    
    7.50
    
    
    
    10.05
    
    
    
    7.43
    
    
    
    
    
    
    
    Fourth Quarter
    
    
    7.63
    
    
    
    4.13
    
    
    
    7.75
    
    
    
    4.13
    
    
    
    
    
    
    
    2001
    
    
    7.13
    
    
    
    3.50
    
    
    
    7.10
    
    
    
    3.53
    
    
    
    37.85
    
    
    
    17.73First Quarter
    
    
    7.13
    
    
    
    4.25
    
    
    
    7.10
    
    
    
    4.25
    
    
    
    
    
    
    
    Second Quarter
    
    
    4.78
    
    
    
    3.50
    
    
    
    4.63
    
    
    
    3.53
    
    
    
    
    
    
    
    Third Quarter
    
    
    6.80
    
    
    
    3.89
    
    
    
    6.95
    
    
    
    4.15
    
    
    
    37.85
    
    
    
    17.73Fourth Quarter
    
    
    6.85
    
    
    
    4.50
    
    
    
    6.95
    
    
    
    4.43
    
    
    
    30.79
    
    
    
    18.902002
    
    
    7.55
    
    
    
    3.55
    
    
    
    7.38
    
    
    
    3.78
    
    
    
    33.92
    
    
    
    17.26First Quarter
    
    
    7.55
    
    
    
    4.70
    
    
    
    7.38
    
    
    
    4.70
    
    
    
    33.92
    
    
    
    21.29Second Quarter
    
    
    5.00
    
    
    
    4.00
    
    
    
    4.93
    
    
    
    4.05
    
    
    
    24.04
    
    
    
    19.19Third Quarter
    
    
    4.77
    
    
    
    3.86
    
    
    
    4.68
    
    
    
    3.88
    
    
    
    22.53
    
    
    
    18.51Fourth Quarter
    
    
    4.50
    
    
    
    3.55
    
    
    
    4.53
    
    
    
    3.78
    
    
    
    21.67
    
    
    
    17.26
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Nasdaq
    
    London Stock Exchange
    
    Tel Aviv Stock Exchange**($ per ADS)
    
    ($ per ADS)
    
    (NIS per ordinary share)Year Ended December 31,
    
    High
    
    Low
    
    High
    
    Low
    
    High
    
    Low2003First Quarter
    
    
    3.70
    
    
    
    2.56
    
    
    
    3.58
    
    
    
    2.68
    
    
    
    17.03
    
    
    
    12.45Second Quarter
    
    
    4.91
    
    
    
    3.45
    
    
    
    4.90
    
    
    
    3.55
    
    
    
    21.91
    
    
    
    16.21Third Quarter
    
    
    6.11
    
    
    
    4.90
    
    
    
    5.95
    
    
    
    4.85
    
    
    
    27.25
    
    
    
    20.96Fourth Quarter
    
    
    7.84
    
    
    
    5.92
    
    
    
    7.70
    
    
    
    5.40
    
    
    
    34.46
    
    
    
    26.54
   *
    
    Because our ADSs were first issued on October 26, 1999, the high and low
closing quotations for 1999 are the same as those for the Fourth Quarter.**
    
    Our ordinary shares began trading on the Tel Aviv Stock Exchange on July
3, 2001. Previous Six Months Nasdaq
    
    London Stock Exchange
    
    Tel Aviv Stock Exchange**($ per ADS)
    
    ($ per ADS)
    
    (NIS per ordinary share)High
    
    Low
    
    High
    
    Low
    
    High
    
    LowOctober 2003
    
    
    7.24
    
    
    
    5.92
    
    
    
    7.08
    
    
    
    5.90
    
    
    
    32.81
    
    
    
    26.54November 2003
    
    
    7.27
    
    
    
    6.71
    
    
    
    7.23
    
    
    
    6.95
    
    
    
    32.88
    
    
    
    30.32December 2003
    
    
    7.84
    
    
    
    6.84
    
    
    
    7.70
    
    
    
    5.40
    
    
    
    34.46
    
    
    
    30.69January 2004
    
    
    8.45
    
    
    
    7.50
    
    
    
    8.20
    
    
    
    7.70
    
    
    
    36.63
    
    
    
    34.63February 2004
    
    
    8.21
    
    
    
    7.41
    
    
    
    8.125
    
    
    
    7.575
    
    
    
    36.49
    
    
    
    33.44March 2004
    
    
    8.49
    
    
    
    7.59
    
    
    
    7.95
    
    
    
    7.725
    
    
    
    37.99
    
    
    
    33.86
 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. Page 137




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9D. Selling Shareholders Not applicable. 9E. Dilution Not applicable. 9F. Expenses of the Issue Not applicable. Page 138




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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. 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 182,695,574 ordinary
shares were issued and outstanding as of Page 139




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December 31, 2003. All outstanding ordinary shares are validly issued. The
rights attached to the 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 a
dividend with respect to any fiscal year only out of profits, in accordance
with the provisions of the Companies Law. Declaration of a dividend requires
approval by an ordinary shareholders resolution, which may decrease but not
increase the amount proposed by the board of directors. See Item 10E.
Additional Information  Taxation. Dormant shares 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 be 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 Page 140




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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, the declaration of dividends 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. 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. 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. 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. Page 141




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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 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, as defined in the Companies Law. According to our articles of
association, dormant shares bear no rights as long as they are dormant shares,
except 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 at least twenty-one days prior to the date of the meeting is
required. 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. Page 142




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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 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 License  License Conditions, Item 4B.
Information on the Company  Business Overview  Our 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 We are not a party to any material contracts other than those entered into
in the ordinary course of business. 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 subsidiary, Partner Future Communications 2000 Ltd., 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. Page 143




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10E. Taxation Israeli Taxation 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. Israeli Tax Reform On July 24, 2002, the Israeli Knesset enacted income tax reform
legislation, commonly referred to as the Tax Reform. The Tax Reform has
introduced fundamental and comprehensive changes into Israeli tax laws. Most of
the legislative changes took effect on January 1, 2003. The 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 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 individuals from the sale of securities traded on
the Tel-Aviv Stock Exchange). Various issues related to the 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. It should be noted that under the 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. General Corporate Tax Structure The regular rate of corporate tax in Israel is 36%. 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 Page 144




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deductions and adjustments to depreciation deductions and tax loss carry
forwards to mitigate the effects resulting from an inflationary economy. 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 Israeli Consumer Price Index or 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 Israeli 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 Israeli CPI between
the date of purchase and the date of sale. The Real
Gain accrued at the sale of an asset purchased on or
after January 1, 2003 is taxed at a 25% rate, both for
individuals and for corporations, as opposed to the
previous 36% rate applicable to corporations, and to
the marginal tax rate of up to 49% applicable to
individuals with respect to sale transactions effected
prior to January 1, 2003.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
previous capital gains tax rate (36% for a corporation
and a marginal tax rate of up to 49% 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.Inflationary Surplus is exempt from tax. Page 145




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Upon the sale of an asset subject to capital gains tax,
a tax advance of 25% of the capital gain is payable
within 30 days of the transaction. The Assessing
Officer may accept the actual amount of tax payable, if
this is lower, provided that a detailed return
including a computation of the tax due is filed within
that period. Capital gains are also reportable on
annual income tax returns.
    
    Taxation of Israeli Residents  Shareholders Subject
to the Inflationary Adjustments Law. The Inflationary
Adjustments Law includes provisions concerning taxation
on gains from the sale of traded securities. These
provisions apply to most corporate shareholders and to
certain individuals. There is some uncertainty as to
whether those provisions also apply to foreign
corporations that hold our shares because non-resident
companies are not expressly exempt from them. A
shareholder who is subject to the Inflationary
Adjustments Law will be taxed, upon the sale of his or
her Shares, on the full amount of its gain at the tax
rate applicable to that shareholder (36% for a
corporation and a marginal tax rate of up to 49% for
individuals). It should be noted that the Tax Reform
has not altered significantly the legal situation
concerning this aspect of Israeli taxation.
    
    Taxation of Israeli Residents  Other Shareholders. 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 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. 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 or who are not
subject to the Inflationary Adjustments Law. As demonstrated below, the timing
of that the shareholders purchase of the shares will determine the tax
outcomes in this regard. Our analysis is based partially on guidelines published by the Israeli Tax
Authorities prior to enactment of the Tax Reform concerning the tax treatment
of securities traded in the Tel Aviv Stock Exchange and on foreign stock
exchanges. Accordingly, the analysis may change should new legislation or
amended guidelines be published in the future. Sale of shares purchased after January 1, 2003 The shareholder will be subject to tax at 15% 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%. Sale of shares purchased after the listing on the Tel Aviv Stock Exchange and
before January 1, 2003 Page 146




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
    
    The shareholder will be subject to tax on the gain derived commencing
January 1, 2003 at a rate of 15%. The cost value of the shares for the
purpose of the gain computation, will be based on the average price of
the shares during the last three trading days preceding January 1,
2003 or the original cost of the shares, whichever is the higher. To
the extent that the taxpayer claims a deduction of financing expenses,
the gain will be subject to tax at a rate of 25%.
    
    The remainder of the gain realized (i.e., the real gain attributed to
the period from the purchase date until January 1, 2003) will be
exempt from Israeli tax. Sale of shares purchased prior to the listing on the Tel Aviv Stock Exchange A shareholder who elected to recognize a tax event at the listing date on
the Tel Aviv Stock Exchange or rescinded an election to defer the tax event. If a shareholder elected to recognize a tax event on the date of the
listing of our Shares on the Tel Aviv Stock Exchange, or rescinded an election
to defer the tax event until the date of actual sale of the shares on the Tel
Aviv Stock Exchange, the profit realized will be allocated among three separate
components: (i) profit or loss determined as of the date of listing on the Tel
Aviv Stock Exchange; (ii) profit or loss accrued from the date of listing the
shares on the Tel Aviv Stock Exchange until January 1, 2003 and (iii) Gain (or
loss) accrued from January 1, 2003 until the actual sale of the shares. Regarding profits determined as of the listing date, the shareholder
generally will be taxed at a rate of 35% for an individual shareholder or 36%
for a corporate shareholder. If such shareholder elected to defer payment of
the tax on the date of listing, the shareholder will be required to pay
interest and linkage to the Israeli CPI on the tax amount from the date of
listing. Profits accrued from the date of listing of the shares on the Tel Aviv
Stock Exchange until January 1, 2003 are generally exempt from capital gains
tax. Capital gain accrued from January 1, 2003 until the actual sale of the
shares will be subject to tax at a rate of 15%. The cost basis of the shares
for the purpose of the gain computation, will be based on the average price of
the shares during the last three trading days preceding January 1, 2003 or, as
commonly understood, preceding the value at the listing date, whichever is
higher. To the extent that the taxpayer claims a deduction of financing
expenses, the gain will be subject to tax at a rate of 25%. A shareholder who elected to defer the tax event until the actual sale of
the shares Page 147




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If a shareholder elected to defer the tax event until the date of the
actual sale of the securities and has notified the tax authorities of the
election, the shareholder will generally be taxed at a rate of 35% for an
individual shareholder or 36% for a corporate shareholder on all gains realized
from the sale of the securities. Under certain interpretations of the law, reduced tax rates may apply with
respect to the gain accrued as from January 1, 2003 until the actual sale of
the shares.  
    
    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:  q
    
    Foreign investors (individuals and corporations) that are not
engaged in the business of trading securities through a permanent
establishment in Israel and are not subject to the Inflationary
Adjustments Law, 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.q
    
    Foreign investors (individuals and corporations) that are not
engaged in the business of trading securities and are not subject to
the Inflationary Adjustments Law, who purchased Shares before the
listing on the Tel Aviv Stock Exchange will be subject to similar
capital gain tax treatment as Israeli residents. The tax applicable to
foreign individual investors will be determined in accordance with the
marginal tax rates of up to 49% and not in accordance to the
preferential 35% tax rate applicable to Israeli individual investors.
However, foreign investors may be exempt under the terms of an
applicable bilateral double taxation treaty.  
    
