Israel’s communications market has undergone significant changes in the past decade and, although still highly-regulated, has grown rapidly and is highly competitive in nearly every segment. The government has encouraged competition in all facets of the communications market and has been a significant driver of the market’s development.

Another major driver of growth in the Israeli communications market is Israel’s strong economy. According to the Israeli Central Bureau of Statistics, gross domestic product, or GDP, growth in 2006 was 5.0%, placing it ahead of the developed Western European nations and in line with developing Eastern European nations. At the same time, GDP per capita was approximately $21,000 placing it in a comparable range with developed nations.

An additional factor behind the industry’s growth is the Israeli population. According to the Ministry of Communications, as of the end of 2006, fixed telephony lines passed 99% of Israeli homes, the broadband penetration rate was 62% of households, and the individual mobile telephone penetration rate was 106%, which demonstrates the significant utilization of multiple communication services by the Israeli population.

According to the Ministry of Communications, the Israeli communications market was estimated to be $5.5 billion in 2005, 51% of which was from cellular services, 24% from local fixed-line and data, 13% from multi-channel TV, 7% from international telephony and 5% from Internet.

Each of these sub-sectors, except for local fixed-line and data, has grown from 2003 through 2005. From 2003 to 2005, the cellular market grew from $2.5 billion to $2.8 billion. During the same period, the local fixed-line and data markets decreased from $1.4 billion to $1.2 billion. Multi-channel TV grew during that time to $0.7 billion. International telephony grew to $370 million in 2005 and Internet grew during that period to $320 million.

As of June 30, 2007, the Company had over 500,000 active residential, business and carrier customers for its broadband services, including many of the largest companies in Israel, the Government of Israel and the two largest Israeli banks.

The Company is one of Israel’s three leading ISPs providing high speed broadband access to the Internet via ADSL and cable networks. The Company offers high-speed continuous access connections employing digital leased lines at various bandwidths to meet customer needs.

The Company provides specialized data services to bandwidth-intensive organizations and international carriers, allowing them to transmit electronic data from point to point or from point to multi-points. The Company’s fee structure for these services depends on three main factors: volume of capacity, distance and the type of technology used.

The Company offers traditional voice services to residential and business customers throughout Israel and to international carriers and local cellular operators. The Company’s traditional voice services include incoming and outgoing international telephony, hubbing services for international carriers and roaming and signaling services for cellular operators.

Cost of revenues increased by 280.9% from NIS 101.7 million for the six months ended June 30, 2006 to NIS 387.4 million ($91.2 million) for the six months ended June 30, 2007.

Selling and marketing expenses increased by 157.5% from NIS 30.4 million for the six months ended June 30, 2006 to NIS 78.2 million ($18.4 million) for the six months ended June 30, 2007.

Income from operations increased by 289% from NIS 14.7 million for six months ended June 30, 2006 to NIS 57.3 million ($13.5 million) for the six months ended June 30, 2007.

Net income for the six months ended June 30, 2007 was NIS 21.2 million ($5.0 million) compared with NIS 8.3 million for the six months ended June 30, 2006.