Chapter A – Description of Corporation’s Operations In this report, which contains a description of the Corporation’s business operations as at December 31, 2008, the Company has included forward-looking information, as defined in the Securities Law 5728-1968 (the Securities Law). Such information includes forecasts, targets, appraisals and assessments which apply to future events or matters the realization of which is not certain and is not under the Corporation’s control. Forward-looking information in this report will usually be identified specifically, or by employing statements such as “the Company expects”, “the Company assesses”, “it is the Company’s intention”, and similar statements. Forward-looking information is not a proven fact and is based only on the Company’s subjective assessment, based, inter alia, on a general analysis of the information available at the time of drafting of this report, including public announcements, studies and surveys, and they contain no undertakings as to the correctness or completeness of the information contained therein, and the Corporation does not independently check the correctness thereof. The Company’s assessments vary from time to time, depending on circumstances. In addition, the realization and/or otherwise of the forward-looking information will be affected by factors that cannot be assessed in advance, and which are not within the control of the Company, including the risk factors that are characteristic of its operations as set out in this report, and developments in the general environment, and external factors and the regulation that affects the Company’s operations, as set out in this report. Bezeq The Israel Telecommunication Corporation Limited (the Company or Bezeq) along with the subsidiaries that it owns in whole or in part, whose financial statements are consolidated with the Company's, shall be jointly referred to in this periodic report as the Group or the Bezeq Group. 1. Description of General Development of Group Operations 1.1 Group Activity and Description of its Business Development 1.1.1 As at the date of this periodic report, the Bezeq Group is the principal provider of communications services in Israel. The Bezeq Group implements and provides a broad range of telecommunications operations and services, including domestic fixed-line, cellular and international communication services, multi-channel television, satellite broadcasts, internet services, customer call centers, maintenance and development of communications infrastructures, provision of communications services to other communications providers, television and radio broadcasts, and supply and maintenance of equipment on customer premises (network end point – NEP – services). 1.1.2 The telecommunications sector is developing rapidly in global markets and in Israel. The telecommunications sector is affected by changes in technology, in relation to both the business structure of the industry and the applicable regulations. 1.1.3 The Company was founded as a government company in 1980 and has been privatized over a period of years. The Company became a public company in 1990 and its shares are traded on the Tel Aviv Stock Exchange. 1.1.4 Since October 11, 2005, the controlling shareholder of the Company is Ap. Sb. Ar. Holdings Ltd. (Ap. Sb. Ar.) which holds 40.66% of the shares in the Company (38.62% in full dilution) on March 23, 2009 after exercising an option to purchase 10.66% of the Company’s shares held by the State (see section 1.3.1 below). A-1 The following chart describes the structure of shareholdings of the Company, and the Company’s shareholdings in its principal subsidiaries and affiliates, as at March 22, 2009. 1 2 3 4 5 6 The State of Zeevi Group The Public Ap.Sb.Ar. Israel 1 17.75% 37.68% 3.90%2 40.66%3 "Bezeq" The Israeli Telecommunication Corp. Ltd. 100% 100%4 100% 100%5 49.77%6 D.B.S. Pelephone Bezeq Bezeq Gold Bezeq On Satellite Communications International (Holdings) Line Ltd. Services Ltd. Ltd. Ltd. (1998) Ltd. 34.41%7 Walla! Communications Ltd. The holdings in the diagram above are correct as at the date of publication of this periodic report. As set out in section 2.9.6 below, the State issued the Company’s employees with 122,697,648 options, exercisable for 122,697,648 of the Company’s shares held by the State. Under an employee option plan (apart from members of senior management), the Company allotted 78,151,368 options, exercisable into 78,151,368 of the Company's shares,7 and as part of an options plan for senior managers and employees of the Group – 59,550,000 options (net, less expired options) exercisable into 59,550,000 of the Company’s shares. The following are details of the rates of holdings of the Company under full dilution, assuming exercise of all of the options allocated to the Group’s employees and managers as at December 31, 2008 and March 23, 2009 . 