    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 Tax Reform, Israeli stockbrokers have a duty to withhold tax upon
the sale of traded securities. The applicable withholding tax rate is
15% from the real gain. Page 148




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Dividends We currently do not intend to pay dividends in the foreseeable future.
However, the following Israeli tax consequences would apply in the event of
actual payment of any dividends on ordinary shares or ADSs. The distribution of dividend income, other than bonus shares (stock
dividends), to Israeli residents who purchased our Shares will generally be
subject to income tax at a rate of 25% for individuals and will be exempt from
income tax for 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 25% by way of a tax withholding, unless a
lower rate is stipulated by a treaty between Israel and the shareholders
country of residence. 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, or 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%. The maximum rate of withholding tax on dividends
paid by Israeli corporation to a US corporation will be 12.5% if 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) by a holder
that (a) is a resident of the United States for purposes of the US Treaty, and
(b) 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. 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. Page 149




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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 Taxation 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,
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. Page 150




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As
used herein, the term US holder means a beneficial holder of an
ordinary share or an ADS who is eligible for benefits as a U.S. 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:  
    
    an individual citizen or 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
United States persons have the authority to control all of the trusts substantial decisions. If a partnership 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. 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 We currently do not intend to pay dividends for the foreseeable future.
However, in the event we make any distributions of cash or other property to a
US holder of ordinary shares or ADSs, the 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, to the extent that such
distributions are paid out of our current or Page 151




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accumulated earnings and profits as determined for US federal income tax
purposes. Distributions in excess of our earnings and profits will be applied
against and will reduce the US holders tax basis in its ordinary shares or
ADSs and, to the extent in excess of such tax basis, will be treated as gain
from a sale or exchange of such ordinary shares or ADSs. 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 is 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. 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 holders, financial services income for US
foreign tax credit purposes. 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. The US Treasury
has expressed concerns that parties to whom ADSs are released may be taking
actions that are inconsistent with the claiming of foreign tax credit for US
holders of ADSs. Accordingly, the discussion above regarding the creditability
of the Israeli withholding tax on dividends could be affected by future actions
that may be taken by the US Treasury. 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. US holders who
do not elect to claim 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. Recent US Tax Law Changes Applicable to Individuals Under 2003 US tax legislation, some US holders (including individuals) are
eligible for reduced rates of US federal income tax (currently a maximum of
15%) in respect of qualified dividend income Page 152




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received in taxable years beginning after December 31, 2002 and beginning
before January 1, 2009. For this purpose, qualified dividend income generally
includes dividends paid by non-US corporations if, among other things, certain
minimum holding periods are met and 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-Israel income tax treaty) which provides for the
exchange of information. We currently believe that if we were to pay any
dividends with respect to our ordinary shares and ADSs, the dividends would
constitute qualified dividend income for US federal income tax purposes. Some
of the eligibility requirements for non-US corporations are not entirely clear,
however, and further guidance from the Internal Revenue Service is anticipated.
In addition, the Internal Revenue Service is expected to issue certification
procedures in 2004 whereby a non-US corporation will be required to certify as
to the eligibility of its dividends for the reduced US federal income tax
rates. Sale or Other Disposition Upon the sale 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 disposition and the holders
adjusted tax basis, determined in US dollars, in the ordinary shares or ADSs.
Any gain or loss recognized upon the disposition of the ordinary shares or ADSs
will be treated as long-term capital gain or loss if, at the time of the
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 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. Page 153




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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, 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 believe that we were not a PFIC for the year
ended December 31, 2003. 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 Shares or ADSs. Furthermore, dividends paid by a PFIC are not eligible to be
treated as qualified dividend income (as discussed above). 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 or other disposition of ordinary shares or ADSs may be subject to
information reporting to the Internal Revenue Service (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. Page 154




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10F. Dividends and Paying Agents Not applicable. 10G. Statement By Experts Not applicable. 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.
Copies of this material are also available by mail from the Public Reference
Section of the SEC, at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. 10I. Subsidiary Information Not applicable. Page 155




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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 to interest rates and foreign currencies. 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 US dollars, shekels linked to the Israeli CPI and
unlinked shekels. The following table provides information derived from the
financial statements about these borrowings. Non-Derivative Instruments Book Value(1)(NIS
equivalent inmillions, except percentages)US dollar borrowingsLong termsubordinated notes
    
    
    766Fixed interest rate payable on our senior subordinated notes
    
    
    13
    %NIS linked to the Israeli CPILong-termfixed
    
    
    364Weighted average interest rate payable on fixed rate debt
    
    
    5.8
    %Unlinked NISLong-termfloating
    
    
    1,443Weighted average interest rate payable on floating rate debt
    
    
    6.5
    %Total
    
    
    2,573
   (1)
    
    Book value approximates fair value at December 31, 2003. Expected Maturity Dates: Our credit facility is divided into three tranches: A multi-currency term
loan facility of $383 million (Facility A), a revolving multi-currency loan
facility of $150 million (Facility B) and a fixed-term shekel loan facility
of $150 million (Facility C and, together with
Facility A and Facility B, the Facilities). Page 156




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The total commitments under the Facilities will be reduced during each of
the following years to the following amounts:*  Dollars in
MillionsA
    
    B
    
    C
    
    Total2003
    
    
    383
    
    
    
    150
    
    
    
    150
    
    
    
    6832004
    
    
    356
    
    
    
    150
    
    
    
    150
    
    
    
    6562005
    
    
    266
    
    
    
    150
    
    
    
    141
    
    
    
    5572006
    
    
    172
    
    
    
    150
    
    
    
    114
    
    
    
    4362007
    
    
    62
    
    
    
    150
    
    
    
    84
    
    
    
    2962008
    
    
    0
    
    
    
    0
    
    
    
    72
    
    
    
    72June 30, 2009
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
 On August 10, 2000, we completed an offering of $175 million of unsecured
senior subordinated notes due 2010. The notes bear interest at the rate of 13%
per annum, which is payable semi-annually on each February 15 and August 15,
commencing February 15, 2001. We may redeem up to 100% of the aggregate
principal amount of the notes beginning August 15, 2005. Foreign Exchange Substantially all of our revenues and a majority of our operating expenses
are denominated in shekels. However, through December 31, 2003, 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, and our
notes are denominated in US dollars and require US dollar interest payments.
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, but we do not
currently hedge the principal payable on our notes. We are exposed from time to time to movements in foreign currency exchange
rates on short-term liabilities to suppliers, denominated in US dollars or
euros. 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 enter into foreign currency forward transactions and purchases and
write foreign currency options in order to protect ourselves against the risk
that the eventual dollar cash flows resulting from Page 157




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the existing assets and liabilities will be affected by changes in exchange
rates. The writing of such options is part of a comprehensive hedging strategy
and is designed to effectively swap the currencies relating to existing assets
and liabilities. Each of the options written is combined with purchase of an
option for the same period and the same notional amount. We do not hold or
issue derivative financial instruments for trading purposes. The transactions are mainly designated to hedge the cash flows related to
payments of dollar interest on notes payable as well as those related to
anticipated 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
    
    
    
    
    
    Fair Value atDecember 31,
    
    Maturing
    
    December 31,2003
    
    in 2004
    
    2003(NIS equivalent in millions)Currency options purchased  for the exchange of:Dollars into NIS
    
    
    88
    
    
    
    88
    
    
    
    0.5Currency options written  for the exchange of:Dollars into NIS
    
    
    44
    
    
    
    44
    
    
    
    (0.7
    )Forward transactions  for the exchange of:Dollars into NIS
    
    
    568
    
    
    
    568
    
    
    
    (10.0
    )Embedded derivatives  : Dollars into NIS
    
    
    209
    
    
    
    209
    
    
    
    (1.3
    )
 Page 158




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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 Chief Executive Officer and
our Chief Financial Officer, after evaluating the effectiveness of our
disclosure controls and procedures (as defined in US Exchange Act Rule
13a-15(e)) as of the end of the period covered by this Form 20-F, have
concluded that, as of such date, our disclosure controls and procedures were
effective. (b) Internal Control Over Financial Reporting. There were no changes in
our internal control over financial reporting that occurred during the year
ended December 31, 2003 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 Mr. Robert Donald Fullerton is
an audit committee financial expert as defined in Item 16A of Form 20-F. Mr.
Fullerton and each of the other members of the Audit Committee are independent
directors as defined in the Nasdaq listing standards applicable to us. Page 159




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ITEM 16B. CODE OF ETHICS We have adopted a code of ethics that applies to our Chief Executive
Officer, President, Chief Financial Officer and Corporate Controller. 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:
+972-67-814191. 
 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, 2003, 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 2003 and 2002. 2003 (NIS thousands)
    
    2002 (NIS thousands)Audit Fees (1)
    
    
    1,303
    
    
    
    1,159Audit-related Fees (2)
    
    
    81
    
    
    
    93Tax Fees (3)
    
    
    284
    
    
    
    85All Other Fees (4)
    
    
    
    
    
    
    1,611TOTAL
    
    
    1,668
    
    
    
    2,948
  (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.(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.(3)
    
    Tax Fees include fees billed for tax compliance services, including the preparation
of original and amended tax returns and claims for tax refund; tax
consultations, such as assistance and representation in Page 160




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connection with tax audits and appeals, and requests for rulings or
technical advice from taxing authority; and tax planning services.(4)
    
    All Other Fees include fees billed for IT consultation services, performed during
2002, by a former affiliate, which during 2002, was transferred to IBM
Israel Ltd. Audit Committee Pre-approval Policies and Procedures Our Audit Committee has not adopted any pre-approval policies and procedures. 
 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. PageREPORT OF INDEPENDENT AUDITORS
    
    
    F-1FINANCIAL STATEMENTS:Balance sheets at December 31, 2002 and 2003
    
    
    F-2F-3Statements of operations for the years ended December 31, 2001, 2002 and 2003
    
    
    F-4Statements of changes in shareholders equity (capital deficiency) for the
years ended December 31, 2001, 2002 and 2003
    
    
    F-5F-6Statements of cash flows for the years ended December 31, 2001, 2002 and 2003
    
    
    F-7F-8Notes to financial statements
    
    
    F-10F-52
 Page 161




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ITEM 19. EXHIBITS Exhibit No.
    
    Description++1.1
    
    Partners 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
    
    Form of Deposit Agreement including Form of ADR Certificate*2.(b)
    
    Form of Indenture between Partner and The Bank of New York, as trustee, including form of note**4.(a).1
    
    Relationship Agreement dated October 10, 1999**4.(a).2
    
    License from the Israeli Ministry of Communications issued April 8, 1998**4.(a).3
    
    Bank Facility dated August 13, 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 11, 2001**4.(a).9
    
    Lease Agreement with Mivnei Taasia dated July 2, 1998**4.(a).10
    
    Interconnect Agreement with Cellcom dated February 15, 1999**4.(a).11
    
    Interconnect Agreement with Pelephone dated May 1, 1999*4.(a).12
    
    Amending and Rescheduling Agreement dated July 9, 2000++4.(a).13
    
    Supplemental Agreement dated April 18, 2002+4.(a).14
    
    Amendment to Relationship Agreement dated April 23, 2002***4.(a).15
    
    Amendment No. 1 to License from the Israeli Ministry of Communications issued May 11, 1999***4.(a).16
    
    Amendment No. 2 to License from the Israeli Ministry of Communications issued September 29,
1999***4.(a).17
    
    Amendment No. 3 to License from the Israeli Ministry of Communications issued October 3, 1999***4.(a).18
    
    Amendment No. 4 to License from the Israeli Ministry of Communications issued June 28, 2000***4.(a).19
    
    Amendment No. 5 to License from the Israeli Ministry of Communications issued September 10,
2000***4.(a).20
    
    Amendment No. 6 to License from the Israeli Ministry of Communications issued March 19, 2001+4.(a).21
    
    Amendment No. 7 to License from the Israeli Ministry of Communications issued September 23,
2001+4.(a).22
    
    Amendment No. 8 to License from the Israeli Ministry of Communications issued December 27,
2001+4.(a).23
    
    Amendment No. 9 to License from the Israeli Ministry of Communications issued March 13, 2002+4.(a).24
    
    Amendment No. 10 to License from the Israeli Ministry of Communications issued April 14, 2002+4.(a).26
    
    Amendment No. 11 to License from the Israeli Ministry of Communications issued April 25, 2002++4.(a).27
    
    Amendment No. 12 to License from the Israeli Ministry of Communications issued June 26, 2002++4.(a).28
    
    Amendment No. 13 to License from the Israeli Ministry of Communications issued June 30, 2002
 Page 162




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Exhibit No.
    
    Description++4.(a).29
    
    Amendment No. 14 to License from the Israeli Ministry of Communications issued September 11,
2002++4.(a).30
    
    Amendment No. 15 to License from the Israeli Ministry of Communications issued October 24,
2002++4.(a).31
    
    Amendment No. 16 to License from the Israeli Ministry of Communications issued November 26,
2002++4.(a).32
    
    Amendment No. 17 to License from the Israeli Ministry of Communications issued February 2,
20034.(a).33
    
    Amendment No. 18 to License from the Israeli Ministry of Communications issued May 29, 20034.(a).34
    
    Amendment No. 19 to License from the Israeli Ministry of Communications issued July 31, 20034.(a).35
    
    Amendment No. 20 to License from the Israeli Ministry of Communications issued October 8, 20034.(a).36
    
    Amendment No. 21 to License from the Israeli Ministry of Communications issued October 9, 20034.(a).37
    
    Amendment No. 22 to License from the Israeli Ministry of Communications issued March 16, 20044.(a).38
    
    Amendment No. 23 to License from the Israeli Ministry of Communications issued March 21, 2004+4.(a).39
    
    Amending Agreement to the Facility Agreement dated January 8, 2002+4.(a).40
    
    Amending Agreement to the Facility Agreement dated January 30, 2002+4.(a).41
    
    Amending Agreement to the Facility Agreement dated February 6, 2002+4.(a).42
    
    Amending Agreement to the Facility Agreement dated February 28, 2002+4.(a).43
    
    Amending Agreement to the Facility Agreement dated March 14, 2002+4.(a).44
    
    Amending Agreement to the Facility Agreement dated March 24, 2002+4.(a).45
    
    Amending Agreement to the Facility Agreement of April 2002+4.(a).46
    
    Amending Agreement to the Facility Agreement dated April 24, 2002++4.(a).47
    
    Amending Agreement to the Facility Agreement dated December 31, 2002#4.(a).48
    
    Purchase Agreement with Nortel Networks ISRAEL (Sales and Marketing) Ltd. Dated November 12,
2003.6.
    
    See Note 1q to our financial statements for information explaining how earnings (loss) per
share information was calculated.8.
    
    List of Subsidiaries12.(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 200214.(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). Page 163




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***
    
    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.#
    
    Confidential treatment requested.Confidential material has been redacted and has been separately filed with
the Securities and Exchange Commission. Page 164




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GLOSSARY OF SELECTED
TELECOMMUNICATIONS TERMS The following explanations are not intended as technical definitions, but
to assist the reader to understand 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 mobileBase 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.Closed User Group
    
    A group of users with a special mutual relationship (such as working for the
same company or department within a company).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.Digital Technology
    
    A technology in which a signal is converted to a stream of numbers which are
in turn stored, processed or transmitted in a binary (on-off) manner.Dropped call
    
    When a mobile phone call is involuntarily terminated.Dual band handsets
    
    Handsets that operate on two bands, for example, GSM 900 and GSM 1800.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.
 Page 165




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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 AmericaGSM 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.Microcells
    
    A base transceiver station of limited range and capacity intended to serve a
relatively small area, such as a building or mall.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.PLMN
    
    A Public Land Mobile Network, or a mobile telephone network which is available
for use by the public.PSTN
    
    A Public Switched Telephone Network, or the fixed (landline) telephone network.Roaming
    
    The mobile telephone feature that permits subscribers of one network to use
their mobile telephones and telephone numbers when in another operators
network.SIM roaming
    
    The use of a GSM customers SIM in a different handset while roaming in a
network that operates on a frequency band or system incompatible with the
subscribers own GSM handset.SMS
    
    Short message service, a service which enables mobile telephone users to send
and receive written messages on their handsets.Subscriber Identity Module
    
    SIM or SIM Card; a small card or chip provided to each GSM network subscriber
that is inserted into a GSM handset. The SIM is a computer processor that
uniquely identifies a GSM network subscription and stores the subscribers
personal phone book, sent and received text messages, network security codes
and other programs that enable addition network features.Switch
    
    Element of a telephone network which connects telephone calls to and from one
user or another on the same or other networks.TDMA
    
    Time Division Multiple Access; a method by which many users can share a single
digit radio channel by dividing it into a number of repeating part-time
channels to which each user has access in turn.
 Page 166




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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.
 Page 167




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REPORT OF INDEPENDENT AUDITORS To the Shareholders of PARTNER COMMUNICATIONS COMPANY LTD. We have audited the consolidated balance sheets of Partner Communications
Company Ltd. and its subsidiary (collectively the Company) as of December 31,
2002 and 2003 and the related consolidated statements of operations, changes in
shareholders equity (capital deficiency) and cash flows for each of the three
years in the period ended December 31, 2003. 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 generally
accepted in Israel and in the United States, including those prescribed by the
Israeli Auditors (Mode of Performance) Regulations, 1973. Those standards
require that we plan and perform the audits 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 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 the Company as of December 31, 2002 and 2003 and the consolidated results of
operations, changes in shareholders equity (capital deficiency) and cash flows
for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States. Tel-Aviv, Israel
    
    /s/ Kesselman &
KesselmanMarch 30, 2004
    
    Kesselman &
Kesselman
Certified Public Accountants (Israel)
 Page F-1




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PARTNER COMMUNICATIONS COMPANY LTD.
(An Israeli Corporation) 
 CONSOLIDATED BALANCE SHEETS
 December 312002
    
    2003
    
    2003Conveniencetranslation into USNew Israeli shekels
    
    $ (note 1a)In thousandsAssetsCURRENT ASSETS:Cash and cash equivalents
    
    
    1,360
    
    
    
    3,774
    
    
    
    862Security deposit
    
    
    107,794Accounts receivable (note 13):Trade
    
    
    518,768
    
    
    
    482,141
    
    
    
    110,103Other
    
    
    50,986
    
    
    
    56,543
    
    
    
    12,912Inventories
    
    
    137,508
    
    
    
    102,861
    
    
    
    23,490Deferred income taxes (note 10)
    
    
    
    
    
    
    220,000
    
    
    
    50,240Total current assets
    
    
    816,416
    
    
    
    865,319
    
    
    
    197,607INVESTMENTS AND LONG-TERM RECEIVABLES:Non-marketable securities (note 2)
    
    
    3,530Accounts receivable - trade (note 13)
    
    
    
    
    
    
    13,906
    
    
    
    3,176Funds in respect of employee rights upon retirement (note 7)
    
    
    42,461
    
    
    
    58,724
    
    
    
    13,41045,991
    
    
    
    72,630
    
    
    
    16,586FIXED ASSETS,net of accumulated depreciation and
amortization (note 3)
    
    
    1,864,511
    
    
    
    1,694,584
    
    
    
    386,980LICENSE AND DEFERRED CHARGES,
net of accumulated amortization (note 4)
    
    
    1,269,348
    
    
    
    1,325,948
    
    
    
    302,797DEFERRED INCOME TAXES(note 10)
    
    
    
    
    
    
    413,752
    
    
    
    94,486Total assets
    
    
    3,996,266
    
    
    
    4,372,233
    
    
    
    998,456
 /s/ Amikam Cohen
    
    /s/ Alan Gelman
    
    /s/ Ben-Zion ZilberfarbAmikam Cohen
    
    Alan Gelman
    
    Ben-Zion ZilberfarbChief Executive Officer
    
    Chief Financial Officer
    
    Director
 Page F-2




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##### Table of Contents



December 312002
    
    2003
    
    2003Conveniencetranslation into USNew Israeli shekels
    
    $ (note 1a)In thousandsLiabilities and shareholders equity (net of capital deficiency)CURRENT LIABILITIES:Current maturities of long-term bank loans (note 5)
    
    
    
    
    
    
    119,853
    
    
    
    27,370Accounts payable and accruals:Trade
    
    
    532,987
    
    
    
    387,818
    
    
    
    88,563Other (note 13)
    
    
    202,166
    
    
    
    252,585
    
    
    
    57,681Total current liabilities
    
    
    735,153
    
    
    
    760,256
    
    
    
    173,614LONG-TERM LIABILITIES:Bank loans, net of current maturities (note 5)
    
    
    2,467,556
    
    
    
    1,687,215
    
    
    
    385,297Notes payable (note 6)
    
    
    828,975
    
    
    
    766,325
    
    
    
    175,000Liability for employee rights upon retirement (note 7)
    
    
    60,966
    
    
    
    76,506
    
    
    
    17,471Asset retirement obligations (note 13)
    
    
    
    
    
    
    6,367
    
    
    
    1,454Total long-term liabilities
    
    
    3,357,497
    
    
    
    2,536,413
    
    
    
    579,222COMMITMENTS AND CONTINGENCIES(note 8)Total liabilities
    
    
    4,092,650
    
    
    
    3,296,669
    
    
    
    752,836SHAREHOLDERS EQUITY (CAPITAL DEFICIENCY)(note 9):Share capital - ordinary shares of NIS 0.01 par
value: authorized - December 31, 2002 and 2003 -
235,000,000 shares; issued and outstanding -
December 31, 2002 - 181,595,222 shares and
December 31, 2003 - 182,695,574 shares
    
    
    1,816
    
    
    
    1,827
    
    
    
    417Less - receivable in respect of shares
    
    
    
    
    
    
    (4,374
    )
    
    
    (999
    )Capital surplus
    
    
    2,293,270
    
    
    
    2,303,055
    
    
    
    525,933Deferred compensation
    
    
    (6,385
    )
    
    
    (2,509
    )
    
    
    (573
    )Accumulated deficit
    
    
    (2,385,085
    )
    
    
    (1,222,435
    )
    
    
    (279,158
    )Total shareholders equity (capital deficiency)
    
    
    (96,384
    )
    
    
    1,075,564
    
    
    
    245,6203,996,266
    
    
    
    4,372,233
    
    
    
    998,456
 The accompanying notes are an integral part of the financial statements. Page F-3




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PARTNER COMMUNICATIONS COMPANY LTD.
(An Israeli Corporation) 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended December 312001
    
    2002
    
    2003
    
    2003Conveniencetranslationinto US $New Israeli shekels
    
    (note 1a)In thousands (except per share data)REVENUES- net :Services
    
    
    2,972,079
    
    
    
    3,766,584
    
    
    
    4,117,887
    
    
    
    940,371Equipment
    
    
    277,270
    
    
    
    287,979
    
    
    
    349,832
    
    
    
    79,8893,249,349
    
    
    
    4,054,563
    
    
    
    4,467,719
    
    
    
    1,020,260COST OF REVENUES:Services
    
    
    2,187,612
    
    
    
    2,499,534
    
    
    
    2,586,707
    
    
    
    590,707Equipment
    
    
    531,551
    
    
    
    569,924
    
    
    
    549,749
    
    
    
    125,5422,719,163
    
    
    
    3,069,458
    
    
    
    3,136,456
    
    
    
    716,249GROSS PROFIT
    
    
    530,186
    
    
    
    985,105
    
    
    
    1,331,263
    
    
    
    304,011SELLING AND MARKETING EXPENSES
    
    
    292,960
    
    
    
    308,079
    
    
    
    314,008
    
    
    
    71,708GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    134,282
    
    
    
    143,594
    
    
    
    162,387
    
    
    
    37,083OPERATING PROFIT
    
    
    102,944
    
    
    
    533,432
    
    
    
    854,868
    
    
    
    195,220FINANCIAL EXPENSES, net (note 13)
    
    
    400,927
    
    
    
    445,180
    
    
    
    321,710
    
    
    
    73,467LOSS ON IMPAIRMENT OF INVESTMENTS
IN NON-MARKETABLE SECURITIES(note
2)
    
    
    8,862
    
    
    
    4,054
    
    
    
    3,530
    
    
    
    806INCOME (LOSS) BEFORE TAX BENEFIT
    
    
    (306,845
    )
    
    
    84,198
    
    
    
    529,628
    
    
    
    120,947TAX BENEFIT (note 10)
    
    
    
    
    
    
    
    
    
    
    633,022
    
    
    
    144,559INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLES
    
    
    (306,845
    )
    
    
    84,198
    
    
    
    1,162,650
    
    
    
    265,506CUMULATIVE EFFECT, AT BEGINNING OF
YEAR, OF A CHANGE IN ACCOUNTING
PRINCIPLES(note 1p)
    
    
    3,483NET INCOME (LOSS) FOR THE YEAR
    
    
    (303,362
    )
    
    
    84,198
    
    
    
    1,162,650
    
    
    
    265,506EARNINGS (LOSS) PER SHARE (EPS):Basic:Before cumulative effect
    
    
    (1.72
    )
    
    
    0.47
    
    
    
    6.39
    
    
    
    1.46Cumulative effect
    
    
    0.02(1.70
    )
    
    
    0.47
    
    
    
    6.39
    
    
    
    1.46Diluted:Before cumulative effect
    
    
    (1.72
    )
    
    
    0.46
    
    
    
    6.34
    
    
    
    1.45Cumulative effect
    
    
    0.02(1.70
    )
    
    
    0.46
    
    
    
    6.34
    
    
    
    1.45WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDINGBasic
    
    
    178,909,274
    
    
    
    179,984,090
    
    
    
    181,930,803
    
    
    
    181,930,803Diluted
    
    
    178,909,274
    
    
    
    183,069,394
    
    
    
    183,243,157
    
    
    
    183,243,157
 The accompanying notes are an integral part of the financial statements. Page F-4




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##### Table of Contents



PARTNER COMMUNICATIONS COMPANY LTD. (An Israeli Corporation) 
 Consolidated Statements Of Changes In Shareholders Equity (Capital Deficiency)
 Share capitalReceivablesin respect ofNumber of
    
    
    
    
    
    shares
    
    Capital
    
    Deferred
    
    Accumulatedshares
    
    Amount
    
    issued
    
    surplus
    
    compensation
    
    deficit
    
    Total(In thousands)New Israeli ShekelsBALANCE AT DECEMBER 31, 2000
    
    
    178,888,888
    
    
    
    1,789
    
    
    
    
    
    
    
    2,317,993
    
    
    
    (65,021
    )
    
    
    (2,165,921
    )
    
    
    88,840CHANGES DURING THE YEAR ENDED DECEMBER 31,
2001:Exercise of options granted to employees
    
    
    35,697
    
    
    
    *
    
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    47Amortization of deferred compensation
related to employee stock option grants
net of deferred compensation with
respect to stock options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,960
    )
    
    
    40,659
    
    
    
    
    
    
    
    20,699Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (303,362
    )
    
    
    (303,362
    )BALANCE AT DECEMBER 31, 2001
    
    
    178,924,585
    
    
    
    1,789
    
    
    
    
    
    
    
    2,298,080
    
    
    
    (24,362
    )
    
    
    (2,469,283
    )
    
    
    (193,776
    )CHANGES DURING THE YEAR ENDED DECEMBER 31,
2002:Exercise of options granted to employees
    
    
    2,670,637
    
    
    
    27
    
    
    
    
    
    
    
    4,210
    
    
    
    
    
    
    
    
    
    
    
    4,237Amortization of deferred compensation
related to employee stock option grants
net of deferred compensation with
respect to stock options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,020
    )
    
    
    17,977
    
    
    
    
    
    
    