1 Of this, 17.63% are held by Zeevi Communications Holdings Ltd., to which a receiver has been appointed, with authority to exercise the rights flowing from the shares in accordance with the ruling and approval of the Court. 0.12% of the Company’s shares are held by D.E. Dirot Elite Ltd. 2 For the option granted to Ap. Sb. Ar. to purchase up to approximately 10.66% of the State’s shares, see section 1.3 below; for the options to employees for the State’s shares in the Company, see section 2.9.6.1 below. 3 The shareholders in Ap. Sb. Ar. are 1. SCG Israel Ventures LLC (capital 45%, voting 40.5%), controlled by private companies controlled by Haim Saban; 2. Purple Green Project and Investment Co. Ltd. together with Yellow Green Financing and Investment Ltd. (jointly: capital 45%, voting 40.5%), indirectly wholly owned (100%) by corporations in the Apax Europe VI Fund, managed by Apax Europe Managers Ltd. 3. Arkin Communications Ltd. (capital 10%, voting 19%), which is wholly owned (100%) by Moshe Arkin. 4 A company whose only activity is to hold series 5 debentures of the Company (see section 2.13.7 and 2.17.1 below) 5 As of the date of publication, the Company has option warrants which afford it the right to increase its holdings in DBS to approximately 58.36% (see section 1.1.5(A) below. 6 34.25% as at December 31, 2008 and 32.42% in full dilution 7 Of this amount, 59,574 options were allotted to two employee-directors. A-2 Shareholders Percentage of holdings As at December 31, As at March 23, 2009 Fully diluted 2008 Ap. Sb. Ar. 40.66% 40.66% 38.62% State of Israel 4.38% 3.90% 0.96% Zeevi Group 17.75% 17.75% 16.86% The Public 37.21% 37.68% 43.56% 1.1.5 Mergers and acquisitions D.B.S. Satellite Services (1998) Ltd. (DBS) On August 2, 2006, the Company and DBS submitted merger notices to the Antitrust Commissioner regarding the exercise of options for DBS’s shares by the Company, which, if exercised, will increase the Company’s holdings in DBS from 49.8% to 58%. On December 31, 2006, the Antitrust Commission gave notice of the Antitrust Commissioner’s objection to the merger and on May 15, 2007, the Company appealed the decision. On February 3, 2009, the Antitrust Tribunal approved the merger under terms that are subject to approval by the Company within three months. The Antitrust Authority and Eurocom DBS Ltd. (a shareholder in DBS) appealed the Tribunal's ruling. In addition, after the Antitrust Authority's request to delay implementation of the ruling was denied by the Antitrust Tribunal and an additional request to delay implementation was filed with the Supreme Court, the parties reached an agreement, at the request of the Supreme Court, which received the effect of a ruling, whereby at this stage, implementation of the merger would be delayed. A hearing of the appeals was set for the first week of June 2009. For additional details regarding the Company’s investment in DBS, see also Note 33 to the Company’s financial statements for the year ended December 31, 2008, included in this periodic report. 1.1.6 Disposals Satellite communication operations On March 26, 2008, the Company signed an agreement with RRsat Global Communications Network Ltd., a company registered in Israel whose shares are traded on the NASDAQ in the USA. The agreement was for the sale of the Company's satellite communications operations (Inmarsat and Bezeq Sat) and assets relating to such operations, including the satellite communications site at the Ella Valley. Under the agreement, the operations are to be sold in consideration for the total NIS equivalent of US $15 million plus VAT, subject to price adjustments. Completion of the transaction was subject, inter alia, to regulatory approvals and on November 4, 2008, the transaction was completed after the fulfillment of all the conditions required for its completion, including the receipt of the regulatory approvals. The Company recorded a capital gain of approximately NIS 50 million for this transaction (gross, before tax) in its financial statements for the year ended December 31, 2008. 1.2 Areas of Operation The Group has four principal areas of operation. These four areas of operation are reported as business segments in the Company’s consolidated financial statements (see also Note 28 to the Company’s financial statements for the year ended December 31, 2008, included in this periodic report). 1.2.1 Domestic fixed-line communications This segment primarily includes the Company’s operation as a domestic operator, including telephony services, internet services, transmission services and data communications.