    8,957Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,198
    
    
    
    84,198BALANCE AT DECEMBER 31, 2002
    
    
    181,595,222
    
    
    
    1,816
    
    
    
    
    
    
    
    2,293,270
    
    
    
    (6,385
    )
    
    
    (2,385,085
    )
    
    
    (96,384
    )CHANGES DURING THE YEAR ENDED DECEMBER 31,
2003:Exercise of options granted to employees
    
    
    1,100,352
    
    
    
    11
    
    
    
    (4,374
    )
    
    
    7,754
    
    
    
    
    
    
    
    
    
    
    
    3,391Income tax benefit in respect of
exercise of options granted to
employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    730
    
    
    
    
    
    
    
    
    
    
    
    730Deferred compensation related to
employee stock option grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,666
    
    
    
    (2,666
    )Amortization of deferred compensation
related to employee stock option grants
net of deferred compensation with
respect to stock options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,365
    )
    
    
    6,542
    
    
    
    
    
    
    
    5,177Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,162,650
    
    
    
    1,162,650
 Page F-5




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Share capitalReceivablesin respect ofNumber of
    
    
    
    
    
    shares
    
    Capital
    
    Deferred
    
    Accumulatedshares
    
    Amount
    
    issued
    
    surplus
    
    compensation
    
    deficit
    
    Total(In thousands)BALANCE AT DECEMBER 31, 2003
    
    
    182,695,574
    
    
    
    1,827
    
    
    
    (4,374
    )
    
    
    2,303,055
    
    
    
    (2,509
    )
    
    
    (1,222,435
    )
    
    
    1,075,564Convenience translation into US dollars(note 1a):BALANCE AT JANUARY 1, 2003
    
    
    181,595,222
    
    
    
    414
    
    
    
    
    
    
    
    523,698
    
    
    
    (1,458
    )
    
    
    (544,664
    )
    
    
    (22,010
    )CHANGES DURING THE YEAR ENDED DECEMBER 31,
2003:Exercise of options granted to employees
    
    
    1,100,352
    
    
    
    3
    
    
    
    (999
    )
    
    
    1,771
    
    
    
    
    
    
    
    
    
    
    
    775Income tax benefit in respect of
exercise of options granted to
employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    167
    
    
    
    
    
    
    
    
    
    
    
    167Deferred compensation related to
employee stock option grants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    609
    
    
    
    (609
    )Amortization of deferred compensation
related to employee stock option grants
net of deferred compensation with
respect to stock options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (312
    )
    
    
    1,494
    
    
    
    
    
    
    
    1,182Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    265,506
    
    
    
    265,506BALANCE AT DECEMBER 31, 2003
    
    
    182,695,574
    
    
    
    417
    
    
    
    (999
    )
    
    
    525,933
    
    
    
    (573
    )
    
    
    (279,158
    )
    
    
    245,620
  *
    
    Representing an amount less than NIS 1,000. The accompanying notes are an integral part of the financial statements. Page F-6




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PARTNER COMMUNICATIONS COMPANY LTD.
(An Israeli Corporation) 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year ended December 312001
    
    2002
    
    2003
    
    2003Conveniencetranslationinto US $New Israeli Shekels
    
    (note 1a)In thousandsCASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss) for the year
    
    
    (303,362
    )
    
    
    84,198
    
    
    
    1,162,650
    
    
    
    265,506Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Depreciation and amortization
    
    
    538,267
    
    
    
    516,199
    
    
    
    536,871
    
    
    
    122,601Loss on impairment of investments in
non-marketable securities
    
    
    8,862
    
    
    
    4,054
    
    
    
    3,530
    
    
    
    806Amortization of deferred compensation
related to employee stock option grants, net
    
    
    20,699
    
    
    
    8,957
    
    
    
    5,177
    
    
    
    1,182Liability for employee rights upon retirement
    
    
    18,736
    
    
    
    18,632
    
    
    
    15,540
    
    
    
    3,549Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    (633,752
    )
    
    
    (144,726
    )Income tax benefit in respect of exercise of
options granted to employees
    
    
    
    
    
    
    
    
    
    
    730
    
    
    
    167Accrued interest, exchange and linkage
differences on (erosion of) long-term
liabilities
    
    
    54,522
    
    
    
    91,027
    
    
    
    (67,438
    )
    
    
    (15,400
    )Erosion of (accrued interest and exchange
differences on) security deposit
    
    
    (6,590
    )
    
    
    (6,925
    )
    
    
    8,877
    
    
    
    2,027Amount carried to deferred charges
    
    
    (22
    )
    
    
    (3,805
    )Capital loss (gain) on sale of fixed assets
    
    
    1,647
    
    
    
    839
    
    
    
    (7,829
    )
    
    
    (1,788
    )Changes in operating asset and liability items:Decrease (increase) in accounts receivable:Trade
    
    
    (55,944
    )
    
    
    (56,638
    )
    
    
    22,721
    
    
    
    5,189Other
    
    
    (14,235
    )
    
    
    (8,056
    )
    
    
    (5,557
    )
    
    
    (1,269
    )Increase (decrease) in accounts payable and
accruals:Trade
    
    
    57,271
    
    
    
    31,909
    
    
    
    (93,444
    )
    
    
    (21,339
    )Other
    
    
    65,838
    
    
    
    14,796
    
    
    
    47,541
    
    
    
    10,857Increase in asset retirement obligations
    
    
    
    
    
    
    
    
    
    
    1,228
    
    
    
    280Decrease (increase) in inventories
    
    
    36,859
    
    
    
    (12,996
    )
    
    
    34,647
    
    
    
    7,912Net cash provided by operating activities
    
    
    422,548
    
    
    
    682,191
    
    
    
    1,031,492
    
    
    
    235,554CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of fixed assets
    
    
    (601,050
    )
    
    
    (599,769
    )
    
    
    (350,344
    )
    
    
    (80,005
    )
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Year ended December 312001
    
    2002
    
    2003
    
    2003Conveniencetranslationinto US $New Israeli Shekels
    
    (note 1a)In thousandsProceeds from sale of fixed assets
    
    
    1,771
    
    
    
    5,737
    
    
    
    12,309
    
    
    
    2,811Investment in non-marketable securities
    
    
    (16,446
    )Withdrawal of security deposit
    
    
    
    
    
    
    
    
    
    
    98,917
    
    
    
    22,589Purchase of additional spectrum
    
    
    
    
    
    
    (207,635
    )
    
    
    (121,388
    )
    
    
    (27,720
    )Funds in respect of employee rights upon
retirement
    
    
    (13,336
    )
    
    
    (14,301
    )
    
    
    (16,263
    )
    
    
    (3,714
    )Net cash used in investing activities
    
    
    (629,061
    )
    
    
    (815,968
    )
    
    
    (376,769
    )
    
    
    (86,039
    )
 Page F-8




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PARTNER COMMUNICATIONS COMPANY LTD.
(An Israeli Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 312001
    
    2002
    
    2003
    
    2003Conveniencetranslationinto US $New Israeli Shekels
    
    (note 1a)In thousandsCASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock options granted to
employees
    
    
    47
    
    
    
    4,237
    
    
    
    3,391
    
    
    
    775Long-term bank loans received
    
    
    1,111,869
    
    
    
    1,349,326
    
    
    
    240,000
    
    
    
    54,806Repayment of long-term bank loans
    
    
    (901,000
    )
    
    
    (1,223,698
    )
    
    
    (895,700
    )
    
    
    (204,544
    )Net cash provided by (used in) financing activities
    
    
    210,916
    
    
    
    129,865
    
    
    
    (652,309
    )
    
    
    (148,963
    )INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    4,403
    
    
    
    (3,912
    )
    
    
    2,414
    
    
    
    552CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    
    
    869
    
    
    
    5,272
    
    
    
    1,360
    
    
    
    310CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    
    5,272
    
    
    
    1,360
    
    
    
    3,774
    
    
    
    862SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION-
cash paid during the year:Interest
    
    
    285,465
    
    
    
    323,841
    
    
    
    287,629
    
    
    
    65,684Advances to income tax authorities
    
    
    5,617
    
    
    
    5,207
    
    
    
    3,750
    
    
    
    856
 Supplementary information on investing activities not involving cash flows At December 31, 2001, 2002 and 2003, trade payables include NIS 148,276,000,
NIS 117,406,000 and NIS 65,681,000 ($ 14,999,000), respectively, in respect of
acquisition of fixed assets. In addition, at December 31, 2002, trade payables
include NIS 7.2 million in respect of acquisition of additional spectrum and at
December 31, 2003, shareholders equity include NIS 4.4 million receivable in
respect of shares issued. These balances are recognized in the cash flow
statements upon payment. The accompanying notes are an integral part of the financial statements. Page F-9




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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 based upon the Global System for
Mobile Communications (GSM) Standard in Israel.2)
    
    The Company was incorporated on September 29, 1997. The Company
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. At the beginning of January 1999, the Company
commenced full commercial operations.The Company paid a one-time license fee of approximately new Israeli
shekels (NIS) 1.6 billion which is presented under license and
deferred charges. The Company is entitled to request extension of the
license for an additional period of six years and then renewal for one
or more further 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 2017. During June 2002, the Minister of
Communications amended and further extended the license through 2022.
As to the change in estimate of the useful life of the license see
also note f(1) below.In consideration for the above additional spectrum the Company paid
NIS 180 million ($41 million) for the 2G spectrum, and is committed to
pay NIS 220 million ($50 million) for the 3G spectrum in six
installments through 2006. Out of this amount, approximately NIS 130
million (approximately $30 million) was paid as of December 31, 2003. Page F-10




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Under the terms of the amended license, the Company has 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.3)
    
    The Company will incur substantial capital expenditures in
building out the 3G network. The Company estimates that capital
expenditures in connection with building out the 3G network will be
approximately $250 million over the next three years from the
beginning of the network build-out, see also note 8a(3).  Use of estimates in the preparation of financial statementsThe preparation of financial statements in conformity with generally
accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting years. Actual results could differ from those
estimates.Functional currency and reporting currencyThe functional currency of the Company and its subsidiary is the local
currency New Israeli Shekels - NIS. The consolidated financial statements
have been drawn up on the basis of the historical cost of Israeli currency
and are presented in NIS.Convenience translation into U.S. dollars (dollars or $)The NIS figures at December 31, 2003 and for the year then ended have been
translated into dollars using the representative exchange rate of the
dollar at December 31, 2003 ($1 = NIS 4.379). 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 principlesThe consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP).b.
    
    Principles of consolidation:  1)
    
    The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary (together - the Group). Page F-11




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2)
    
    Intercompany balances between the Company and its subsidiary have
been eliminated.  c.
    
    InventoriesInventories 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.d.
    
    Non-marketable securitiesThese investments are stated at cost, less provision for impairment losses,
see also note 2.e.
    
    Fixed assets:  1)
    
    These assets are stated at cost, handsets for use abroad by
subscribers are carried by the base stock method.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 installation of the fixed assets is 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
    
    
    15-33Vehicles
    
    
    20Office furniture and equipment
    
    
    7-15
  Leasehold improvements are amortized by the straight-line method over
the term of the lease, or the estimated useful life of the
improvements, whichever is shorter.The Company terminated the lease agreement for one of its headquarter
buildings in March 2003, in favor of a new building (see note 8a(2)b)
and abandoned part of its leasehold improvements. Following the
decision to abandon the leasehold improvements, in October 2002, the
un-amortized balance of the existing leasehold improvements was Page F-12




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amortized on a straight-line basis as of October 1, 2002
- over the
period of 6 months ending March 31, 2003.5)
    
    Computer Software CostsThe 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 5 to 7 years.  f.
    
    License and deferred charges:  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.Through the period ended December 31, 2001 the license was amortized
over 9.25 years.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 as follows: as of January 1, 2002 -
over the period ending in 2017; as of April 1, 2002 - over the period
ending in 2022.The costs relating to the 3G band are not amortized since the
utilization period has not yet commenced.As a result of the above extensions, in 2002, and 2003 license
amortization expenses (included in cost of services revenues)
decreased by approximately NIS 113 million and NIS 117 million,
(approximately $ 27 million), respectively, net income increased by
approximately NIS 113 million and NIS 75 million ($ 17 million),
respectively, and earnings per share increased by NIS 0.63 and NIS
0.41 ($ 0.09), respectively compared to the figures computed based on
the amortization rates used prior to the changes in the estimated
useful life.Interest expenses which served to finance the license fee - incurred
until the commencement of utilization of the license - are capitalized
to cost of the license. During the year 2002 and 2003 - NIS 7 million
and NIS 10 million ($ 2 million) interest costs were capitalized to
the cost of the license, respectively. Page F-13




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2)
    
    Deferred charges:  a)
    
    Costs relating to the obtaining of long-term credit
lines are amortized using the effective interest rate stipulated
for the borrowing transactions.b)
    
    Issuance costs relating to Notes payable (see note 6)
are amortized using the effective interest rate stipulated for
the Notes.  g.
    
    Impairment of long-lived assetsThe Company has adopted Statement of Financial Accounting Standards No. 144
(FAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets
effective January 1, 2002. FAS 144 requires that long-lived 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.The adoption of FAS 144, on January 1, 2002, did not have any impact on the
consolidated financial position and results of operations.h.
    
    Cash equivalentsThe 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 incomeThe Company has no comprehensive income components other than net income
(loss).j.
    
    Revenue recognitionService revenues are based on usage and recognized at the time the service
is provided, net of credits and adjustments for service discounts. Sales of
equipment, primarily handsets and wireless data devices, are recognized
upon delivery to the customer. Prepaid calling cards revenues are deferred
until service is provided. Page F-14




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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. It is effective prospectively for all
arrangements entered into in fiscal periods beginning after June 15, 2003.
EITF Issue 00-21 addresses when and, if so, how an arrangement involving
multiple deliverables should be divided into separate units of accounting.
The Company adopted EITF Issue 00-21 in the year ended December 31, 2003
and it had no impact on its financial position and results of operations.k.
    
    Concentration of credit risks - allowance for doubtful accountsThe 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 for the
years ended December 31, 2001, 2002 and 2003 totaled NIS 15,399,000, NIS
17,752,000 and NIS 15,601,000 ($ 3,563,000) (see also note 13a),
respectively.The cash and cash equivalents as of December 31, 2003 are deposited mainly
with leading Israeli banks. Therefore, in the opinion of the Company, the
credit risk inherent in these balances is remote.The Company factors most of its long-term trade receivables resulting from
sales of handsets. The factoring is 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 are charged to financial expenses-net, as incurred.
During the years ended December 31, 2001, 2002 and 2003, the Company
factored NIS 180,302,000, NIS 209,568,000 and NIS 295,827,000
($67,556,000), respectively, from long-term trade receivables.l.
    
    Handsets warranty obligationsUntil the year 2002 provision for warranty was not provided for, as the
Companys liability was covered by the handsets suppliers warranty. As of
2002, the Company has entered into several agreements under which the
supplier does not provide any warranty but rather provides Page F-15




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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. The annual provision is calculated at the rate of 1.5%-3.5% of
the cost of the handsets sold.As of December 31, 2002 and 2003, the provision for warranty totaled NIS
2,589,000 and NIS 2,053,000 ($ 469,000), respectively.Additional warranty liability incurred for the year ended December 31, 2003
totaled NIS 4,215,000 ($ 963,000). Warranty expenses for the years ended
December 31, 2002 and 2003 totaled NIS 2,589,000 and NIS 4,751,000 ($
1,085,000), respectively.m.
    
    Advertising expensesAdvertising expenses are charged to the statement of operations as
incurred. Advertising expenses for the years ended December 31, 2001, 2002
and 2003 totaled NIS 91,681,000, NIS 96,061,000 and NIS 99,061,000 ($
22,622,000), respectively.n.
    
    Deferred income taxesDeferred 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 also note 10d).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.o.
    
    Foreign currency transactions and balancesBalances 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. Page F-16




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p.
    
    Derivative financial instruments (derivatives)The Company has adopted FAS 133 as of January 1, 2001. FAS 133, as amended,
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.The adoption of FAS 133 resulted in recording additional income of
approximately NIS 3.5 million included in the statement of operations of
2001 under cumulative effect, at beginning of year, of a change in
accounting principles, which was recorded against an asset in the balance
sheet, of the same amount. This cumulative effect reflects the fair value
of embedded derivatives (see also note 12b.) as of that date.q.
    
    Earning (loss) Per Share (EPS)Basic EPS is computed by dividing net income (loss) 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 (in 2001, such effect
was not included since it would have been anti-dilutive). Page F-17




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r.
    
    Stock based compensationThe Company accounts for its employee stock option plans using the
treatment prescribed by APB No. 25, Accounting for Stock Issued to
Employees and related interpretations.Under APB 25, compensation cost for employee stock option plans is charged
to shareholders equity, on the date of grant of the options, under
deferred compensation costs and is then amortized over the vesting period
using the accelerated method of amortization.FAS No. 123 Accounting for Stock-Based Compensation, establishes a fair
value based method of accounting for employee stock options or similar
equity instruments, and encourages adoption of such method for stock
compensation plans. However, it also allows companies to continue to
account for those plans using the accounting treatment prescribed by APB
25. The Company has elected to continue accounting for employee stock
option plans according to APB 25, and accordingly discloses pro forma data
assuming the Company had accounted for employee stock option grants using
the fair value based method as defined in FAS 123.The weighted average fair value of options granted using the Black &
Scholes option-pricing model during 2001, 2002 and 2003 is NIS 18.08, NIS
16.68 and NIS 26.96 ($6.16), 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 0%; expected
volatility of 83%, 69% and 62%, respectively; risk-free interest rate in
NIS terms: 2001 - 6.9%, 2002 - 7.7%, 2003 - 4.5 %; weighted expected life:
the 1998 plan - 2002 - 9 years, 2001 - 8 years; the 2000
plan - 9 years. Page F-18




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The following table illustrates the effect on net income (loss) and EPS
assuming the Company had applied the fair value recognition provisions of
FAS 123 to its stock based employee compensation: Year ended December 31,2001
    
    2002
    
    2003
    
    2003ConveniencetranslationNIS
    
    into dollarsIn thousands, except per share dataNet income (loss), as reported
    
    
    (303,362
    )
    
    
    84,198
    
    
    
    1,162,650
    
    
    
    265,506Add: stock based employee
compensation expense-net,
included in reported net income
(loss) (2003-net of income taxes)
    
    
    20,699
    
    
    
    8,957
    
    
    
    3,313
    
    
    
    757Deduct: stock based employee
compensation expense-net,
determined under fair value
method for all awards (2003-net
of income taxes)
    
    
    (59,476
    )
    
    
    (30,029
    )
    
    
    (12,225
    )
    
    
    (2,792
    )Pro-forma net income (loss)
    
    
    (342,139
    )
    
    
    63,126
    
    
    
    1,153,738
    
    
    
    263,471Earning (loss) per share -Basic - as reported:before cumulative effect
    
    
    (1.72
    )
    
    
    0.47
    
    
    
    6.39
    
    
    
    1.46cumulative effect
    
    
    0.02net income (loss)
    
    
    (1.70
    )
    
    
    0.47
    
    
    
    6.39
    
    
    
    1.46Basic - pro forma:before cumulative effect
    
    
    (1.93
    )
    
    
    0.35
    
    
    
    6.34
    
    
    
    1.45cumulative effect
    
    
    0.02net income (loss)
    
    
    (1.91
    )
    
    
    0.35
    
    
    
    6.34
    
    
    
    1.45Diluted - as reported:before cumulative effect
    
    
    (1.72
    )
    
    
    0.46
    
    
    
    6.34
    
    
    
    1.45cumulative effect
    
    
    0.02net income (loss)
    
    
    (1.70
    )
    
    
    0.46
    
    
    
    6.34
    
    
    
    1.45Diluted - pro-forma:before cumulative effect
    
    
    (1.93
    )
    
    
    0.34
    
    
    
    6.31
    
    
    
    1.44cumulative effect
    
    
    0.02net income (loss)
    
    
    (1.91
    )
    
    
    0.34
    
    
    
    6.31
    
    
    
    1.44
 Page F-19




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##### Table of Contents



s.
    
    Accounting for asset retirement obligationsThe Company has adopted as of January 1, 2003 FAS 143 Accounting for Asset
Retirement Obligations (FAS 143). 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 13c.t.
    
    Recently issued accounting pronouncements:  1)
    
    FAS 132 (revised 2003)In December 2003, the FASB issued FAS No. 132 (revised 2003),
Employers Disclosures about Pensions and Other Postretirement
Benefits, an amendment of FASB Statements No. 87, 88 and 106, and a
revision of FASB Statement No. 132 (FAS 132 (revised 2003)) . This
Statement revises employers disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or
recognition of those plans. The new rules require additional
disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. Part of the new disclosures provisions
are effective for 2003 calendar year-end financial statements, and
accordingly have been applied by the Company in these consolidated
financial statements. The rest of the provisions of this Statement,
which have a later effective date, are currently being evaluated by
the Company. Page F-20




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2)
    
    FIN 46In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). Under FIN 46,
entities are separated into two populations: (1) those for which
voting interests are used to determine consolidation (this is the most
common situation) and (2) those for which variable interests are used
to determine consolidation. FIN 46 explains how to identify Variable
Interest Entities (VIEs) and how to determine when a business
enterprise should include the assets, liabilities, noncontrolling
interests, and results of activities of a VIE in its consolidated
financial statements.Since issuing FIN 46, the FASB has proposed various amendments to the
Interpretation and has deferred its effective dates. Most recently, in
December 2003, the FASB issued a revised version of FIN 46 (FIN 46-R),
which also provides for a partial deferral of FIN 46. This partial
deferral established the effective dates for public entities to apply
FIN 46 and FIN 46-R based on the nature of the variable interest
entity and the date upon which the public company became involved with
the variable interest entity. In general, the deferral provides that
(i) for variable interest entities created before February 1, 2003, a
public entity must apply FIN 46-R at the end of the first interim or
annual period ending after March 15, 2004, and may be required to
apply FIN 46 at the end of the first interim or annual period ending
after December 15, 2003,If the variable interest entity is a special purpose entity, and (ii)
for variable interest entities created after January 31, 2003, a
public company must apply FIN 46 at the end of the first interim or
annual period ending after December 15, 2003, as previously required,
and then apply FIN 46-R at the end of the first interim or annual
reporting period ending after March 15, 2004.The Company has currently no variable interests in any VIE.
Accordingly, the Company believes that the adoption of FIN 46 and FIN
46-R will not have any impact on its financial position, results of
operations and cash flows. Page F-21




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NOTE 2 - INVESTMENTS IN NON-MARKETABLE SECURITIES The Company and its subsidiary have entered into agreements with a number
of technological companies in the early stages of development of cellular
products (hereafter - the start-up companies). Under the agreements, the Group
ìà ä÷áåöä?is to supply infrastructure and support services which the start-up
companies need to develop their products, in consideration of options and
shares in those companies. In some cases, the Group is also entitled to
royalties on future sales of the products of the start-up companies. Based on
the financial position of the companies, management is in the opinion that the
fair value of the securities granted to the Group, on the grant date and as of
December 31, 2003 is not material. The Groups holdings in the start-up companies (current and fully diluted)
do not exceed 15% of the share capital of any one of them and does not give the
Group significant influence over any one of them. Therefore, the investments
therein are presented on a cost basis. During 2003, the Company recorded an impairment loss of approximately NIS
3.5 million (approximately $ 0.8 million) (2001 and 2002 - approximately NIS
8.9 million and approximately NIS 4.1 million, respectively) in respect of the
above investments. As of December 31, 2003, the balance of these investments was fully
impaired. Page F-22




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NOTE 3 - FIXED ASSETS:  u.
    
    Composition of fixed assets - net, is as follows: December 312002
    
    2003
    
    2003ConveniencetranslationNIS
    
    into dollarsIn thousandsCommunications network
    
    
    2,398,907
    
    
    
    2,553,982
    
    
    
    582,764Computers, hardware and software for
information systems
    
    
    471,079
    
    
    
    548,700
    
    
    
    125,303Vehicles
    
    
    24,955
    
    
    
    2,697
    
    
    
    616Office furniture and equipment
    
    
    31,641
    
    
    
    35,934
    
    
    
    8,206Leasehold improvements
    
    
    140,376
    
    
    
    146,431
    
    
    
    38,677Cellular
telephones - base stock
    
    
    6,309
    
    
    
    6,309
    
    
    
    1,4413,073,267
    
    
    
    3,294,053
    
    
    
    757,007Communications network - construction in
progress (see note 1a(2))
    
    
    
    
    
    
    11,507
    
    
    
    2,6283,073,267
    
    
    
    3,305,560
    
    
    
    759,635Less - accumulated depreciation and amortization
    
    
    1,208,756
    
    
    
    1,610,976
    
    
    
    372,6551,864,511
    
    
    
    1,694,584
    
    
    
    386,980
  Depreciation and amortization in respect of fixed assets totaled NIS
361,265,000, NIS 446,970,000 and NIS 469,205,000 ($ 107,149,000) for the
years ended December 31, 2001, 2002 and 2003, respectively. Page F-23




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v.
    
    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) in respect of: December 312002
    
    2003
    
    2003Conveniencetranslation intoNIS
    
    dollarsIn thousandsCommunications network
    
    
    69,858
    
    
    
    69,858
    
    
    
    15,953Computers, hardware and software
for information systems
    
    
    15,566
    
    
    
    15,566
    
    
    
    3,55585,424
    
    
    
    85,424
    
    
    
    19,508Less - accumulated depreciation
    
    
    51,752
    
    
    
    63,775
    
    
    
    14,564Depreciated balance
    
    
    33,672
    
    
    
    21,649
    
    
    
    4,944
  w.
    
    As to pledges on the fixed assets - see note 11. Page F-24




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NOTE 4 - LICENSE AND DEFERRED CHARGES: December 312002
    
    2003
    
    2003ConveniencetranslationintoNIS
    
    dollarsIn thousandsLicense(note 1a(2))*
    
    
    1,792,714
    
    
    
    1,916,980
    
    
    
    437,767Less - accumulated amortization
    
    
    571,485
    
    
    
    629,893
    
    
    
    143,8441,221,229
    
    
    
    1,287,087
    
    
    
    293,923Deferred charges- in respect of:Obtaining long-term credit lines
    
    
    55,996
    
    
    
    55,996
    
    
    
    12,787Notes payable
    
    
    22,017
    
    
    
    22,017
    
    
    
    5,02878,013
    
    
    
    78,013
    
    
    
    17,815Less - accumulated amortization
    
    
    29,894
    
    
    
    39,152
    
    
    
    8,94148,119
    
    
    
    38,861
    
    
    
    8,8741,269,348
    
    
    
    1,325,948
    
    
    
    302,797
  *
    
    As of December 31, 2003 NIS 153,773,000 ($ 35,116,000) (December 31, 2002
 - NIS 106,719,000) in respect of 3G band spectrum are not amortized, see
also note 1f(1). License amortization expenses for the years ended December 31, 2001, 2002
and 2003 totaled NIS 169,693,000, NIS 62,042,000 and NIS 58,408,000 ($
13,338,000), respectively. Amortization expenses on deferred charges for the
years ended December 31, 2001, 2002 and 2003 totaled NIS 7,309,000, NIS
7,187,000 and NIS 9,258,000 ($2,114,000), respectively. The expected license amortization expenses for the next five years are as
follows: ConveniencetranslationintoNIS
    
    dollarsIn thousandsYear ended December 31:2004
    
    
    67,051
    
    
    
    15,3122005
    
    
    71,424
    
    
    
    16,3102006
    
    
    71,424
    
    
    
    16,3102007
    
    
    71,424
    
    
    
    16,3102008
    
    
    71,424
    
    
    
    16,310
 Page F-25




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NOTE 5 - LONG-TERM BANK LOANS In December 2002, the Company entered into an Amending Agreement in
connection with its primary secured bank credit facility, with Bank Leumi B.M.,
Bank Hapoalim B.M., Israel Discount Bank Ltd., The First International Bank of
Israel Ltd., United Mizrahi Bank Ltd., Mercantile Discount Bank Ltd. and
Citibank N.A., which amends the bank facility agreement dated August 1998
between the Company and the above mentioned banks, as amended from time to
time. The amended facility is divided into three tranches: A multi-currency term
loan facility of $410 million (Facility A), a revolving multi-currency loan
facility of $150 million (Facility B) and a fixed-term NIS loan facility of
$150 million (Facility C). Facility A was available to be drawn through March 31, 2003, from the said
amount, $ 383 million have been drawn. The amount drawn from facility A is to
be repaid in quarterly installments with a final maturity of June 30, 2008.
Facility B may be drawn and repaid until June 30, 2008. Facility C may be drawn
through December 31, 2004 and is to be repaid until June 30, 2009. The bank facility is a dollar denominated facility and it may be drawn in
different currencies, see c. below.  a.
    
    Status of the facility at December 31, 2003 is as follows: AmountsThe total
    
    Amounts
    
    available forfacility
    
    drawn
    
    drawingDollars in millionsFacility A
    
    
    383
    
    
    
    383Facility B
    
    
    150
    
    
    
    18
    
    
    
    132Facility C
    
    
    150
    
    
    
    
    
    
    
    150683
    
    
    
    *401
    
    
    
    282
 Page F-26




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b.
    
    The amounts outstanding, classified by linkage terms and interest rates,
are as follows: December 31,
    
    December 312003
    
    2002
    
    2003
    
    2003Weightedaverageinterest rates
    
    AmountConveniencetranslation%
    
    NIS
    
    into dollarsIn thousandsIn NIS - linked to the
Israeli consumer price
index (CPI) (1)
    
    
    5.8
    %
    
    
    629,056
    
    
    
    364,268
    
    
    
    83,185In NIS - unlinked (2)
    
    
    6.5
    %
    
    
    1,838,500
    
    
    
    1,442,800
    
    
    
    329,4822,467,556
    
    
    
    1,807,068
    
    
    
    * 412,667Less - current maturities
    
    
    
    
    
    
    
    
    
    
    119,853
    
    
    
    27,3702,467,556
    
    
    
    1,687,215
    
    
    
    385,297
  (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 amounts outstanding differ from the amounts drawn, due to differing
linkage terms.c.
    
    Facilities A and B, may be drawn in NIS, US dollars or Euros, provided
that not less than 60% of the outstanding Facilities A and B shall, at any
time, be in NIS. Facility C, may be drawn only in NIS.d.
    
    There is a range of options as to how interest is calculated on
borrowings under the amended facility. These options include rates based
on LIBOR, the bond rate, fixed linked rate, fixed unlinked rate, on-call
rate and prime rate. The margin for facility A and B is 0.90% per annum
and can be reduced to 0.45% on fulfillment of some terms specified in the
agreement. The margin for facility C is 1.25% per annum and cannot be
reduced. Page F-27




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e.
    
    The total commitments under the Facilities will be reduced during each of
the following years to the following amounts: Dollars in millionsA
    
    B
    
    C
    
    TotalDecember 31, 2003
    
    
    383
    
    
    
    150
    
    
    
    150
    
    
    
    6832004
    
    
    356
    
    
    
    150
    
    
    
    150
    
    
    
    6562005
    
    
    266
    
    
    
    150
    
    
    
    141
    
    
    
    5572006
    
    
    172
    
    
    
    150
    
    
    
    114
    
    
    
    4362007
    
    
    62
    
    
    
    150
    
    
    
    84
    
    
    
    2962008
    
    
    0
    
    
    
    0
    
    
    
    72
    
    
    
    72June 30, 2009
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
  f.
    
    Under the amended 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.
The Company believes that it is in compliance with all covenants
stipulated by the amended facility. Under the amended facility, the
Company has undertaken not to transfer any amounts, including dividends,
to its shareholders, except in cases specified in the Agreement.g.
    
    As to pledges to secure loans and liabilities and other restrictions
placed with respect thereto, see note 11. Page F-28




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NOTE 6 - NOTES PAYABLE On August 10, 2000, the Company completed an offering of $ 175 million of
unsecured Senior Subordinated Notes due 2010, which have been issued at their
dollar par value. The Notes have been registered under the U.S. Securities Act
of 1933. The net proceeds from the offering (approximately $ 170.5 million
after deducting commissions and offering expenses) were used mainly to repay a
portion of the indebtedness under the credit facility. The Notes bear dollar interest at the rate of 13% per annum which are
payable semi-annually on each February 15 and August 15, commencing February
15, 2001. The Company may redeem 100% of the aggregate principal amount of the
Notes beginning August 15, 2005, at the following redemption price: Redemption priceAugust 15:2005
    
    
    106.500
    %2006
    
    
    104.333
    %2007
    
    
    102.167
    %2008 and thereafter
    
    
    100.000
    %
 On December 31, 2003, the Notes closing price was 119 points. Commission fees and offering expenses in respect of the Notes totaled
approximately NIS 22 million. These expenses are presented as deferred charges
and the amortization in respect thereof is included in financial expenses,
net. The Company was obligated to keep a restricted deposit in the amount of
one year of interest payment until December 31, 2003, which was deposited and
was presented in the balance sheet under security deposit. On December 31,
2003, the deposit was withdrawn. Page F-29




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NOTE 7 - 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, 2001, 2002
and 2003 were approximately NIS 21,113,000, NIS 24,094,000 and NIS
19,723,000 (approximately $ 4,333,000), respectively.c.
    
    The Company expects to contribute in 2004, NIS 68,500,000 ($15,643,000)
in respect of its severance pay and retirement obligation. Page F-30




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NOTE 8 - COMMITMENTS AND CONTINGENCIES:  a.
    
    Commitments:  1)
    
    Royalty CommitmentsThe Company is committed to pay royalties to the Government of Israel
on its income from cellular services as defined in the Regulations
(see below), which includes all kinds of turnover of the licensee from
the granting of Bezeq services under the license - including airtime,
roaming services and non-recurring connection fees, but excluding: bad
debts, income transferred to another holder of a communications
license or 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). The principal change to the old regulations was the
reduction of the percentage of royalties payable by mobile phone
companies from 8% to 5% in 2001, 4.5% in 2002 , 4% in 2003 and 3.5% in
2004 and thereafter. In addition, the basis in respect of which the
royalties are paid has been expanded (as described above). The
amendment is effective as from January 1, 2001.The royalty expenses for the years ended December 31, 2001, 2002 and
2003 were approximately NIS 112,201,000, NIS 117,281,000 and NIS
119,387,000 (approximately $ 27,264,000), respectively, and are
included under cost of services revenues.2)
    
    Operating leasesThe 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.(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 Page F-31




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##### Table of Contents



additional years (including the original lease periods). The
rental payments fees are partly linked to the dollar and are
partly linked to the Israeli CPI.(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 (based upon
agreements in force as of December 31, 2003) for the next five
years, at rates in effect at December 31, 2003, are as follows: ConveniencetranslationNIS
    
    into dollarsIn thousandsYear ended December 31:2004
    
    
    140,028
    
    
    
    31,9772005
    
    
    78,256
    
    
    
    17,8712006
    
    
    40,779
    
    
    
    9,3122007
    
    
    28,718
    
    
    
    6,5582008
    
    
    21,191
    
    
    
    4,8392009 and thereafter
    
    
    45,443
    
    
    
    10,377354,415
    
    
    
    80,934
  (f)
    
    The rental expenses for the years ended December 31,
2001, 2002 and 2003 were approximately NIS 93 million, NIS 113
million, and NIS 163 million (approximately $ 37 million),
respectively.  3)
    
    During November 2003, the Company entered into an agreement with
Nortel Networks Israel (Sales and Marketing) Ltd. (Nortel) for the
supply, maintenance and support of a 3G system and the provision of
related services, see also note 1a(3).The Agreement is divided into two phases:  (a)
    
    First phase scheduled for the year 2004:
For the sum of approximately $15 million. Payment is due only
after Nortel meets certain milestones in accordance with the
project plan and other applicable terms, provisions and
requirements as defined in the agreement. The payment is subject
to an Acceptance Tests Procedure (ATP), during which the
equipment and the system delivered during the first phase undergo
a series of specific and detailed acceptance tests. Page F-32




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##### Table of Contents



(b)
    
    Second phase:The agreement serves as a framework agreement, under which the
Company may purchase, from time to time, any equipment and
services on a purchase order basis. The payments in respect of
this phase are also subject to the ATP as described above.According to Companys current purchase forecasts the second phase
is scheduled for the years 2004-2007 for the total sum of
approximately $78 million.  4)
    
    At December 31, 2003, the Company is committed to acquire fixed
assets (including the first phase of the Nortel agreement), as
described above, for approximately NIS 160 million (approximately $ 36
million).5)
    
    At December 31, 2003, the Company is committed to acquire
handsets for approximately NIS 162 million (approximately $ 37
million).6)
    
    As to the Companys commitment to pay NIS 107 million
(approximately $ 23 million) regarding the award of the new spectrum,
see note 1a.  b.
    
    Contingencies:  1)
    
    On October 28, 1999, an Israeli consumer organization lodged a
claim against the Company, alleging a variety of consumer complaints
and requested that this claim be recognized as a class action.On March 20, 2002, the Haifa District Court decided to strike the
claim, because the consumer organization lost, on December 31, 2001, a
special status required under Israeli law for consumer organizations
to file class action claims.Another claim, involving a substantial amount, which was filed by a
private consumer who had previously asked to join the above class
action, has been brought again before the court. The court had
previously frozen the proceedings of the private consumers claim,
until a decision was made in the case filed by the consumer
organization.On May 25, 2003, the private consumer filed a request to amend his
motion to file a class action claim and the proposed claim itself, and
also a draft of the proposed amended motion and claim. The motion to
amend was granted and on January 21, 2004, the Company has submitted
its response to the certification motion.While the amount of the claim is substantial, the ultimate liability
cannot be determined because of the considerable uncertainties that
exist. At this stage, unless and until the claim is certified as class
action, the Company and its legal council are unable to evaluate Page F-33




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the probability of success of such claim and therefore no provision
has been made. In addition, the Company and its legal advisers are of
the opinion that in light of the facts known at this early stage, the
chances that a material amount would be ordered in favor of the
plaintiffs are low.2)
    
    On July 8, 2001, a claim was filed against the Company for
alleged violation of suppliers exclusivity agreement. For filing
purposes, the claim was set at NIS 18 million; however, this amount
can be increased by the claimant.At this stage, since preliminary proceedings between the parties are
yet to take place, and the claim concerns a contract interpretation
issue, the Company and its legal counsel are unable to evaluate the
probability of success of the said litigation, and therefore no
provision has been made.3)
    
    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. Only a
preliminary hearing has taken place and another preliminary hearing is
set for March 28, 2004.At this stage, and until the claim is certified 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.In addition the Company and its legal council are of the opinion that
even if the request to approve this claim as a class action is
granted, and even if the plaintiffs arguments are accepted, the
outcome of the claim will be significantly lower than the
abovementioned amount.4)
    
    On April 13, 2003 a claim was filed against the Company and other
cellular telecommunication companies, together with a request to
approve 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. The Company has filed its
response on October 1, 2003.At this stage, no hearings have taken place and unless and until the
claim is certified 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. Page F-34




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##### Table of Contents



5)
    
    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.6)
    
    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. The accounts do not include a provision in respect
thereof.7)
    
    On July 15, 2003, the Ministry of Communications decided to
decrease the deduction rate in respect of payments that Bezeq The
Israel Communication Corp. Limited fails to collect from its customers
for using the Companys network to 1.1% from 2.5%. The decision is
effective retroactively for the period from October 2, 2000 and
through August 31, 2003. As from September 1, 2003 the deduction rate
was cancelled altogether.Bezeq has lodged an appeal with the Jerusalem District Court against
the Ministers decision.On January 6, 2004, the Supreme Court  within the framework of
Partners appeal against the District Courts verdict in respect of
previous case between the parties, that related to Bezeqs failure to
collect payments from its customers for using the Companys network
for calls from fixed lines to mobile lines - ruled that the Ministers
decision concerning the aforementioned deduction of 1.1% shall also
apply to the period from March 1, 2000 to October 2, 2000, and that
this deduction rate shall remain in effect or shall be amended in
accordance with the outcome of the appeal lodged by Bezeq against the
aforesaid decision of the Minister.At this stage, since preliminary proceedings are yet to take place,
the Company and its legal counsel are unable to evaluate the
probability of success of the appeal, therefore the effect of the
Ministry of Communications decision on the Companys results (income
of approximately NIS 19.5 million), was not recognized. Page F-35




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NOTE 9 - SHAREHOLDERS EQUITY (CAPITAL DEFICIENCY):  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 according to the dual listing regulations. On December 31, 2003, the
closing price per ADR on the Nasdaq - NM was $7.84; the Companys shares
were quoted on that date on the LSE at $7.70, and on the TASE at NIS 34.46
($7.87).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.b.
    
    Employee 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, 2003 - 5,505,557 options have been granted pursuant to
the 1998 Plan, of which 3,538,436 options have been exercised and
590,373 options have been forfeited (options forfeited are 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 Page F-36




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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, 2003 - 188,983 options of the 1998 Plan remain
ungranted.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, 2003 - 5,317,555 options were granted
pursuant to the 2000 Plan, of which 268,250 options have been
exercised, 1,219,833 options have been forfeited and 60,250
expired (options forfeited are available for subsequent grants).
As of December 31, 2003 - 14,820 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 offers 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, 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. As of December 31, 2003 - 224,930 options of
the 2003 amended Plan remain ungranted. Page F-37




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d.
    
    The ordinary shares derived from the exercise of the
options confer the same rights as the other ordinary shares of
the Company.e.
    
    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 exchange, the Company
will defer the deduction of such taxable income as an expense, for
a period of 4 years from the date it commences paying income
taxes.The agreement applies only to employees who have joined the
agreement, and relate to (1) options that were exercised by
December 31, 2002; and/or (2) options that vest by December 31,
2003 and are 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. Page F-38




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##### Table of Contents



2)
    
    Following is a summary of the status of the plans as of December 31,
2001, 2002 and 2003 and the changes therein during the years ended on
those dates: Year ended December 312001
    
    2002
    
    2003Weighted average
    
    
    
    
    
    Weighted average
    
    
    
    
    
    Weighted averageexercise price*
    
    
    
    
    
    exercise price*
    
    
    
    
    
    exercise price*Number
    
    NIS
    
    Number
    
    NIS
    
    Number
    
    NISBalance outstanding at beginning
of year
    
    
    8,541,669
    
    
    
    12.296
    
    
    
    8,962,235
    
    
    
    12.746
    
    
    
    6,611,110
    
    
    
    18.001Changes during the year:Granted**
    
    
    1,063,708
    
    
    
    19.286
    
    
    
    768,000
    
    
    
    20.976
    
    
    
    195,000
    
    
    
    20.450Exercised
    
    
    (32,314
    )
    
    
    1.440
    
    
    
    (2,670,637
    )
    
    
    1.591
    
    
    
    (1,100,352
    )
    
    
    7.057Forfeited
    
    
    (610,828
    )
    
    
    19.286
    
    
    
    (448,488
    )
    
    
    16.747
    
    
    
    (304,538
    )
    
    
    23.025Expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,250
    )
    
    
    26.284Balance outstanding at end of year
    
    
    8,962,235
    
    
    
    12.746
    
    
    
    6,611,110
    
    
    
    18.001
    
    
    
    5,340,970
    
    
    
    19.945Options exercisable at end of year
    
    
    3,501,109
    
    
    
    7.386
    
    
    
    2,728,806
    
    
    
    17.740
    
    
    
    3,504,914
    
    
    
    19.351
  *
    
    Includes options under the 1998 Plan, the exercise price of which is
weighted based on the applicable dates NIS - dollar exchange rate.**
    
    2001 and 2002 - at market value, 2003 - below market
value.

The following table summarizes information about options outstanding at
December 31, 2003: Options outstanding
    
    Options exercisableWeightedNumber
    
    average
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    outstanding
    
    remaining
    
    average
    
    Number
    
    averageexercise
    
    at
    
    contractual
    
    exercise
    
    exercisable at
    
    exerciseprices
    
    December 31,
    
    life
    
    price
    
    December 31,
    
    priceNIS
    
    2003
    
    Years
    
    NIS
    
    2003
    
    NIS1.502
    
    
    1,049,595
    
    
    
    2.81
    
    
    
    1.502
    
    
    
    899,143
    
    
    
    1.50217.25-22.23
    
    
    1,752,208
    
    
    
    6.77
    
    
    
    20.261
    
    
    
    679,104
    
    
    
    20.28827.35
    
    
    2,539,167
    
    
    
    5.83
    
    
    
    27.35
    
    
    
    1,926,667
    
    
    
    27.3501.502 - 27.35
    
    
    5,340,970
    
    
    
    5.54
    
    
    
    19.945
    
    
    
    3,504,914
    
    
    
    19.351
  c.
    
    DividendsAs to restrictions with respect to cash dividend distributions, see note
5f. Page F-39




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##### Table of Contents



NOTE 10 - TAXES ON INCOME:  a.
    
    Measurement of results for tax purposes under the Income Tax
(Inflationary Adjustments) Law, 1985Under 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 subsidiaryThe income of the Company and its subsidiary are taxed at the regular rate
of 36%.c.
    
    Losses carried forward to future yearsAt December 31, 2003, the Group had carryforward losses of approximately
NIS 1,300 million (approximately $ 297 million). The carryforward tax
losses are linked to the Israeli CPI and can be utilized indefinitely. Page F-40




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##### Table of Contents



d.
    
    Deferred income taxesThe 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, 2002 and 2003, are as
follows: December 312002
    
    2003
    
    2003Conveniencetranslation intoNIS
    
    dollarsIn thousandsIn respect of carryforward tax
losses (see c. above)
    
    
    721,405
    
    
    
    508,916
    
    
    
    116,217Subscriber acquisition costs
    
    
    49,833
    
    
    
    47,766
    
    
    
    10,908Allowance for doubtful accounts
    
    
    27,404
    
    
    
    27,826
    
    
    
    6,354Provisions for employee rights
    
    
    13,910
    
    
    
    14,011
    
    
    
    3,200Depreciable fixed assets
    
    
    (18,087
    )
    
    
    (45,048
    )
    
    
    (10,287
    )Amortized license
    
    
    
    
    
    
    66,149
    
    
    
    15,106Options granted to employees
    
    
    28,607
    
    
    
    17,051
    
    
    
    3,895Other
    
    
    
    
    
    
    5,636
    
    
    
    1,287823,072
    
    
    
    642,307
    
    
    
    146,680Valuation
allowance - in respect of
carryforward tax losses and
deductions that may not be utilized
    
    
    (823,072
    )
    
    
    (8,555
    )
    
    
    (1,954
    )-,-
    
    
    
    633,752
    
    
    
    144,726
  The changes in the valuation allowance for the years ended December 31,
2001, 2002, and 2003, are as follows: 2001
    
    2002
    
    2003
    
    2003Conveniencetranslation intoNIS
    
    dollarsIn thousandsBalance at beginning of year
    
    
    568,052
    
    
    
    745,703
    
    
    
    823,072
    
    
    
    187,959Utilization during the year
    
    
    
    
    
    
    (30,410
    )
    
    
    (161,541
    )
    
    
    (36,890
    )Change during the year
    
    
    177,651
    
    
    
    107,779
    
    
    
    (652,976
    )
    
    
    (149,115
    )Balance at end of year
    
    
    745,703
    
    
    
    823,072
    
    
    
    8,555
    
    
    
    1,954
 Page F-41




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The Company analyzes its deferred tax asset with regard to potential
realization. The Companys determination of the realizability of its net
deferred tax asset involves considering all available evidence, both
positive and negative, regarding the likelihood of sufficient future
income. The methodology used involves estimates of future income, which
assumes ongoing profitability of its business. These estimates of future
income are projected through the life of the deferred tax asset using
assumptions which management believes to be reasonable. As of December 31, 2002, the Company had carryforward tax losses of
approximately NIS 2,000 million and timing differences of approximately NIS
300 million. The Company did not have a substantial record of utilization
of the carryforward tax losses (the Company had its first net income during
2002), and the Company had not been assessed for tax purposes since
incorporation. Consequently, managements assessment was, that a full
valuation allowance should be established. Based on the methodology described above, the Companys updated estimates
of its future earnings and profitability, assessments relating to the
cellular market and trends, and the receipt of final tax assessments for
the tax years through December 31, 2001, which validated the amount of the
carryforward tax losses, the Company concluded that a valuation allowance
is no longer necessary. Accordingly, a valuation allowance of approximately
NIS 653 million (approximately $ 149 million) was reversed during 2003. The carryforward tax losses are linked to the Israeli CPI and can be
utilized indefinitely. During the year 2003, the Company utilized NIS 450 million ($ 103 million)
of its carryforward tax losses. As of December 31, 2003, the Company would require approximately NIS 1,760
million of future taxable income in order to fully realize the related
deferred tax assets. 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. A valuation allowance was provided in respect the portion of tax benefits
arising from options granted to employees, which will not be realized. Page F-42




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##### Table of Contents



e.
    
    The difference between the theoretical tax expenses, assuming all income
is taxed at the statutory tax rate applicable to the Company (see b.
above), and the actual tax expenses as reported in the statement of
operations for the year ended December 31, 2003 results almost entirely
from changes in the valuation allowance.f.
    
    Tax assessments:  1)
    
    The Company has received final assessment through the year ended
December 31, 2001.2)
    
    The subsidiary has not been assessed for tax purposes since
incorporation. Page F-43




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##### Table of Contents



NOTE 11  LIABILITIES SECURED BY PLEDGES AND RESTRICTIONS PLACED IN RESPECT OF
LIABILITIES At December 31, 2003, balances of liabilities of the Company in the amount
of NIS 1,807 million ($ 413 million), are secured by fixed charges on the fixed
assets (including leasehold rights), share capital and insurance rights, and by
floating charges on the assets. The Company has also undertaken under the
facility agreement not to register any further charges on its assets, with
certain exceptions (see also note 5). Page F-44




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##### Table of Contents



NOTE 12  FINANCIAL INSTRUMENTS AND RISK MANAGEMENT  a.
    
    Linkage of monetary balances:  1)
    
    As follows: December 31, 2003In/or linked toforeign currencies
    
    Linked to the(mainly dollars)
    
    Israeli CPI
    
    UnlinkedIn thousandsNIS:Assets
    
    
    1,443
    
    
    
    18,309
    
    
    
    519,009Liabilities
    
    
    907,545
    
    
    
    365,995
    
    
    
    1,902,022Convenience
translation into
dollars:Assets
    
    
    329
    
    
    
    4,181
    
    
    
    118,522Liabilities
    
    
    207,249
    
    
    
    83,580
    
    
    
    434,351
  2)
    
    Data regarding the dollar exchange rate and the Israeli CPI: Exchange rate of one
    
    Israelidollar
    
    CPI*At December 31:2003
    
    NIS 4.379
    
    178.58 points2002
    
    NIS 4.737
    
    182.01 points2001
    
    NIS 4.416
    
    170.91 points2000
    
    NIS 4.041
    
    168.53 pointsIncrease (decrease) during the year:2003
    
    
    (7.6
    %)
    
    
    (1.9
    %)2002
    
    
    7.3
    %
    
    
    6.5
    %2001
    
    
    9.3
    %
    
    
    1.4
    %
  *
    
    Based on the index for the month ending on each balance sheet date, on
the basis of 1993 average = 100. Page F-45




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##### Table of Contents



b.
    
    Derivative financial instrument  foreign exchange risk management The Company enters into foreign currency forward transactions and purchases
and writes foreign currency options in order to protect itself against the
risk that the eventual dollar cash flows resulting from the existing assets
and liabilities will be affected by changes in exchange rates. The writing
of such options is part of a comprehensive hedging strategy and is designed
to effectively swap the currencies relating to existing assets and
liabilities. Each of the options written is combined with purchase of an
option for the same period and the same notional amount. The Company does
not hold or issue derivative financial instruments for trading purposes. The transactions are mainly designated to hedge the cash flows related to
payments of dollar interest on notes payable as well as those related to
anticipated 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. As the counterparties to the foreign currency options and forward
transactions are Israeli banks, the Company considers the inherent credit
risks remote. The notional amounts of foreign currency derivatives as of December 31,
2002 and 2003 are as follows: December 312002
    
    2003
    
    2003Convenience translationNIS
    
    into dollars(In millions)Currency options purchased
 for the exchange of
dollars into NIS
    
    
    431
    
    
    
    88
    
    
    
    20Currency options written 
for the exchange of
dollars into NIS
    
    
    431
    
    
    
    44
    
    
    
    10Forward transactions  for
the exchange of:Dollars into NIS
    
    
    264
    
    
    
    568
    
    
    
    130Euros into NIS
    
    
    52Embedded derivatives -
Dollars into NIS
    
    
    41
    
    
    
    209
    
    
    
    48
 The derivatives financial instruments are for a period of up to one year.
As of December 31, 2003, the remaining contractual lives are for periods up
to one year. Page F-46




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##### Table of Contents



c.
    
    Fair value of financial instrumentsThe financial instruments of the Company as of December 31, 2003 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 6.The fair value of derivatives as of December 31, 2003, is a liability of
approximately NIS 11.5 million (approximately $ 2.6 million) (December 31,
2002  approximately NIS 2 million). Page F-47




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##### Table of Contents



NOTE 13 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION: a. Accounts receivable: December 312002
    
    2003
    
    2003Conveniencetranslation intoNIS
    
    dollarsIn thousands1) Trade (current and long-term)The item is presented after the deduction of:(a) Deferred interest income*
    
    
    (1,040
    )
    
    
    (3,183
    )
    
    
    (727
    )(b) Allowance for doubtful accounts
    
    
    (74,622
    )
    
    
    (77,295
    )
    
    
    (17,651
    )
  *
    
    Long-term trade receivables (including current maturities) as of December
31, 2002 and 2003 in the amount of NIS 4,561,000 and NIS 26,275,000
($6,000,000), 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 to the date of the
transaction (6.3% - 10%).  2)
    
    Other: December 312002
    
    2003
    
    2003ConveniencetranslationNIS
    
    into dollarsIn thousandsGovernment institutions
    
    
    12,144
    
    
    
    19,396
    
    
    
    4,429Prepaid expenses
    
    
    24,040
    
    
    
    17,603
    
    
    
    4,020Sundry
    
    
    14,802
    
    
    
    19,544
    
    
    
    4,46350,986
    
    
    
    56,543
    
    
    
    12,912
 Page F-48




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b.
    
    Accounts payable and accruals - other: December 312002
    
    2003
    
    2003Conveniencetranslation intoNIS
    
    dollarsIn thousandsEmployees and employee institutions
    
    
    60,974
    
    
    
    86,130
    
    
    
    19,669Provision for vacation and recreation pay
    
    
    20,578
    
    
    
    21,138
    
    
    
    4,827Government institutions
    
    
    23,704
    
    
    
    38,235
    
    
    
    8,731Income received in advance
    
    
    40,979
    
    
    
    44,601
    
    
    
    10,185Accrued interest on long-term liabilities
    
    
    49,030
    
    
    
    45,156
    
    
    
    10,312Derivatives instruments
    
    
    1,881
    
    
    
    11,546
    
    
    
    2,637Handsets warranty
    
    
    2,589
    
    
    
    2,053
    
    
    
    469Sundry
    
    
    2,431
    
    
    
    3,726
    
    
    
    851202,166
    
    
    
    252,585
    
    
    
    57,681
  c.
    
    Asset retirement obligations -the changes in the asset retirement
obligations for the year ended December 31, 2003, are as follows: ConveniencetranslationNIS
    
    into dollarsIn thousandsJanuary 1, 2003
    
    
    4,665
    
    
    
    1,065Liability incurred during the year
    
    
    626
    
    
    
    143Liability settled during the year
    
    
    (341
    )
    
    
    (78
    )Accretion expenses
    
    
    296
    
    
    
    68Revision in the estimates during the year
    
    
    1,121
    
    
    
    256Balance at December 31, 2003
    
    
    6,367
    
    
    
    1,454
 Page F-49




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##### Table of Contents



d.
    
    Financial expenses, net: Year ended December 312001
    
    2002
    
    2003
    
    2003Conveniencetranslation intoNIS
    
    dollarsIn thousandsFinancial income
    
    
    (9,879
    )
    
    
    (5,052
    )
    
    
    (1,952
    )
    
    
    (446
    )Financial expenses
    
    
    306,724
    
    
    
    350,377
    
    
    
    320,771
    
    
    
    73,252Derivatives instruments
    
    
    (169
    )
    
    
    (8,302
    )
    
    
    59,580
    
    
    
    13,606Exchange rate differences
    
    
    73,352
    
    
    
    69,797
    
    
    
    (59,168
    )
    
    
    (13,512
    )CPI Linkage differences
    
    
    21,893
    
    
    
    35,723
    
    
    
    (4,554
    )
    
    
    (1,040
    )Factoring costs
    
    
    9,006
    
    
    
    9,614
    
    
    
    17,111
    
    
    
    3,908Less - capitalized interest
    
    
    
    
    
    
    (6,977
    )
    
    
    (10,078
    )
    
    
    (2,301
    )400,927
    
    
    
    445,180
    
    
    
    321,710
    
    
    
    73,467
  e.
    
    Diluted EPS  Following are data relating to the net income (loss) and the weighted
average number of shares that were taken into account in computing the
basic and diluted EPS (the effect of the inclusion of the options for the
year 2001 is anti-dilutive): Year ended December 312001
    
    2002
    
    2003
    
    2003Conveniencetranslation intoNIS
    
    dollarsIn thousandsNet income (loss)
used for the
computation of
basic and diluted
EPS (in thousands)
    
    
    (303,362
    )
    
    
    84,198
    
    
    
    1,162,650
    
    
    
    265,506Weighted average
number of shares
used in computation
of basic EPS
    
    
    178,909,274
    
    
    
    179,984,090
    
    
    
    181,930,803
    
    
    
    181,930,803A d d - net
additional shares
from assumed
exercise of
employee stock
options
    
    
    4,593,060
    
    
    
    3,085,304
    
    
    
    1,312,354
    
    
    
    1,312,354Weighted average
number of shares
used in computation
of diluted EPS
    
    
    183,502,334
    
    
    
    183,069,394
    
    
    
    183,243,157
    
    
    
    183,243,157
 Page F-50




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##### Table of Contents



NOTE 14 - TRANSACTIONS AND BALANCES WITH RELATED PARTIES:  a.
    
    Transactions with related parties: Year ended December 312001
    
    2002
    
    2003
    
    2003ConveniencetranslationNIS
    
    into dollarsIn thousandsAcquisition of
handsets from related
party
    
    
    300,024
    
    
    
    185,237
    
    
    
    203,675
    
    
    
    46,512Financial expenses, net
    
    
    60,202
    
    
    
    81,212
    
    
    
    67,906
    
    
    
    15,507Selling commissions
and maintenance
expenses
    
    
    26,807
    
    
    
    20,624
    
    
    
    7,458
    
    
    
    1,703
  b.
    
    Balances with related parties: December 312002
    
    2003
    
    2003Conveniencetranslation intoNIS
    
    dollarsIn thousandsCash and cash equivalents
    
    
    643
    
    
    
    1,855
    
    
    
    424Current liabilities
    
    
    7,200
    
    
    
    19,066
    
    
    
    4,354Long-term liabilities
    
    
    692,572
    
    
    
    491,987
    
    
    
    112,351
  c.
    
    Cost sharing agreementThe Company has entered 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. Page F-51




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##### Table of Contents



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, 2003, the Company had given notice of its participation
in six projects. The Companys expected share in these projects in
financial terms (including its share of joint expenses and liabilities) is
not material. Page F-52




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##### Table of Contents



NOTE 15 - SUBSEQUENT EVENT On March 15, 2004, the Company signed a Memorandum Of Agreement (MOA)
with Matav - Cable Systems Media Ltd. (Matav) and its shareholders, Dankner
Investments Ltd. and Delek Investments Ltd.-, which are all considered related
parties of the Company. Matav is one of Israels three cable television providers and its shares
are registered both in the US and Israel. The MOA sets out the principles for a transaction, under which the Company
will purchase up to 40% of the shareholding of Matav in consideration for up to
$137 million in cash, and receive control in Matav for a period of two years
from the closing date. The transaction is subject to a number of conditions
precedent, including, inter-alia, the approval of the parties
respective boards of directors, as
stipulated in the MOA, and other necessary corporate approvals. As of March 30, 2004, these conditions have not been met
yet. The Company is examining a number of options to finance the transaction. Page F-53




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##### Table of Contents



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/ Alan GelmanChief Financial OfficerApril 30, 2004By:
    
    /s/ Amikam CohenChief Executive OfficerApril 30, 2004




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##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    Description++1.1
    
    Partners 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
    
    Form of Deposit Agreement including Form of ADR Certificate*2.(b)
    
    Form of Indenture between Partner and The Bank of New York, as trustee, including form of note**4.(a).1
    
    Relationship Agreement dated October 10, 1999**4.(a).2
    
    License from the Israeli Ministry of Communications issued April 8, 1998**4.(a).3
    
    Bank Facility dated August 13, 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 11,2001**4.(a).9
    
    Lease Agreement with Mivnei Taasia dated July 2, 1998**4.(a).10
    
    Interconnect Agreement with Cellcom dated February 15, 1999**4.(a).11
    
    Interconnect Agreement with Pelephone dated May 1, 1999*4.(a).12
    
    Amending and Rescheduling Agreement dated July 9, 2000++4.(a).13
    
    Supplemental Agreement dated April 18, 2002+4.(a).14
    
    Amendment to Relationship Agreement dated April 23, 2002***4.(a).15
    
    Amendment No. 1 to License from the Israeli Ministry of Communications issued May 11, 1999***4.(a).16
    
    Amendment No. 2 to License from the Israeli Ministry of Communications issued September 29,
1999***4.(a).17
    
    Amendment No. 3 to License from the Israeli Ministry of Communications issued October 3, 1999***4.(a).18
    
    Amendment No. 4 to License from the Israeli Ministry of Communications issued June 28, 2000***4.(a).19
    
    Amendment No. 5 to License from the Israeli Ministry of Communications issued September 10,
2000***4.(a).20
    
    Amendment No. 6 to License from the Israeli Ministry of Communications issued March 19, 2001+4.(a).21
    
    Amendment No. 7 to License from the Israeli Ministry of Communications issued September 23,
2001+4.(a).22
    
    Amendment No. 8 to License from the Israeli Ministry of Communications issued December 27,
2001+4.(a).23
    
    Amendment No. 9 to License from the Israeli Ministry of Communications issued March 13, 2002+4.(a).24
    
    Amendment No. 10 to License from the Israeli Ministry of Communications issued April 14, 2002+4.(a).26
    
    Amendment No. 11 to License from the Israeli Ministry of Communications issued April 25, 2002++4.(a).27
    
    Amendment No. 12 to License from the Israeli Ministry of Communications issued June 26, 2002++4.(a).28
    
    Amendment No. 13 to License from the Israeli Ministry of Communications issued June 30, 2002




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##### Table of Contents



Exhibit No.
    
    Description++4.(a).29
    
    Amendment No. 14 to License from the Israeli Ministry of Communications issued September 11,
2002++4.(a).30
    
    Amendment No. 15 to License from the Israeli Ministry of Communications issued October 24,
2002++4.(a).31
    
    Amendment No. 16 to License from the Israeli Ministry of Communications issued November 26,
2002++4.(a).32
    
    Amendment No. 17 to License from the Israeli Ministry of Communications issued February 2,
20034.(a).33
    
    Amendment No. 18 to License from the Israeli Ministry of Communications issued May 29, 20034.(a).34
    
    Amendment No. 19 to License from the Israeli Ministry of Communications issued July 31, 20034.(a).35
    
    Amendment No. 20 to License from the Israeli Ministry of Communications issued October 8, 20034.(a).36
    
    Amendment No. 21 to License from the Israeli Ministry of Communications issued October 9, 20034.(a).37
    
    Amendment No. 22 to License from the Israeli Ministry of Communications issued March 16, 2004.4.(a).38
    
    Amendment No. 23 to License from the Israeli Ministry of Communications issued March 21, 2004.+4.(a).39
    
    Amending Agreement to the Facility Agreement dated January 8, 2002+4.(a).40
    
    Amending Agreement to the Facility Agreement dated January 30, 2002+4.(a).41
    
    Amending Agreement to the Facility Agreement dated February 6, 2002+4.(a).42
    
    Amending Agreement to the Facility Agreement dated February 28, 2002+4.(a).43
    
    Amending Agreement to the Facility Agreement dated March 14, 2002+4.(a).44
    
    Amending Agreement to the Facility Agreement dated March 24, 2002+4.(a).45
    
    Amending Agreement to the Facility Agreement of April 2002+4.(a).46
    
    Amending Agreement to the Facility Agreement dated April 24, 2002++4.(a).47
    
    Amending Agreement to the Facility Agreement dated December 31, 2002#4.(a).48
    
    Purchase Agreement with Nortel Networks ISRAEL (Sales and Marketing) Ltd. Dated November 12,
2003.6.
    
    See Note 1q to our financial statements for information explaining how earnings (loss) per
share information was calculated.8.
    
    List of Subsidiaries12.(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 200214.(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).




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##### Table of Contents



***
    
    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 20F for the fiscal year ended December 31, 2002.#
    
    Confidential treatment requested. Confidential material has been redacted and has been separately filed with
the Securities and Exchange Commission.